There are several ways to measure your business’ success. A company’s revenue churn is one of the most important criteria.
Sure we don’t want to lose, but it is always better to learn from it when we do.
Revenue churn is a must-know key performance indicator for the SaaS business model. Though many SaaS businesses ignore this concept, it is essential to understand the success and growth of the company.
With this article, you will learn what revenue churn means and how to calculate your business’ rate.
Let’s dive into it!
What is Revenue Churn?
Revenue churn is the percentage of income loss in a period. To understand this concept, you need to be familiar with the meaning of the churn issue. You may wonder what churn means in business. It means the ratio of customers stopping to do business with a company. Also known as attrition rate, churn issue can be about customers who cancel their subscriptions. The higher your company’s churn rate, the customer traffic gets lower month over month.
Since we all learned the meaning of churn issue, what does revenue churn mean exactly? Although most businesses do not care about this concept, it is a percentage you need to focus on not losing customers rapidly.
Revenue Churn Formula
Revenue Churn Formula=Net Revenue Lost from Existing Customers÷Total Revenue
A company’s churned revenue ratio shows the business’ ability to keep the customers. Seeing that your beloved customers are starting to leave might be upsetting.
So as not to experience this situation all the time, analyzing the recurring churn allows you to prevent these downfalls periodically.
It is crucial to categorize this concept into different kinds and ideas to shed light on this notion.
Gross revenue churn
Gross revenue churn is part of monthly earnings. It results from customers’ cancellations or failure to renew their subscriptions periodically.
The monthly churn rate may increase considering the monthly subscription plan failures and abandonments.
Net revenue churn
Net revenue churn also shows the impact of customers’ cancellations and not renewing their subscriptions. On the other hand, it indicates the activity of remaining customers. If there are any upgrades on your company and current customer (expansion revenue) engage in them, this might impact net revenue churn.
Seeing both the consequences of remaining customers and those who left, net revenue churn helps you see the big picture with negative churn rate and expansion revenue. Comparing it to previous months’ data makes it easy to analyze your company’s upgrades’ effectiveness. You can examine total monthly revenue by looking at these data and achieve customer success.
Customer churn is another critical concept that SaaS companies should focus on. However, most SaaS executives and founders ask whether to concentrate on revenue churn rate vs. customer churn rate.
The answer is both of them!
For better efficiency and customer success, you need to measure both of them in detail.
For example, when you only look at your revenue churn but not your customer churn rate, you overlook the customer’s activities. For instance, if there are any upgrades and changes in payment options, the revenue might increase or decrease.
Without considering customer churn, a company cannot see whether its customer success is consistent or not.
Since both can go up or go down, it would be wiser to measure both regularly. One should not separate revenue churn and customer churn from each other.
What does logo churn mean?
You might have heard of logo churn as well. The term customer churn is also known as logo churn. Some say that these terms are not defined, but it means the lost customers’ number during a given period. So what is the difference between logo churn and revenue churn? Aka customer base churn, logo churn is about customers’ activities.
Why is Revenue Churn So Important?
You may ask yourself, “what’s all the fuss about it?”.
Do you need to analyze these churns and prepare reports?
One has to pay special attention to their business’ revenue churn. To evaluate the effectiveness of your marketing efforts, you need to analyze feedback from your customers. There are tools you can use to obtain feedback from customers.
For example, you might include surveys in your onboarding process. In that case, you can use onboarding tools such as UserOnboarding to reduce churn and customer frustration.
People deciding to abandon your company is important feedback that you should not ignore. Understand your customers’ needs and desires. It goes hand in hand with noting down feedback. Also, write down customers’ requests.
Implementing these requests and recommendations can make your customers sustainable. Customers become satisfied because their needs and demands are not left unanswered. 🥳
Being familiar with your customer profile will help you understand why they cancel their subscriptions so that you can prevent an incoming crisis.
What are the primary reasons for revenue churn?
- Because of unfortunate bankruptcies, in the annual rate, it can be seen in a company.
- Downgrades also affect revenue churns.
- Lost annual contracts and abandonments have a significant influence on churns as well. If a contract’s term has ended, it will undoubtedly affect monthly revenue.
- Customers who freeze their membership or change their subscription to another mode of payment result in revenue churn.
How to Calculate Revenue Churn Rate
Revenue Churn Rate=Net Revenue Lost from Existing Customers÷Total Revenue X 100
So revenue churn is an important thing that you should not ignore. But how do you calculate the revenue churn rate?
It is like shelling peas!
You can calculate your company’s revenue weekly, monthly or yearly. Of course, it depends on your aim and customer profile. But please calculate and analyze it monthly.
To calculate revenue churn, you can look at a specific period. Then include alterations on your account value in this period. Downsells, upsells, new customers, customer lifetime value, remaining customers, and customers who left have to be included in this calculation process for sure.
Remember, we said consider both customer churn and revenue churn while calculating your company’s revenue churn rate. So while calculating this ratio, take all these details that can alter your revenue into consideration.
Let’s say your company gained revenue from upsells during a specific period. This revenue can exceed the down-sells. Also, revenue churn because of lost customers can exceed the upsells. When this happens, Net Revenue Retention Rate, the ratio of recurring revenue of remaining customers, maybe over 100%.
If Net Revenue Retention Rate, also known as NRR, is over 100%, it is referred to as negative revenue churn. If the negative churn ratio is above 100%, it is referred to as optimal. Specifically, in SaaS subscriptions, this ratio is taken into account and shows the company’s credibility.
To calculate net revenue churn, all you need to do is divide net revenue lost from previous members to the total income of a specific period. Then the number you get after this calculation has to be between 0 and 1. So this number indicates revenue churn percentage.
For instance, you gained $100,000 from your remaining customers at the beginning of a period. Then $10,000 has been lost because of lost customers, subscriptions that have not been renewed. But if a few existing customers upgraded their membership, you gained $2,000.
In this case, you both lost and gained from remaining and lost customers. So how will this affect your rate? When you consider these details of a specific time period while calculating your ratio, your revenue lost is $8,000.
It means that your net revenue churn rate becomes 8%.
What is a Good Revenue Churn Rate?
Observing that your subscription company is losing revenue and its loyal customers, you may want to take action to prevent that. By analyzing the revenue churn of your business with the formulas we explained before, you can act immediately.
You may wonder about the average churn rate to optimize your business with different tactics. What is the ideal revenue churn rate for SaaS companies? It should definitely be as low as possible. If the revenue churn rate is below 1%, it shows that your company hasn’t lost many customers and members during a given period.
Predict your annual churn rate by analyzing the previous months quickly. It does not have to be the same every month for sure, so please don’t forget the alterations and upgrades you made during a specific period.
Revenue churns being low signifies that a business can retain its customers. It shows the sustainability of customers rather than inconsistent customer profiles who come and go.
You can research the acceptable churn rate by market, considering your sector. It allows you to compare and contrast your revenue churns with your competitors’. It is crucial to know your customers not to lose them in a period of time. Revenue churn rates give you hints about what to do and what not to do.
It takes time to be familiar with your customers and their needs. What they expect from your company and how you can answer their needs will develop day by day.
Tips & Metrics to Track Alongside Revenue Churn for Success
There are a few SaaS metrics and suggestions that go hand in hand with revenue churn. By applying these to your business, you can achieve more success and reach out to more customers.
Use ARR effectively.
By using ARR churn rate which means Annual Recurring Revenue, you can calculate your company’s annual revenue churn rate. Also with 12-month memberships, using the ARR churn rate metric helps you to see the big picture of your business.
Give importance to renewal rates.
Tracking down the renewal rates of your company allows you to estimate the revenue churn. While analyzing renewal rates, you can examine customer renewal rate, MRR renewal rate, and revenue renewal rate. Also, look for the booking renewal rate.
You can use churn prediction software.
There are several operating systems for churn prediction. They can help you to estimate your churn based on your data.
Churnly is a machine learning software that is built for SaaS companies. By using Churnly, you can estimate customer churn beforehand. Thanks to its AI, customer data is gathered and analysis is being made in detail.
As a Predictive Sales Software, Qymatix aims to maintain customer success. Therefore, it is suitable for B2B companies to better understand their customers and revenue churn.
Trifacta serves as an open and interactive cloud. It is stated on their website that AI meets Human Intelligence and they work collaboratively. So you can gather your data and have a big picture of the revenue churn rates of your company.
Adjust the time range of subscriptions.
You may contemplate adjusting your membership’s time span. The time range of subscriptions is significant and can affect revenue churn directly.
Subscriptions can be monthly and annually. If there is only an annual subscription option on your website, customers may want to cancel their subscription in a specific time range.
You can analyze when customers leave to change subscriptions to monthly subscriptions.
Instead of customer downgrade, you can add a monthly subscription option as well.
Encourage customers to upgrade their subscription and become a member.
To keep remaining customers, you can offer discounts and special offers on pricing plans. In that way, customers can upgrade their membership using these discounts.
Also, it can help you to reach out to incoming customers.
There are a few examples of some companies encouraging customers on that matter.
H&M offers a 10% discount for their members.
H&M’s 10% discount on their members encourages customers to become members to take this opportunity.
Spotify has a 1-month free membership offer.
Spotify, being a subscription business, has different subscription options such as individual, duo, and family. It enables its users to choose various pricing plans according to their needs. By stating that “you can cancel any time” the company gives its members a sense of freedom with their premium plan as well.
To cut a long story short…
In conclusion, we learned what revenue churn is and why it is essential to track it regularly. Since you learned what annual and monthly revenue churn are and how to calculate them, you can achieve customer satisfaction by applying some suggested strategies.
Thanks to the metrics we suggested, which can go along with revenue churn, you can make some optimizations.
Try to find which one is best for you and your customer profile. Then, you can make alterations for your needs and play with them!
Don’t forget to track your churn periodically! Let us know if you have any questions or ideas about this matter. 🤓