Revenue Churn And Its Common Pitfalls

Revenue churn is the loss of revenue from existing customers over a specific period, which can occur through cancellations, downgrades, or non-renewals.

Revenue Churn And Its Common Pitfalls

What Is Revenue Churn?

Revenue churn is the loss of revenue from existing customers over a specific period. It includes cancellations, downgrades, or non-renewals.

There are two types of revenue churn: net revenue churn and gross revenue churn which we'll get to in a minute.

How To Calculate Revenue Churn?

It's simple, really! To calculate revenue churn, you first need to find the total revenue lost from customers who have either canceled their subscriptions or downgraded to a cheaper tier. And that's it!

Gross Revenue Churn = Revenue Lost from Churned Customers

Net Revenue Churn = Revenue Lost from Churned Customers - Revenue Gained from Expansions from Existing Customers

where,

  • Expansion Revenue: Additional revenue gained from existing customers through upsells, cross-sells, or usage upgrades within the same period.
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We subtract expansion revenue only when calculating net revenue churn. If you want to calculate simply gross churn, you don't need to subtract it.

For example, at Churnkey, our base plan includes cancel flows. There are also powerful add-ons like Customer Health which would be treated as expansion revenue if existing customers layer it on.

What Revenue Churn Includes

  • Subscription Cancellations: If a customer who was paying $100 per month cancels their subscription, this $100 monthly revenue loss is included in revenue churn.
  • Downgrades: A customer downgrading their subscription from a $200 per month plan to a $100 per month plan would result in $100 monthly revenue churn.
  • Contract Non-renewals: For businesses with annual contracts, if a customer decides not to renew a contract worth $1,200 annually, this entire amount is considered revenue churn at the end of the contract period.
    You can create a custom flow in Churnkey for enterprise clients, eg if plan amount is greater than $1,200 have them contact customer support to mitigate this kind of revenue churn.
  • Involuntary Churn Due to Payment Issues: This is included in revenue churn since revenue is lost. However, involuntary churn like this that occurs because of payment issues (e.g., credit card expiration) is often treated separately. It represents a recoverable revenue opportunity rather than a deliberate decision by the customer to reduce their spending. Churnkey recovers up to 89% of failed payments.

Simply Ignore These

  • One Time Revenue: such as onboarding fees, setup fees, or other non-recurring charges is not included. One-time payments, while helpful to overall revenue, do not provide insight into the long-term customer value, which is what net revenue churn aims to capture.
  • New Customer Revenue: Revenue generated from new customers acquired within the period is not included. Both net and gross revenue churn calculations focus exclusively on the revenue movements within the existing customer base, not new customer acquisitions.

Common Mistakes Made When Calculating Revenue Churn

  • Not Segmenting Revenue Types: Failing to differentiate between types of revenue such as existing, expansion, contraction, and churned revenue can lead to inaccurate calculations. It's important to understand the movement of revenue across these categories to accurately assess churn. ChartMogul is a revenue analytics software that can help correctly categorize these. It's a best of breed software. Nothing else (in my opinion) comes close.
  • Overlooking Involuntary Churn: Not accounting for involuntary churn, such as payment failures or technical issues, can skew revenue churn figures. It's important to distinguish between voluntary and involuntary churn to develop targeted strategies for reducing churn.
  • Ignoring Expansion Revenue: Neglecting to subtract expansion revenue from churned revenue when calculating net revenue churn can result in an overstated churn rate. Expansion revenue from upsells or cross-sells can offset revenue lost from churned customers.
  • Relying on CRM Data for ARR Calculations: Calculating Annual Recurring Revenue (ARR) in a CRM system can be risky due to constantly changing data. It's better to calculate ARR in a data warehouse or in a ARR reporting tool like Equals to ensure accuracy.
  • Not Adjusting for Customer Behavior: For non-subscription businesses, not doing customer research to estimate natural usage frequency and using that to define churn can lead to inaccurate churn rates.
  • Failing to Account for Uncertainty: Not evaluating the seasonality in growth work and the impact of churn on future revenue can lead to unrealistic forecasts. It's important to account for uncertainty by discounting forecasted impacts based on confidence levels.

Should I Measure Revenue Churn or Customer Churn?

Both but one might be more important for you than the other.

  • Revenue Churn: Is there a high variance in how much customers spend? Then revenue churn will help understand the impact of losing high-value customers versus low-value customers.
  • Customer Churn: Is the customer lifetime value is relatively uniform across your customer segments? Then, customer churn is a better metric.

Customer churn can help you gauge overall market sentiment and loyalty. While revenue churn will offer insights into the financial implications of churn. It helps prioritize retention efforts based on revenue impact.

This dual approach helps analyze how churn affects both your customer base and revenue.

Minimize Revenue Churn With Churnkey

Revenue churn keeps a pulse. Improvements have outsized impact on your MRR and profitability. With the Churnkey platform, you'll improve all aspects of revenue churn and optimize your company’s growth. You'll keep more customers with personalized cancel flows, recover more failed payments, and you'll expand customer-driven product development.


Frequently Asked Questions

1. How to calculate gross churn?

To calculate gross churn, you just to add up all the revenue lost from customers who have either canceled their subscriptions or downgraded to a cheaper tier.

2. What is net revenue churn formula?

The net revenue churn formula is Revenue Lost from Churned Customers Minus Revenue Gained from Expansions from Existing Customers.

Thanks for reading!