What’s the limit to linear growth?
As a bootstrapped saas owner, it’s hard to stay on top of everything that you know you should be doing.
Sometimes, a problem will rear its head in an area you thought was stable and boring, and so you stopped paying a lot of attention to it.
It can be scary when a problem shows up somewhere super important. For me this happened to my MRR.
The good ole days
For a long time, my MRR grew at a small, but steady rate of $100-$200 per month.
There were months where I’d make a big change like rewriting my sales pages and see some big boosts, but for the most part it would continue on at a steady rate.
I was pretty happy with this predictable increase, because if you go far enough into the future, $100 per month can add up to a nice, big number.
I’d also grown up listening to stories like The Tortoise and the Hare. Slow and steady wins the race, after all.
So I was fine with nice, slow, predictable growth.
I’d heard and read stories about the plateau of death, where your churn rates catch up to your MRR growth and it flattens out and you no longer grow.
But this seemed to always happen at pretty high MRR numbers (compared to me, anyway), so I wasn’t worried about it at all.
When the unexpected happens
It turns out the plateau of death doesn’t care about how big your MRR is… it can strike at any time.
I didn’t really notice a problem at first. The first month just seemed like a slow month and thought the next month would probably return to normal. I’d had a down month once or twice before and it wasn’t a big deal.
The second month was a little more worrying, but denial kicked in pretty quick. Ok, so I had two slow months, maybe my traffic numbers were off for some reason?
After the third month, I couldn’t ignore it anymore.
The traffic numbers were about the same. New signups were about the same. Churn rates were about the same.
Now I was a little more worried, and I wanted to know more about the plateau of death.
So I busted out excel and got to work investigating what was going on.
What causes the Plateau of Death?
The first piece of the puzzle is human nature.
We expect things to continue behaving the way they did in the past.
In the case of your business’s growth, your growth looks like a nice straight line, extending up and to the right into the future. What happened last month and the month before will happen next month, and so on.
You see the MRR growth line for you business (the blue line below) and your mind automatically assumes that the red line should continue on into the future.
But in reality, your MRR will not grow up and to the right forever. The growth is capped by a simple relationship, and in reality your growth will look more like this:
What looked like a straight line is actually a curve that will level off.
When does growth level off?
Your MRR growth will level off when churn catches up to MRR growth.
This means you will be losing as much revenue to churn each month as you added from new customers.
This wasn’t news to me, because I had read about this exact thing from successful bootstrappers that came before me.
What was a surprise was when it happened to me.
It always seemed to happen to business that were 5-10x bigger than mine was. How was this possible?
When does growth really level off?
Part of the reason the plateau of death sneaks up on people is because churn doesn’t play by the same rules as new revenue growth.
When your business is growing at a steady rate, new revenue growth is linear.
This means the new revenue you get each month is about what you got last month (or maybe a little bit bigger).
If you charted your new revenue each month on a graph, it would form a fairly flat line.
If you charted your new revenue added to your last month’s revenue you’d get a nice, straight line that goes up and to the right like the first image above.
If you are in a big market or you are very good at marketing, your line will be steep.
If you are in a smaller market (or aren’t very good at marketing) your line will be less steep.
But both will basically be straight lines. (note: you can get super-linear growth, but it’s rare for bootstrappers and needs a viral mechanism to your growth)
The surprise factor is that Churn isn’t linear.
This month’s churn isn’t based on last month’s churn.
It’s based on ALL of the revenue you accumulated.
When you calculate churn, it’s typically a flat percentage of last month’s TOTAL revenue.
What this means, is that churn grows much, much more quickly than MRR. And when Churn catches up to MRR growth, your MRR plateaus.
But wait there’s more…
As if this weren’t enough, that churn grows so quickly, I still didn’t expect my MRR to top out so soon.
I thought this process only happened at a higher MRR. Like I said before most people I talked to had this problem at 5-10x higher MRR than I did.
It turns out this churn limiting MRR relationship has another nasty feature…
It’s not related to your current MRR.
That’s right, your current MRR has no bearing on where you’ll end up.
The equilibrium point, where MRR growth is canceled out by churn, is determined only by new monthly revenue and churn rate.
The relationship is (Monthly new revenue) / (Churn rate)
For example, if you are gaining $2,000 new revenue per month with a 5% churn rate, your growth will be capped at $40k / mo.
Your current MRR is completely irrelevant.
If you have $20k MRR, you will grow until you near the $40k cap.
If you have $80k MRR, you will shrink until you reach the $40k cap.
There’s only 3 basic ways to break out of the plateau
Once your growth reaches an equilibrium where new revenue matches churned revenue, the only way out is:
- Add new customers Faster.
- Improve retention so you lose less revenue per month to churn.
- Increase the revenue per existing customer. ← this is why “negative churn” is so highly sought after
The problem with solutions #1 and #2 are that they don’t really solve the problem.
They kick the can down the road and you can deal with another plateau of death at a later day.
Which, let’s be honest future me can deal with that better than I can.
Solution #3 is different.
Solution #3 is also known as expansion revenue and operates on a similar basis as churn, in that it grows as a function of ALL your existing customers.
This means it can grow as fast as (or faster than) churn, and its limit is capped by other mechanics.
The key to expansion revenue is having a good pricing model, so you can continue to earn more revenue from your best customers that grow with you. (i.e. unlimited use plans are a bad idea in this context)
Hopefully what I learned can help you see the plateau of death coming, so you can try to stay ahead of it.