Buyers are discounting our recurring revenue multiple because our gross customer churn is high, even though our net revenue retention is over one hundred percent. How do we defend our valuation?

Question

Tyler Smith · Accepted Answer

A net revenue retention rate over one hundred percent is a strong indicator of value, but high gross customer churn signals a leaky bucket. Buyers look at gross churn because it reveals customer dissatisfaction and high customer acquisition costs. If you are constantly replacing lost clients with new ones, your business model is less stable than it appears. To defend your valuation, you must address this issue openly using your operational data. Use your Level 10 Meeting to IDS the root causes of the gross churn. Break down your customer base into cohorts. Often, you will find that the churn is concentrated in a specific, low-value customer segment that you have intentionally outgrown. Present this cohort analysis to the buyer. Prove that your core, ideal customers have incredibly low churn and high lifetime value, while the high churn is limited to legacy clients who do not fit your current target market. Additionally, show the buyer that you have assigned clear accountability on your Accountability Chart for customer success and retention. By demonstrating that you have identified the problem, adjusted your sales targeting, and institutionalized a system to protect your customer relationships, you can convince the buyer that your recurring revenue is durable and deserves a premium multiple.