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SaaS churn stress test

The FirstPass Memo SaaS churn stress test is a free tool that shows what monthly churn does to a SaaS listing's MRR over 12 months and to its payback, if new sales carry on as now or stop when the founder leaves. A flat payback assumes today's MRR stays where it is.

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How it works

Next month's MRR = this month's MRR × (1 − churn) + new MRR
Monthly profit = MRR × margin
Payback = the month in which cumulative profit reaches the asking price

With new sales, MRR moves towards the level where churn removes exactly what new customers add: new MRR ÷ churn. If new sales stop, MRR falls by the churn rate every month, and the most today's customers can ever pay is MRR × margin ÷ churn. If that total is below the asking price, payback never arrives without new sales.

The test uses revenue churn because that is what moves profit. If the seller gives customer churn only, ask for revenue churn too, since a few large accounts leaving can matter more than many small ones.

Worked example

A composite listing, not a real one: a micro-SaaS asking $75,000 with $3,000 of MRR, 6% monthly churn, about $120 of new MRR a month and an 80% margin.

The flat payback is 31.3 months. With new sales as now, MRR drifts down towards $2,000, where churn and new sales balance, and payback takes 39.3 months. MRR after 12 months is about $2,476. If new sales stop, MRR is about $1,428 after 12 months and today's customers pay about $40,000 of profit in total, so the $75,000 price is never earned back.

Questions to send the seller

What were monthly customer churn and revenue churn for each of the last 12 months?
How many new paying customers arrive each month, and from which channels?
Can you reconcile MRR to cash collected last month, including failed payments, discounts, refunds and annual plans?

Frequently asked questions

What churn rate should I use if the listing does not give one?

Ask for monthly revenue churn for each of the last 12 months before you rely on any payback figure. To see how sensitive the deal is, run the test at a few rates, for example 3%, 5% and 8%, and compare the results.

Why would new sales stop after a sale?

In small SaaS businesses, new customers often come from the founder's own network, content or community posts. If that work stops when the founder leaves, new MRR can fall even though the product is unchanged. Ask where each month's new customers came from.

Are annual plans counted?

The test treats all revenue as monthly. If many customers pay annually, ask how those payments are counted in MRR and when they renew, since a renewal month can hide churn for the rest of the year.

Get the SaaS and software seller checklist

Join the FirstPass Memo waitlist and the next page gives you the SaaS and software seller question checklist (web page and PDF) straight away, along with the other free files: seller question checklists for eleven business types, the 72-hour vetting plan and a deal-tracker spreadsheet. Nothing is emailed; you download them on the page.

We will write when paid memos open, and occasionally before. Unsubscribe any time by replying "stop" to hello@firstpassmemo.com. Looking at a live listing priced $10k–150k? Apply for a free beta memo instead; its confirmation page has the same downloads.

This calculator does arithmetic on the figures you enter. It is not investment, legal, tax or valuation advice, and it does not check whether a seller's figures are true.