Countering fake churn from past due payments
From time to time one of your customers will delay a payment. Maybe it’s an expired credit card or a person responsible for making a wire transfer is on vacation. One way or the other such delay in payment affects your metrics. Let’s look into one example of such delay, or past-due payment, and see what possible solutions we could apply to minimize impact on your metrics.
Consider someone paying you $5000 monthly on the 10th. It’s a big contract so they have 7 days to pay the invoice.
- 10th April – 5000$
- 11th May – 5000$
Now let’s assume it’s 12th June and they haven't paid you yet.
You ask your data analyst or revenue ops – what is our Churn? And the question is – should you include this past-due customer in your churn number or not. Technically it is a churn since 12th of April. So what should you do?
If such a situation happens to you often – for example you receive payments via wire transfer and you have net payment terms of 7 days – there is one trick to counter this situation – by introducing what we call a churn window.
You need to define a period that you, as a business owner, consider ok for the payments to be past due. During this period even if an invoice is not paid yet the customer will still be recognized as MRR. Once the period ends there are two options. Either the invoice is paid and all is ok. Or if it’s still not paid, you should treat it as a churn that happened at the beginning of the period (when the invoice was originally due to be paid).
One thing to be aware of defining a churn window is that it makes the churn metric less proactive. It might give you this warm fuzzy feeling of not having any churn, and suddenly after the churn window elapses and it turns out that your customers actually didn’t pay you, you get to see churn appearing a few days back.
Continuing with the above example, if your churn window was set to 7 days, then you would not see any churn on 12th June, because the payment was due for less than 7 days.
If the user paid at any point in time, then all is ok and you recognize the correct MRR with no Churn.
If they didn’t ever pay, then you will report Churn on 10th of June, when the payment was supposed to be paid originally.
As you can see, introducing the churn window will introduce a bit more predictability into your metrics, especially if your payments aren’t paid on time on a regular basis. SaaS businesses which have smaller monthly payments (think under $1000/mo) might not benefit from it. Companies with less but more enterprise customers and bigger contracts are more likely to see advantages of this and get more predictability when looking at their metrics.
by Mike Co-founder @ Probe
Illustration by Violetta Barsuk from Ouch!