Great write-up. The upside here is tempting and they do seem to be getting things right. But I certainly agree with your core premise that there are too many unknowable / unpredictable parts to have a high level of certainty.
A few follow-up thoughts:
1. I think the product is at least somewhat sticky. From what I've seen there are no comprehensive alternatives at this price point (sure there are single point solutions but part of their selling point is the breadth of the offering) and I think the problems Thryv is solving quickly become a core part of a small business operation. Churn can happen for a range of reasons not just bankruptcy. Could be from affordability or a less thorough initial product test before purchase relative to larger companies, with customers opting to use the product to determine if it works for them.
2. You can calculate gross churn using net dollar retention and the Thryv revenue. ChatGPT can help with a formula here. Seems to have averaged about 2.5% over the last five quarters if I've done this correctly.
3. Although churn may be higher for the SMBs, what really matters is the LTV / CAC. As you say they're hunting more in the zoo, but that doesn't mean that they're completely ignoring the outside world. Although the SMB customers churn more, there are also many more of them. And presumably it's easier to sign one up than a 50 person business? I have their average customer term at 3.25 years using a 2.5% gross churn which at the $335 ARPU puts a customer LTV at about $9k. Now I'm not quite sure exactly what the incremental spend is to get that customer since there are probably a lot of fixed costs in the sales & marketing spend line which may even include marketing services as you state. But I've seen estimates for typical SMB SaaS CAC of $1k - $5k so at the midpoint of $3k you have your 3:1 LTV / CAC ratio that is often targeted. All of this is just guess-work with little precision, but what I'm saying is that a business can be viable at this churn level.
4. I get comfort from their multiple product lines that they have available to sell. Not only will this reduce churn, as you've mentioned, but it will grow ARPU. And the incremental cost of selling a new product to an existing customer has got to be less, right? These products have also only just become available so are just starting to gain traction (alongside Keap's cross-sell). If ARPU grows close to what they have targeted in their long-term goals, you really don't need amazing customer growth to get a good outcome. My point here is that it gives them another way to win by a) reducing churn, b) increasing ARPU, and c) getting customers in with another product that may fit them better.
Keen to hear your thoughts on the above? Also interested in feedback from any further research you may do on Thryv, so please do share.
Thanks for reading and for the thoughtful comment!
1) Generally in agreement here
2) Could you explain how you are calculating gross churn? I believe the missing variable is expansion revenue. Can't see how you can calculate gross churn given revenue and NDR without that.
3) This is a fair way of looking at things (and not sure how you are calculating LTV but isn't it $335*40=$13.4k). I think my issue is that there's just no telling what that equation looks like once the zoo is done (plus they probably already got most of the low hanging fruit), or what the competitive landscape for new customer acquisition will look like at that time. The better the quality of the customer they aspire to, the more competitive it is going to be. I don't disagree that a business can be viable at this churn level. But I'd need to see a stronger moat (e.g. the CPAY example) to have confidence in the stability of the LTV:CAC over time.
4) Generally agree, but this is all subject to the above going favorably.
Expansion revenue is Ending revenue - NDR x Starting revenue. So the formula for gross annual churn becomes: 1 + Ending ARR / Starting ARR - 2 x NDR. Convert this to monthly churn by using 1 - (1 - gross annual churn) ^ (1/12)
Checking my work while answering you made me realise I had my calcs wrong and the gross monthly churn has actually averaged 3.9% over the last five quarters. That gives a customer lifetime of just 24.6 months which is quite different and probably too high to be sustainable! The average gross churn has been about 4.3% over the last 15 quarters.
Regarding the LTV I provided before, that applied a 70% gross profit margin to the revenue which is why you got $13.4k vs my $9.4k. But with a 3.9% gross churn the LTV is now only $5.8k
I'd be interested in what their incremental CAC is... have you ever seen them mention this figure?
I don't think I agree with these formulas. Your Expansion revenue formula may be revenue from new customers, but not expansion revenue from existing customers. Expansion, contraction, and churn are all included in NDR.
I have not seen any mentions of incremental CAC, but I'd be surprised if it doesn't go materially higher from here (hence why they are focusing more on expand instead of land).
Great write-up. The upside here is tempting and they do seem to be getting things right. But I certainly agree with your core premise that there are too many unknowable / unpredictable parts to have a high level of certainty.
A few follow-up thoughts:
1. I think the product is at least somewhat sticky. From what I've seen there are no comprehensive alternatives at this price point (sure there are single point solutions but part of their selling point is the breadth of the offering) and I think the problems Thryv is solving quickly become a core part of a small business operation. Churn can happen for a range of reasons not just bankruptcy. Could be from affordability or a less thorough initial product test before purchase relative to larger companies, with customers opting to use the product to determine if it works for them.
2. You can calculate gross churn using net dollar retention and the Thryv revenue. ChatGPT can help with a formula here. Seems to have averaged about 2.5% over the last five quarters if I've done this correctly.
3. Although churn may be higher for the SMBs, what really matters is the LTV / CAC. As you say they're hunting more in the zoo, but that doesn't mean that they're completely ignoring the outside world. Although the SMB customers churn more, there are also many more of them. And presumably it's easier to sign one up than a 50 person business? I have their average customer term at 3.25 years using a 2.5% gross churn which at the $335 ARPU puts a customer LTV at about $9k. Now I'm not quite sure exactly what the incremental spend is to get that customer since there are probably a lot of fixed costs in the sales & marketing spend line which may even include marketing services as you state. But I've seen estimates for typical SMB SaaS CAC of $1k - $5k so at the midpoint of $3k you have your 3:1 LTV / CAC ratio that is often targeted. All of this is just guess-work with little precision, but what I'm saying is that a business can be viable at this churn level.
4. I get comfort from their multiple product lines that they have available to sell. Not only will this reduce churn, as you've mentioned, but it will grow ARPU. And the incremental cost of selling a new product to an existing customer has got to be less, right? These products have also only just become available so are just starting to gain traction (alongside Keap's cross-sell). If ARPU grows close to what they have targeted in their long-term goals, you really don't need amazing customer growth to get a good outcome. My point here is that it gives them another way to win by a) reducing churn, b) increasing ARPU, and c) getting customers in with another product that may fit them better.
Keen to hear your thoughts on the above? Also interested in feedback from any further research you may do on Thryv, so please do share.
Thanks for reading and for the thoughtful comment!
1) Generally in agreement here
2) Could you explain how you are calculating gross churn? I believe the missing variable is expansion revenue. Can't see how you can calculate gross churn given revenue and NDR without that.
3) This is a fair way of looking at things (and not sure how you are calculating LTV but isn't it $335*40=$13.4k). I think my issue is that there's just no telling what that equation looks like once the zoo is done (plus they probably already got most of the low hanging fruit), or what the competitive landscape for new customer acquisition will look like at that time. The better the quality of the customer they aspire to, the more competitive it is going to be. I don't disagree that a business can be viable at this churn level. But I'd need to see a stronger moat (e.g. the CPAY example) to have confidence in the stability of the LTV:CAC over time.
4) Generally agree, but this is all subject to the above going favorably.
Expansion revenue is Ending revenue - NDR x Starting revenue. So the formula for gross annual churn becomes: 1 + Ending ARR / Starting ARR - 2 x NDR. Convert this to monthly churn by using 1 - (1 - gross annual churn) ^ (1/12)
Checking my work while answering you made me realise I had my calcs wrong and the gross monthly churn has actually averaged 3.9% over the last five quarters. That gives a customer lifetime of just 24.6 months which is quite different and probably too high to be sustainable! The average gross churn has been about 4.3% over the last 15 quarters.
Regarding the LTV I provided before, that applied a 70% gross profit margin to the revenue which is why you got $13.4k vs my $9.4k. But with a 3.9% gross churn the LTV is now only $5.8k
I'd be interested in what their incremental CAC is... have you ever seen them mention this figure?
I don't think I agree with these formulas. Your Expansion revenue formula may be revenue from new customers, but not expansion revenue from existing customers. Expansion, contraction, and churn are all included in NDR.
I have not seen any mentions of incremental CAC, but I'd be surprised if it doesn't go materially higher from here (hence why they are focusing more on expand instead of land).