Did you know that it’s possible to know in advance when your startup might hit its growth ceiling?
That’s the point at which the number of churned customers—people who unsubscribe from and stop paying for your product—exceeds the number of newly-acquired customers for that reporting period.
When you hit your growth ceiling, every new customer gets offset by an old customer walking out the door, and your growth stalls.
Wouldn’t you like to know ahead of time when that might happen to you?
If your churn rate is low, it might take you a long time to reach your growth ceiling. But the truth is that most smaller SaaS often struggle with churn.
Because they deal in higher volumes and sign larger contracts, larger companies often benefit from the fact that their customers will stick to the solutions they choose once they choose them.
That’s why the average churn rates reported by large companies are often difficult for smaller SaaS companies to achieve—they simply aren’t realistic for an individual entrepreneur taking care of a few hundred customers.
Why would I want to know my growth ceiling?
It’s similar to having a Startup Death Clock: knowing the date when your money is going to run out is a good motivator and could encourage you to act before it’s too late.
This is important because breaking through the growth ceiling almost never happens overnight—it requires time, patience and investment in your business.
How is the growth ceiling calculated?
Your growth ceiling is the most revenue/customers that your SaaS could possibly achieve in its current situation, at its current churn rate.
You start by calculating the maximum number of customers your business could attain by dividing the number of monthly new customers by your churn rate percentage. (I.e. the customers who leave every month, expressed as a percentage of total customers.)
After that, you can calculate your maximum revenue by multiplying the maximum number of customers with the average revenue per user (ARPU).
You could pick any time frame for this calculation, but to get more reliable results you should use long-term averages or annual values. Just make sure you use stable figures and have the same time frame for both new customers and churn rate.
Let’s use 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 unless you improve your metrics.
If the average revenue per user (ARPU) is $27, then those 200 customers will end up paying you $5,400 per month.
Ok, so how do I break through the ceiling?
Every business is different, and breaking through different growth ceilings will require different tactics. In general, however, you’ll want to focus your actions on three main factors:
- The new customers you acquire
- The existing customers you’re losing
- The revenue you get from each existing customer
Many growth strategies will focus on factor #1: bringing more people in the door. But each of these is a good potential starting point for raising your growth ceiling. If you can budge just one of them, your growth ceiling will grow.
You might very well be better off trying to stop churn and retaining your existing customers than looking for new ones. Same goes for the customers who aren’t churning out, the ones that are happy with your product and stick with you. Could you be monetizing them better?
Joel York has an excellent guide to growth ceilings and how to break through them over at his website, if you’re looking for a more in-depth treatment of the topic.
I’ve seen firsthand how business dynamics change when figures pass certain tipping points, so I definitely believe in the ‘growth phases’ thinking that Joel presents in this guide. It can sometimes be hard to see exactly which phase you’re in, but the more wary you are of your growth ceiling, the easier it will be to know which levers you need to pull.