Revenue churn, also known as revenue attrition or contraction, measures the reduction in recurring revenue over a specific period. Revenue churn is primarily concerned with revenue loss resulting from existing customers, as opposed to customer churn, which focuses on the loss of customers themselves.
There are typically two components of revenue churn:
Gross Revenue Churn: This measures the revenue lost from existing customers during a specific period and accounts for the total loss in revenue from existing customers, including downgrades, cancellations, and lost business.
Net Revenue Churn: This measurement accounts for the expansion or upsell revenue from existing customers in addition to the revenue lost. It provides a more comprehensive view of the revenue dynamics.
Measuring revenue churn is crucial to help businesses understand the financial impact of customer retention and expansion. A negative net revenue churn rate, where expansion revenue outweighs gross revenue churn, is seen as a positive sign, as it indicates that existing customers are not only staying but also contributing to revenue growth through upsells and expansions.
The formula for calculating the revenue churn rate is as follows:
Revenue Churn Rate = (Gross Revenue Churn / Starting Recurring Revenue) × 100%
In this formula:
Gross Revenue Churn represents the total revenue lost from existing customers during a specific period.
Starting Recurring Revenue is the recurring revenue at the beginning of the same period.
The revenue churn rate is expressed as a percentage and provides insights into the financial impact of customer retention and expansion efforts. Businesses strive to minimize revenue churn and maintain or achieve negative net revenue churn to sustain and grow their recurring revenue streams.
In this example, a subscription-based software company has $500,000 in monthly recurring revenue (MRR) from existing customers. During the most recent quarter, the company experiences the following changes in MRR related to existing customers:
Start of Quarter | End of Quarter | |
|---|---|---|
Customer A | $5,000 | $0 |
Customer B | $1,000 | $800 |
Customer C | $600 | $800 |
Customer D | $1,000 | $1,100 |
In order to get the Gross Revenue Churn Rate, this company needs to first calculate the MRR lost from Customers A and B, using the formula:
Gross Revenue Churn = Lost MRR from Customer A + Lost MRR from Customer B
Gross Revenue Churn = -$5,000 (cancellation) + (-$200) (downgrade) = -$5,200
They then need to calculate the Expansion Revenue using the formula:
Additional MRR from Customer C + Additional MRR from Customer D
$200 (upgrade) + $100 (add-on) = $300
They then need to calculate the Net Revenue Churn, using the formula:
Net Revenue Churn = Gross Revenue Churn + Expansion Revenue
(-$5,200) + $300 = -$4,900
They then need to calculate the Revenue Churn Rate, using the formula:
Revenue Churn Rate = (Net Revenue Churn / Starting MRR) * 100%
(-$4,900 / $500,000) * 100% = -0.98%
The revenue churn rate is expressed as a percentage. In this example, the calculated revenue churn rate is -0.98%, indicating that the company had a slight negative churn rate during the quarter. The negative sign indicates that the expansion (additional MRR) from existing customers exceeded the lost revenue (gross revenue churn), resulting in a net revenue increase. Negative revenue churn is a favorable outcome, as it means that this company’s existing customers contributed to revenue growth during the quarter.
A good revenue churn rate varies depending on the industry, business model, and other factors specific to the company. However, in most cases, a lower or negative revenue churn rate is considered desirable. Here are some general guidelines for evaluating the quality of a revenue churn rate:
Negative Revenue Churn: A negative revenue churn rate is often seen as a positive sign, as it indicates that expansion revenue from existing customers—including upsells, cross-sells, add-ons – is outpacing the lost revenue from downgrades and cancellations. This means that a company’s existing customer base is contributing to revenue growth.
Low Single-Digit Percentage: Many SaaS and subscription businesses aim for a revenue churn rate in the low single-digit percentage range, e.g., below 5%. This means that the revenue lost from existing customers is minimal in comparison to the overall recurring revenue.
Industry Benchmarking: A business should assess its revenue churn rate in the context of its industry, because some industries naturally have higher churn rates due to the nature of their products or services. Using industry benchmarks will help a company determine whether its churn rate is normal for the industry.
Retention Goals: A company’s target revenue churn rate should align with its growth and retention goals. If a business aims for rapid expansion, it might accept a slightly higher churn rate in exchange for aggressive customer acquisition.
Customer Segmentation: Analyze revenue churn rate by customer segments. Certain segments may have higher or lower churn rates, and a company should try to retain high-value customers and minimize churn in critical segments.
Historical Data: A company should use historical data to analyze its current revenue churn rate to determine if its is maintaining or improving its churn rate over time.
Competitive Landscape: A business should consider the competitive landscape as high competition can make it challenging to maintain low churn rates.
Economic Factors: Economic conditions can influence churn rates. During economic downturns, customers may be more price-sensitive, potentially impacting a company’s revenue churn.