The negative impact of high customer attrition
Everyone instinctively knows that losing customers is bad. Because customer attrition is inevitable, however, some SaaS companies simply accept it as a normal part of doing business. This is an unhealthy attitude.
It may be inevitable that customers will churn, but it is a metric that can be managed with a little effort on your part. More importantly, taking the time to control the customer turnover rate can result in a more solid product that will actually attract more users over time.
So taking proactive steps to reduce churn will not only save you money, but will act as an effective strategy for new customer acquisition on top of that. Let's look at some ways that customer attrition hurts your business.
We'll start with the obvious. If customers leave, so does the revenue. In SaaS, monthly recurring revenue (MRR) is not only the lifeblood of a company, it's also an indicator of long-term viability. Customer attrition directly decreases revenue, so it is vital to keep it at bay. When a customer churns, you've also lost any ability to further monetize that customer.
Imagine you have a product that you've convinced a single person to spend a million dollars a month on. If you do that, you're riding high for a while, but if you lose that one customer, you've also lost that million dollars. This is an extreme example, but it shows you the value of having as many customers as possible. It isn't just the revenue that having a large customer base provides, it's also the buffer it yields to help when attrition does happen. The more customers you have, the less losing one will hurt you. It goes without saying that in order to have a lot of customers, you need to minimize attrition.
Poor CAC: LTV ratio
Customer acquisition cost (CAC) is the amount of money that you have to spend in order to acquire a new customer. Your customer lifetime value represents the total amount of money you can expect from each of your customers throughout their time with your company. The goal, to maximize profits, is to have the lifetime value of the customer be significantly higher than the cost of acquiring that customer.
If you're spending to acquire customers and they churn before you make back those costs, then you're running a tough deficit. Churn increases your average CAC.