Here is the story - his friend manages the finances of over 14,000 recurring businesses and analyzed their churn rate and lTV.
He saw that one of the top indicators for a lower churn rate and higher LTV was 🥁 drum roll - contract length.
If you are doing MoM agreements on average you would have a 10% churn per month.
If you do a 3-month agreement it gets cut in half to 5% churn per month.
But when you do do a 12 month the churn on avg becomes 2% per month.
My theory is that businesses paying longer term:
A) See more value in your service hence longer commitment
B) Have longer-term goals they want you to help them accomplish
C) Have the budget to stay with you long-term
Top businesses making over $5mil in ARR have over 30% of their client base in yearly agreements.
So what did we do?
We switched to a 3-month minimum and it makes sense since most of our clients close their first cold deal past the 3-4 month mark.
Why did we do it?
We have the data on clients that have stayed with us for 6-12 months on the ROI they are getting.
We have the case studies and references to back us up in terms of what we can deliver
We want to focus only on long-term thinking clients, so not looking to close a deal on the first month when their sales cycle on avg is 3 months let’s say. That's not to say everyone paying MoM is like that but it will help us filter them out better.
When should you do it?
My thinking is the moment you have a solid client base and you are generating at least over $100-150k MRR and you are seeing churn going up - you should start testing it out.
Some companies only do 12-month commitments minimum. Granted SaaS is a good example where it works well since they have a freemium or lower-paid plan initially.
I will update you in a couple of months on how it’s affecting our close rate. But so far we are seeing about the same amount of businesses, albeit deals taking a bit longer to close.
👉 Is your company charging MoM, quarterly, 6 months, yearly, or a mix of all? And how are you seeing churn and LTV get affected by that?
This post was originally shared by Alexander Ivanov on Linkedin.