Churn happens whenever a customer stops doing business when a company.
Revenue churn is the revenue loss from that event.
Revenue churn is also known as MRR (monthly recurring revenue) churn. The revenue churn rate is the percentage of revenue lost to cancellations and downgrades.
Here's an example:
This means you lost $10,000 in churn, so you have a 10% revenue churn rate.
(This is called a gross revenue churn rate, by the way.)
Both are churn. Revenue churn measures revenue lost; customer churn measures customer count lost.
In other words, customer churn answers the question: What percentage of customers did we lose in the past month?
And revenue churn answers the question: What percentage of revenue did we lose last month?
That’s a meaningful difference, but it’s also a subtle one. Different customers can bring in different amounts of revenue, after all.
When discussing ways to minimize revenue churn, we must discuss customers.
Here’s an example:
Assume the following pricing for a SaaS company:
Plan |
Monthly Price |
# of Customers |
MRR |
Essential |
$600 |
50 |
$30,000 |
Premium |
$1,000 |
30 |
$30,000 |
Enterprise |
$2,000 |
20 |
$40,000 |
Now, say this company has a 5% customer churn rate.
That’s not useful information, is it?
Because we need to know where the churn is coming from.
They could have lost 5 enterprise customers (10% of their MRR) or 5 essential plan customers (3% of their MRR).
Massive difference, right?
But if we said they lost 5% of the MRR, you wouldn’t know how many customers they lost, nor in which pricing tiers.
That’s why it’s important to use both.
Revenue churn is a stability metric. A business with a low revenue churn rate does a better job of retaining incoming revenue (and, by proxy, customers) than a business with a higher revenue churn rate.
This signals a few important things to investors and stakeholders:
This all signals that the business is stable.
An increase in revenue churn can signal a few different things:
As with any metric, consulting with Operations, Product, and Customer Success is important to get the full picture of what's happening in the business.
According to Baremetrics, SaaS companies that target SMBs should shoot for under a 3-5% monthly churn rate. Established SaaS companies should shoot for a 5-7% annual churn rate.
CoBloom found in a SaaS company analysis that a 5% churn rate shouldn't be seen as a clear-cut barrier to growth.
Revenue churn is often the source of lagging growth metrics like the LTV/CAC ratio.
In this case, because customers are churning, LTV goes down. So it's difficult to meet that ideal 3:1 ratio.
Revenue churn is simple to calculate.
Revenue Churn Rate = (Contractions + Exits) / MRR
In other words, the revenue churn rate is the ratio of lost revenue to monthly recurring revenue.
Not detailed enough?
Fortunately, you can dig a little deeper by calculating revenue churn in a few different ways.
A net revenue churn rate accounts for expansions as well as contractions.
It’s a slightly different view of the business’s churn rate because it acknowledges growth from existing customers and decline from losing customers.
(An expansion is when an existing customer moves up a pricing tier or purchases an additional product.)
Here’s the formula:
Net Revenue Churn Rate = (Contractions + Exits - Expansions) / MRR
As you can see, this is extremely similar to our previous formula.
The only difference is that we subtract out expansions.
In practice, here’s what it looks like:
Take our previous example, but say we also gained $20,000 in expansions.
Then our net revenue churn rate is as follows:
Net revenue churn rate = $5,000 + $5,000 - $20,000 / $100,000
= - $10,000 / $100,000
= -10%
So even though we made more money this month than we did last month, our net revenue churn rate is negative.
That’s because we made more from expansions than we lost to churn.
In other words:
Negative net revenue churn is good for business!
Until now, we’ve been calculating revenue churn with our entire customer base.
But you can (and should) calculate revenue churn by cohort.
This helps you better understand how specific segments of your customer base are performing.
...what’s a cohort?
A cohort is a subdivision of a customer base that shares a common characteristic.
For example, they could all live in New York City, belong to Mid-Market companies, or work in the pet insurance sector.
This means:
It’s possible to segment by location, size, industry, and other factors (country, market share, language, etc.).
If you find a specific cohort that does well, that’s an opportunity for easy growth.
If you don’t do well with a different cohort, then it’s worth discovering why.
Like any churn, revenue churn results from a few key issues:
The fix, then, is to improve most of these metrics.
Don’t let customers churn without telling you why they’re leaving you.
When a customer downgrades a package or cancels their subscription, you should ask them why.
This feedback will help you better tailor your revenue churn initiatives.
There’s an opportunity to make customers second-guess their decision to downgrade or churn.
When customers tell you they want to churn, give them a counteroffer.
You can do this right before they confirm their decision.
Here are some tactics:
That said, all of this may seem like too little, too late, especially if your customer success team doesn’t have a good reputation or your brand doesn’t have a good rapport with that customer.
Revenue churn isn't a catch-all metric.
You need to supplement it with other metrics in order to get the full story.
Since revenue churn is purely financial, it doesn't go into the details of customers.
This is particularly damaging to businesses that ignore that they're losing thousands of customers (who could have grown into higher pricing tiers) because their revenue churn is low or acceptable.
In other words, because revenue churn only looks at money, it obscures the story of customer count.
A low revenue churn rate correlates with stronger customer loyalty, but there are plenty of other factors that could be at play, like:
Since the strength of your customer relationships is important to your revenue retention going forward, it's essential that you build a strong rapport with your customers.
While revenue churn can definitely help you identify seasonality in groups of customers who use your product, it doesn't tell you why it happens.
It could be that those variations are perfectly normal and related to the calendar year.
But either way, you need to combine revenue churn with reactivation retention, among other metrics, in order to accurately understand how seasonality affects your bottom line.
Now you know what revenue churn is, how to calculate it, and how to improve it.
Which of these strategies will you try first?
Maybe you're going to create a customer success plan.
Or you're going to try some active churn prevention.
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