CFOs of companies in every industry rely on a checklist of key performance indicators (KPIs) to monitor performance. From operating margin to EBITDA, these indicators provide the general insights CFOs need to do their jobs and ensure their company is hitting its marks.

"But if that's all you measure, you're just holding your company up to the same mirror as everyone else," Erich Fischer, principal at Deloitte Consulting, told sister publication Transport Dive. "There is no chance of differentiation."

CFOs are tasked with finding alternative metrics which measure success and build competitive advantage. Within industries, certain specific KPIs are especially helpful. For software-as-a-service (SaaS) companies, churn, which includes lifetime customer value (LTV), and customer acquisition cost (CAC), is vital. 

A SaaS company cannot make a profit if its lifetime customer value doesn't exceed its cost to acquire customers by a certain amount. Churn, which measures the percentage of customers lost over a period of time, principally factors into that calculation.

CFO Dive spoke to three CFOs of SaaS companies about how they evaluate churn, what the metric tells them, and why other CFOs might consider tracking it, regardless of industry.

How SaaS CFOs use churn

For Bill Koefoed, CFO of OneStream Software, there are two parts of churn: gross dollar retention and net dollar retention. He closely tracks both. 

"Gross dollar retention is just what percent of your customers churn every year," Koefoed said. "Investors like predictability. The more you're holding onto your customers, the more predictable you are as a company."

Net dollar retention rates, in the past, has been referred to as "land and expand," Koefoed said. "You want to land in a company, and then grow your footprint."

Snowflake, a SaaS giant that went public earlier this month, has a 158% net dollar retention rate, because they land in a company, expand, and lead people to continue using their software, Koefoed said.

"As it relates to churn, or the inverse of churn, which is retention, those are the two metrics SaaS companies really focus on," Koefoed said. 

Breaking it down

"Really every SaaS company CFO should be tracking churn," Ben Murray, CFO of Mobile Solutions, said. "Churn and retention are key."

Murray breaks churn into two categories: logo churn and dollar churn, which he defines as how many companies use Mobile Solutions and how many dollars go out the door respectively. With these two metrics, Murray tracks gross retention — which according to him is really just churn — and downgrades leaving the business. 

He also studies net revenue retention, which folds out of churn. "I think with every SaaS metric you have to start basic, with logo retention," he said. "Maybe winning that logo, or company, is really not the end result. For us, we want to win that logo. We deal with lots of different industries and across the board churn and customer retention, which are opposites, go hand in hand."

Nonetheless, if you're measuring churn, you're also measuring retention, Murray said. "With SaaS and revenue streams, you have to understand the complete revenue picture, there's not just one stream, but a lot going on."

"You've got your revenue stream moving along each month, you have downgrades, new customers, customers leaving," he added. "It's really important to see layers of revenue because recurring revenue stream is one of the top metrics for your business."

To be successful, a SaaS CFO must "really peel back layers to understand customer base and recurring revenue, Murray concluded.

The precursors to churn

At ThoughtSpot, CFO Mohit Daswani's list of KPIs is long. He tracks bookings growth, how many new customers are added each year, annual contract value (ACV), and annual revenue growth, which is related to net revenue retention (NRR), and captures the ability to retain customers as well as the ability to grow with them.

Churn feeds into that, and the ability to expand, he said. "So much of expense is the go-to-market function, LTV to CAC, and payback period," he said. "From that group of customers you acquire, you want to get to under 24 months of payback period; that's a healthy ratio." 

"Churn is a key measure of health for SaaS business," Daswani said. "Why are they trading at 20 times revenue or higher? Investors expect they maintain long-term customer relationships and grow with them."

Keeping customers happy, engaged and coming back starts with churn, Daswani said. At ThoughtSpot, when they think about churn, if a metric of any kind catches him by surprise, something is already broken. 

"You should have enough lead indicators to hopefully have a good feel on churn," he said. "Not that out-of-the-blue things don't happen. But, in the normal course of business, churn should be last thing you see show up, as opposed to leading indicators that let you not even have to have a customer churn in first place."

Daswani is constantly "fine-tuning the dial" on each of the dominos that ultimately lead to customer churn, which is a multi-step process.

First is getting customers up and running and not letting them fall off the onboarding cycle. "Onboarding has to be a quick, good initial experience to reduce friction," he said. 

From there, he studies how much customers are using the platform via engagement, adoption and active user growth.

Then there's customer sentiment, which is often reflected in the net promoter score. Other measures, like support tickets, indicate the health of a customer.

Daswani checks how many support tickets are coming in, as it may imply a product is not as intuitive as ThoughtSpot thought. Then, if there's a high number of call tickets, how long does the problem take to resolve? 

Those are some key quantitative metrics, but he also looks into the qualitative, engaging in a feedback cycle with the product team. 

"What features are customers requesting? Is there a frequent pain point? Let's adapt our product to meet that opportunity," he said. "The best product teams are attuned to customer feedback. The best products solve the problems themselves. The lower the number of touch points you have the better; it means the product is intuitive. The feedback mechanism between customer success and product is key." 

The bottom line

ThoughtSpot wants to know exactly why churn occurs so it can learn from it.

"If it's bad onboarding experience, you won't get widespread within that company. If nobody's using you, you're going to churn. If usage slips, maybe you spiked initially, but now people aren't finding value, that's pretty good indication you're heading towards a churn," he summarized. "If they don't like you, they're not going to keep you."

Churn is a great metric, but you can't just wait for the churn number to turn up, Daswani said. "There's all these things to do ahead of time. If all you're doing is measuring churn, and not the indicators leading into it, you're being way too reactive."