{"id":10204,"date":"2018-01-04T12:26:45","date_gmt":"2018-01-04T11:26:45","guid":{"rendered":"https:\/\/chartmogul.com\/blog\/?p=10204"},"modified":"2023-08-10T17:11:24","modified_gmt":"2023-08-10T15:11:24","slug":"saas-growth-ceiling","status":"publish","type":"post","link":"https:\/\/chartmogul.com\/blog\/saas-growth-ceiling\/","title":{"rendered":"The SaaS growth ceiling: what happens when churn takes hold"},"content":{"rendered":"

What is the SaaS growth ceiling?<\/b><\/h1>\n

Many SaaS businesses overlook the multiplicative effect that churn can have on their business, especially if new customer acquisition grows linearly. Since customer churn is a percentage of the number of customers, there will come a point when the number of new customers equals the number of churned customers. At this point, the growth rate effectively stalls to zero, finding an equilibrium state known as the growth ceiling<\/strong>.<\/p>\n

In this post, we\u2019ll define the SaaS growth ceiling, show you how to calculate it, use the equation to understand the driving forces that impact the ceiling, and ultimately present three growth levers to use to avoid hitting the ceiling.<\/p>\n

Why is the SaaS growth ceiling important?<\/b><\/h1>\n

The SaaS growth ceiling exposes the dramatic impact of churn on growth as the business scales. Understanding the growth ceiling and the dynamics behind its calculation allows you to forecast, plan, and ultimately solve these inevitable problems before this stage.<\/p>\n

Oftentimes, early SaaS growth is rapid, but succumbs to the growth ceiling as the churned customers cancels out newly acquired customers. If you have stakes in hitting aggressive growth targets, then it\u2019s important to understand the why and the how of this ceiling.<\/p>\n

How to calculate your SaaS growth ceiling<\/b><\/h1>\n

The formula for calculating the SaaS growth ceiling is simple. To start, let\u2019s define the growth ceiling as the highest recurring revenue <\/strong>or the most customers<\/strong> your SaaS business is able achieve, given a specific churn rate.<\/p>\n

You can calculate the maximum number of customers by dividing the number of new customers by your churn rate percentage.<\/p>\n

Max customers = customer acquisition rate \/ % churn rate<\/strong><\/p><\/blockquote>\n

To get to a value for maximum revenue, you can simply multiply the maximum number of customers with your average customer lifetime value (LTV):<\/p>\n

Max MRR = max number of customers * average revenue per account (ARPA)
\n<\/strong><\/p><\/blockquote>\n

It becomes easier to understand when we plot the growth ceiling on a chart, showing growth over time:<\/p>\n

\"\"<\/p>\n

Quick example<\/strong><\/h2>\n

SaaSCo. Acquires 100 new customers each year with an annual churn rate of 20%:<\/p>\n

100 \/ 0.20 = 500
\n<\/strong><\/p><\/blockquote>\n

SaaSCo hits its growth ceiling at just 500 customers. And if the average revenue per account (ARPA) is $100:<\/p>\n

500 * 100 = 50,000<\/strong><\/p><\/blockquote>\n

The maximum achievable MRR for SaaSCo is just $50k<\/strong>.<\/p>\n

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How to smash through the SaaS growth ceiling using growth levers
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The equations show us precisely which inputs and factors drive the growth ceiling. These three are, to hopefully no one\u2019s surprise: new customer rate<\/b>, lifetime value<\/b>, and churn rate<\/b>. Everyone\u2019s business is different, and depending on what stage your business is in, you may be focused on a different metric.<\/p>\n

Here are some simple guidelines to help you identify which of the three levers is the most impactful for your SaaS business.<\/p>\n