How to Calculate Customer Churn Rate and Revenue Churn Rate
What is churn in business? The world of business is replete with several concepts and metrics that help business owners and managers know when they are moving in the right direction and otherwise. Without these indicators, business goals such as productivity, cost minimization, and profit maximization may be more tasking to achieve. Among such business metrics include churn or its other version, the churn rate, whose components include a couple of important rates - the customer and revenue churn rates respectively.
This post answers key questions surrounding the concept of churn: What is churn in business? What is churn rate? What is customer churn? What is revenue churn? It also provides information on the churn rate formula for both customer churn and revenue churn, how to calculate churn rate, the consequences of operating a high churn business, what churn rate SaaS businesses should be maintaining, and more.
What is Churn in Business?
Churn (or attrition) refers to the number of individuals or units leaving a group over a specified period. It is a term that has a variety of meanings in the business world: a customer churn meaning, a revenue churn meaning, an employee churn meaning, and more.
Customer Churn Meaning
Customer Churn refers to customers who terminate their contractual relationships/subscriptions with a company in a given timeframe. The term is primarily associated with companies who operate on a subscription basis, for example, SaaS companies but can apply to any company that has customers.
Revenue Churn Meaning
Revenue churn refers to the recurring revenue lost by a SaaS business through subscription cancelations, non-renewals, and downgrades. SaaS businesses usually measure revenue churn monthly through monthly recurring revenue (MRR) and annually through annual recurring revenue (ARR). Though MRR is a popular measure, ARR can offer broader insights. Like customer churn, revenue churn is key for SaaS companies or companies operating a recurring revenue model.
There are two types of revenue churn – gross revenue churn and net revenue churn.
Gross Revenue Churn
The percentage of recurring revenue lost by the company in a given period as a result of non-renewals, cancellations, and/or contractions (downgrading to a lower-tier account).
Net Revenue Churn
The percentage of total recurring revenue a company loses due to customers not renewing or canceling their subscriptions less any additional revenue earned from remaining customers through upselling, cross-selling, price raising (tier-based), or other service expansions.
What is Churn Rate?
A good understanding of what churn is in business serves as a good background to also comprehend the question: What is churn rate? Churn rate is simply a number (expressed as a percentage) that indicates the degree of churn in an organization. The higher the number, the greater the churn and vice-versa.
Churn Rate Formula
The churn rate formula applies to both customer churn and revenue churn. Understanding it is essential for anyone who doesn’t know how to calculate churn rate. The formula for churn calculation is derived from a ratio of two variables. As noted earlier, there are quite a few kinds of churn, which means there are different churn rates as well. Below are the formulas for the churn rates in focus:
Customer churn rate = No. of customers churned in a period ÷ No. of customers at the start of the period x 100.
Gross revenue churn rate = Churned MRR ÷ MRR at the start of the period x 100.
Net revenue churn rate = Churned MRR – Expansion MRR ÷ MRR at the start of the period x 100.
Customer Churn Rate Calculation
Suppose a company had 40 paying customers for the month of January and by February this number reduced to 38. The churn calculation for the company is as follows:
2/40 x 100 = 5%
Gross Revenue Churn Rate Calculation
Assuming a SaaS company with an MRR of $15 million loses $2.5 million in a particular month. Here’s what the churn calculation will look like:
Gross revenue churn = $2.5 million ÷ $15 million x 100 = 16%.
Net Revenue Churn Rate Calculation
From the above example, assume that the company brought in $1.5 million in additional revenue. Therefore, the churn calculation is:
Net Revenue Churn = ($2.5 million – $1.5 million) ÷ $15 million x 100 = 6%.
The Churn Rate SaaS Companies Should Target
Churn is so important to a SaaS business that any such business may suffer if the owner cannot answer key questions such as: What is churn? What is customer churn? What is revenue churn? It is only a SaaS business operator who has a firm grasp of these concepts that can try to target an ideal rate.
SaaS businesses should aim for as low a number of churned users as possible since achieving profit will be challenging in a high-churn business.
A high number of churned users could imply a decreased net revenue retention rate (NRR) due to fewer paying customers being retained over time. This highlights the importance of reducing churn for SaaS companies and the impact that churn can have on NRR. But what is the specific churn rate SaaS companies should target?
Generally, the churn rate SaaS companies aim for either corresponds to their industry average or is lower than the average. When it comes to a specific figure, opinions differ widely depending on the source. But according to Lincoln Murphy of Sixteen Ventures (as quoted in HubSpot) “an acceptable churn rate is in the 5–7% range ANNUALLY, depending upon whether you measure customers or revenue.”
The Relationship Between Customer Churn and Revenue Churn
In a subscription-based model, a complex and interesting dynamic exists between customers and revenue such that studying both customer and revenue churn helps you gain valuable knowledge on both. Of course, a lost customer means lost revenue, but sometimes, losing a customer doesn’t always translate to reduced revenue (revenue can even be higher in such a case, e.g., if the company upsells).
For example, say you lose 4% of your customers who account for 4% of your revenue in a given month. Fortunately, your remaining customers upgrade to a new feature set you introduced and revenue from those accounts rises by 6%.
So, despite a 4% customer churn for that period, your net revenue churn for the period is actually negative (which is good news).
Churn Rate Data Analysis
Earlier on, certain aspects of the churn concept such as customer churn meaning (What is customer churn?), how to calculate churn rate, the churn rate SaaS businesses should be eyeing and more were discussed. But equally important is the ability to conduct comprehensive data analysis based on churn rate key performance indicators (KPIs) and goals. Just like any other kind of analysis, a successful analysis of churn will require tracking the most relevant data about the concept. Having the correct KPI-oriented goals can enable you to generate clearer insights into the causal factors of churn in your organization.
Here are some key KPIs you should be focussing on:
Usage
An important sign of impending customer churn is a consistent drop in the rate of usage. This serves as an indication of different things, depending on how long the affected customer had used your product prior to the decline of their usage.
h3ompetitor Pricing
It is essential to monitor the pricing models and product offerings of your competitors since it can help with predicting the likelihood of churned users due to shifting to competitors. Moreover, to ensure you always remain competitive, the pricing strategy you adopt should be amenable to constant review and modifications if necessary.
Support Tickets
A support team that is getting fewer tickets than usual may imply that a company is doing a great job (hence the fewer tickets). But it may also be due to a sign lack of engagement by customers who feel that seeking your company’s support to address their concerns is a waste of precious time.
Upgrade Probability
Since even small increases in monthly churn can hurt and it can be pretty tough for a high-churn business to reduce the churn, having a KPI that will enable you to be preemptive in tackling churn is a great idea. One way to achieve this is by boosting customer relationships through upsells.
But you have to contend with questions such as whether some types of customers are more likely to upgrade their subscriptions than others and if there is a particular point in your product lifecycle where upselling is most effective. Focus on such questions and find time to nurture and enhance your relationships with customers. Upselling can help you cope with the impact of churn while you adopt measures to halt or minimize it.
Customer Behavioral Patterns
A typical SaaS company usually has a diverse set of clients with varying behavioral tendencies, including needs, and preferences. Such a situation calls for the use of cohort analysis. By separating your customers into cohorts that capture variables such as sign-up time and product usage characteristics, you’ll be in a better position to analyze, anticipate, and avoid churn.
Be sure to take note of similarities in customer behavior, including customers that have a greater likelihood of leaving after some time; product features that are most and least used respectively; customers that exhibit a higher risk of delinquent churn, and the number of customers seeking support.
The insights you derive from behavioral observations should help you evolve better anti-churn strategies, including those aimed at re-engaging customers who no longer see your product as valuable to their needs. Customers that are drifting away should be engaged through emails and/or direct outreach. Send early alerts to those whose subscriptions will soon expire or those with out-of-date payment methods.
Touchpoint Characteristics
Frustration and churn can result when a customer feels your product is not yet delivering optimal value and that customer support is not helping him to achieve that. Therefore, it is vital to create points of contact for support that will assist customers in deriving maximum utility or satisfaction from using your product while also enabling you to gain valuable insight into how you can improve your product offerings.
One way to pre-empt early frustration is by developing a well-tested and analyzed onboarding process capable of settling the customer into his account. Avoid having tedious processes that require several additional downloads or the purchase of external datasets to work since it can lead to churn before your customers even get started.
Be sure to create a useful FAQs section and help page on your website that addresses likely areas of customer interest. Establish a committed, responsive, and friendly customer service department for both simple and complex issues. A strong customer service department shouldn’t be taken for granted because it is a great PR tool that helps boost brand image, solve client problems, improve relationships, enhance customer lifetime value, and ultimately prevent churn.
Segmentation
Segmenting your customers into groups can provide you with even better information about their behavior. Such grouping can be based on gender, age, geographic location, profession, racial group, and the length of time they’ve been using your products and services.
Things to observe in each segment may include how customers in different professions or industries use your product; any changes in churn risk based on product use duration; how customers in differing pricing tiers operate in terms of potentially churning, for example, whether customers in lower tiers are getting enough features that will keep them using the product and if customers in higher tiers are being charged in excess and hence likely to leave you for more affordable rivals.
The patterns or trends you observe in each segment can help you determine those likely to churn and how you’ll engage them.
Key Attributes of a Churn Analysis Solution
A company in search of a solution that will help it regularly conduct an efficient analysis of all ramifications of customer churn and revenue churn will do well to select a product that has a comprehensive ability to factor in various aspects and types of churn. Below are a few key attributes such a program should have.
Predictive Ability
An effective churn analysis solution should be able to predict the most probable causative factors for churn as well as identify the most at-risk customers, e.g., how much churn is being caused by inefficient customer support or an ineffective onboarding process
Scalability
The solution you use should anticipate growth and be able to offer the same quality service for both a small company and a large enterprise so that you won’t need to start searching for new solutions as you expand. It should also be capable of seamless integration with other programs that may help your business.
Ease of Usage
A great user experience is likely to help you retain customers and thus avoid churn. Remember that churn is not only a customer problem, employees can churn too. So, the churn analysis solution your organization adopts must be easy to use and devoid of unnecessary complexities that can lead to churn.