Rethinking SMB SaaS Retention: Small Business Failure as a Key Churn Indicator

In the business of Vertical SaaS, comprehending and managing churn is vital for long-term success. While most platforms concentrate on conventional churn indicators like subpar customer service or lack of desired outcomes, there's a significant factor that's frequently overlooked, especially for those serving small businesses: business failure (i.e. closure) rates.

The Overlooked Churn Factor: Small Business Failure

As a vertical SaaS provider catering to SMBs, it's imperative to consider the stark realities of small business survival rates. According to the U.S. Bureau of Labor Statistics, approximately 18% of small businesses fail within their first year, 50% cease operations after five years, and 65% close their doors by their tenth year of operation.

These statistics underscore a critical truth: regardless of how much you enhance your onboarding process or minimize customer support times, these efforts won't rescue struggling small businesses from “death.” To effectively address churn and enhance retention, we need to look beyond traditional product metrics and focus on empowering our SMB customers to survive.

Why Small Businesses Fail: The Financial Thread

The primary reasons for small business failure often revolve around financial mismanagement:

1. Inadequate market sizing and research
2. Cash flow mismanagement
3. Flawed data collection
4. Insufficient business planning
5. Deficient overall financial management

Notice the common thread linking these issues? They all relate to finances and accounting. This insight points to a clear solution: more effective accounting practices.

Embedded Accounting: A Transformative Approach for Vertical SaaS

Integrating an accounting offering into your vertical SaaS platform not only bolsters your product's capabilities but also substantially aids your small business customers. Here's how:

1. Accounting as the Strategic Financial Foundation

Embedded accounting enables small businesses to centralize all their financial operations in one place. This consolidation is essential for maintaining a clear and accurate financial picture.

2. Streamlined Financial Management

Consider a restaurant using a Point of Sale (POS) system. Without integrated accounting, they might have revenue collection in one system and expenses in another. This separation complicates the generation of accurate financial statements and tracking of profitability.

With embedded accounting, all transactions — from daily sales to supply purchases — are automatically recorded and categorized. This integration ensures that financial statements remain current and precise, and allow small business owners and operators to clearly see their profitability (or lack thereof).

3. Automation for Efficiency

Embedded accounting can automate many financial processes within the same platform they are already utilizing. This automation diminishes the likelihood of human error and frees up valuable time for small business owners to concentrate on growing their business rather than getting bogged down in manual spreadsheets.

The Impact on Your SaaS Metrics

By supporting your SMB customers' success through embedded accounting, you're not just reducing churn — you're improving several of your own key product metrics:

1. Retention: As businesses become more financially stable and successful, they're more likely to continue utilizing your platform.
2. Elevated NPS (Net Promoter Score): Customers who experience tangible benefits from your one-stop-shop platform are more inclined to recommend it to others.‍
3. Increased Average Revenue Per User (ARPU): As businesses expand and leverage more features of your platform, like embedded accounting, your ARPU is likely to rise.

Rethinking Churn Rate in Vertical SaaS

While the average churn rate for SaaS companies hovers around 5%, this figure is likely much higher for vertical SaaS companies serving SMBs due to the high failure rates of small businesses. By factoring in and addressing small business failure rates, you can significantly lower your churn rate.

Remember, high churn isn't just about lost revenue — it's also a drag on growth, customer acquisition costs, and overall business valuation. By prioritizing your customers' success through embedded accounting, you're investing in your own platform's long-term value.

A New Imperative to SaaS Retention

For vertical SaaS platforms serving SMBs, it's time to reconsider our approach to retention. While traditional churn indicators remain important, we must acknowledge that our customers' survival is intrinsically linked to our own success.

By embedding accounting features into your platform, you're not just adding another feature — you're providing a lifeline to your SMB customers. This approach tackles the root causes of small business failure, dramatically decreasing your churn rate while also fostering growth in other valuable KPIs for your product. Ultimately, the success of your platform is inextricably tied to the success of the small businesses you serve.