A GUIDE FOR CALCULATING YOUR STARTUPS GROWTH CEILING
Did you know that it’s possible to know in advance when your startups growth is going to hit a plateau and stall?
The bigger your customer base gets, the nearer you’ll get to the point where the amount of churned customers exceeds the number of acquired customers. For every new customer you’ll get, one of the old customers walks out - and your growth stalls. You’ve reached the growth ceiling. ￼
If your churn rate is low it will take longer to reach this, but the truth is, smaller SaaS often can’t reach the average churn rates.
The studies referred for the average churn rates study larger companies who sell massive systems. It’s a huge effort to get a customer for such systems, but the customers stick to the solutions they choose. And that’s why the studies end up showing average churn rates that many low-touch SaaS with less dedicated customers can never reach.
But even if your churn rate would be low, you’d want to know the growth ceiling anyway.
WHY DO I WANT TO KNOW THE GROWTH CEILING?
The effect of knowing your growth ceiling is similar than having a Startup Death Clock. Knowing the date when your money is going to run out is a brilliant motivator.
Likewise, knowing when your business is going to plateau will motivate you to act in advance. The actions that you need to take to break through the ceiling don’t produce results overnight.
Especially improving churn often takes time. The seeds of the churn are sown when you acquire a customer. Sometimes the actions needed to improve churn are almost mini-pivots, like moving your focus from consumers to businesses. But just imagine how long it will take before that type of change is visible in the actual churn figures!
HOW IS THE GROWTH CEILING CALCULATED?
Growth ceiling is the most revenue/customers that your SaaS can achieve with its current dynamics.
You can calculate the maximum number of customers by dividing the number of new customers by your churn rate percentage.
After that, you can easily calculate your maximum revenue by multiplying the maximum number of customers with the average revenue per user (ARPU).
￼To get more reliable results, you should use long-time averages (or annual values), but in principle you can pick any time-frame. Just make sure you use stable figures and have the same time-frame for both new customers and churn rate.
I’m using monthly values in the following example.
If you acquire 20 new customers each month and your monthly customer churn rate is 10%, your customer base is not going to grow to over 200 customers. Not unless you improve your metrics.
And if the average revenue per user is $27, then those 200 customers will end up paying you $5,400 per month.
OK, HOW DO I BREAK THROUGH THE CEILING?
You’ll do that by improving your business and the actual actions depend on your situation.
Of course, there are only three factors here:
Customers you acquire
Customers you lose
Money you get from a single customer
If you can budge any of them, your growth ceiling will shift higher.
You can get more details and ideas from Joel’s superb growth ceiling article Driving SaaS Growth Through The Customer Lifecycle.
While using SaaS Compass I’ve seen how business dynamics change when the figures pass certain tipping points, so I definitely believe in the growth phases thinking that Joel presents in that article. It’s just sometimes hard to see in which phase you are in. But the more we use metrics like growth ceiling, the easier it will be to know which levers you need to pull to get more money.