High customer churn and long CAC payback can create a big drain on a SaaS company cash flow. So, asking the right questions on customer churn and CAC payback becomes an important element of SaaS PE due diligence.
From an operational perspective, investing in customer care becomes a critical driver of customer retention. The product features and functionality gets the customer in the door but high quality customer care is what keeps them happy and retained, and recurring revenues flowing in. So measuring investment in customer care becomes another important element of PE due diligence.
Churn is not just lost customers but also feature/ tier downgrade by customers. Cost-conscious customers tend to downgrade product tier if they do not perceive significant benefit for the premium paid. So, the difference in functionality between various tiers of the SaaS product should be clear to potential customers and the premium should justify the benefits. Here's a good article -
You’ve often heard that churn is a company killer for SaaS and subscription businesses. To be more specific, high customer churn and long CAC payback periods will most definitely burn through your cash and ultimately lead to the demise of your business. Therefore, it’s critical to track, monitor and improve the health of your recurring revenue stream which is the engine of every SaaS business. In this post, I will walk through some of the prominent churn and retention metrics that you should be tracking in your SaaS or subscription business. And I’ll dive into exactly how to calculate churn and retention.