Albert Einstein is credited with saying that ‘the most powerful force in the universe is compound interest. The most powerful force in software businesses is revenue retention. High revenue retention rates create extremely valuable businesses, given that in a business with 100% revenue retention, each new sale provides pure incremental growth. A company with a highly stable customer base and a strong sales engine offers reliable, predictable, and growing cash flows over time - the hallmark of a great business. However, not all subscription businesses are created equally. As SaaS Capital and others have found, there is significant variability in the rates of customer churn across SaaS businesses, and as a result, significant differences in business quality.
Churn is the Enemy
The enemy of revenue retention is churn. For every dollar lost, another dollar of new sales must occur in order to maintain the same size of the business, much less to grow it. As a result, customer retention and its antithesis, churn, are the most important metrics in any subscription business. While some level of churn is unavoidable, best in class subscription businesses have built repeatable processes and systems to help ensure customer success and renewal, thereby facilitating faster growth. These systems focus on customer enablement and success, and are built on effectively training, engaging, and enabling customers to get the most out of the product.