At Malpani Ventures, we are long on B2B SAAS and are actively seeking to partner with entrepreneurs building with Indian founders looking to solve the problems of enterprises or global SMBs

As a part of our diligence, one major aspect that we look at is the business and founder’s focus on customer churn and retention. So much so that we base the valuation we offer to founders on the same (NDR%= Net Dollar Retention):

The reasons for focusing on customer churn and retention are well-known: The cost of acquiring new customers vs the cost of retaining existing ones is several times higher, Retention creates a flywheel effect – satisfied customers are likely to refer more potential customers to the business and ultimately when done right, customer retention increases revenue much faster than acquisition.

Simply put churn leads to higher CAC & reduced revenue. 

So, what are the metrics to follow: In our opinion, the two most relevant metrics are: Gross churn and Net Dollar Retention%

Gross churn = (Churned + Contraction MRR) / (total MRR at the beginning of the month)

Net Dollar Retention = (Starting ARR – Churn + Expansion – Contraction)/ Starting ARR

In our view, these two ratios provide a holistic picture of your customers’ health scores and trajectory

The gross churn provides a good understanding of the % of customers dissatisfied with the company, while the NDR% provides a holistic look at the directional revenue of your company from its existing set of customers

We have noticed the following operating factors help in identifying and alleviating customer churn:

Actual usage: A steadily dropping rate of utilisation is the surest warning of approaching customer churn, and depending on how long a client had been using your service prior to the decline, it can indicate many factors.

Price: As it's crucial to foresee the potential of clients defecting to those rivals, keep an eye on the pricing and promotions offered by competitors. To make sure you stay competitive, you should regularly review your pricing approach.

Customer support tickets/ complaints:  Customer complaints are easy to track but regular support tickets are easy to miss. You may be doing everything right if your support team is receiving noticeably fewer tickets than usual. However, it's more likely an indication of disinterest on the part of your consumers, who may no longer think it's worthwhile to contact assistance to resolve their issues with your business.

So, should a business do all of the above? Absolutely not, founders have enough on their plate and can’t go around solving for every customer. Instead, we recommend following this strategy by Dee Sahni:

One: Segment customers around impact - grouping customers into dominant high-impact cohorts. For example, if Amazon Prime's unit economics need improvement, one of the most important cohorts is that of "high-cost customers" given its free delivery.

Two: Pick a strategy. Based on a cohort's impact, pick a pricing strategy. In the Prime example the strategy could be to (a) reduce the size of high-cost cohorts, (b) monetize them higher, and (c) reduce the cost of delivery for these users.

Three: Choose a pricing lever to implement your strategy. We'll pick from a menu of pricing models and levers. In the Prime example, our levers can be (a) incentives to reward low-cost behaviors, like credits to encourage shipment batching, or (b) fees to monetize high-cost deliveries. Prime innately uses a subscription lever to improve retention and therefore LTV.

Four: Customize. Our levers need to be targeted to specific segments and user behaviors. We'll do this by using custom attributes. Attributes such as distance from Amazon fulfillment centers, zip codes, behaviors such as ordering one item at a time, how urgently this delivery is required, etc. will determine what pricing, policies, discounts, incentives, dynamic pricing, etc. to use

Finally, we consider this chart by Lenny Rachitsky a good benchmark for companies to measure themselves against: