The SaaS business model is a wonderful thing - predictable revenue pours in every month, growing and compounding over time to generate a revenue stream which is far more stable than that of a traditional business.
However, every SaaS business faces a significant danger which is unique to SaaS and often ignored or misunderstood until it’s too late. It’s called the growth ceiling, and every successful SaaS business will need to tackle it one day.
The growth ceiling is caused by the effect of percentage churn on a customer base that’s increasing in size — the problem is that churn scales with your customer base.
In a small SaaS business of (for example), 1000 customers, a five percent churn rate means that 50 customers leave every month. Fifty customers leaving isn’t ideal, but it’s a number that can easily be recovered through more acquisition, and the business will continue to grow.
In a business with 10,000 customers, however, the same percentage churn (five percent) means losing 500 customers every month. Suddenly, continuing to grow becomes 10x harder, because the business needs to add 500 customers every month just to stand still.
Approaching the growth ceiling, a SaaS business’s growth will begin to slow significantly, before growth eventually stalls altogether. At the growth ceiling, the number of customers signed up every month is exactly equal to the number leaving, and growth becomes impossible without corrective action.
The levers available to a SaaS business to heighten the growth ceiling are threefold:
- Increase customer acquisition rate
- Decrease customer churn
- Increase average revenue per customer
SaaS businesses of any size need to pay attention to these levers and start to experiment early and often, so that as the business grows, growth can continue to outrun churn.