Revenue churn, customer churn… even if you don’t know exactly what these are, you can probably make the safe assumption that churn isn’t a good thing for businesses. It connotes constant motion and upheaval, and that’s just what these metrics indicate for SaaS companies that would really prefer things to be consistent and calm.
Churn is also pretty much unavoidable.
Not surprisingly, SaaS companies that depend on ongoing subscriptions for success are particularly attuned to churn rates. For SaaS startups, especially, high churn is the stuff bad dreams are made of. High churn rates mean customers aren’t satisfied with your product.
There’s more than one way to measure churn
When people talk about “churn,” they’re most often referring to customer or logo churn, or they could be talking about another metric, revenue churn. Here is how each are defined:
Customer churn: Measures how many customers cancel or fail to renew their subscription during a given period of time.
Revenue churn: Measures how much revenue is lost by customers not renewing or canceling during a given period of time.
What’s the difference?
The difference between customer churn and revenue churn is what your business is losing: customers or cash.
Of course, losing a customer means losing revenue, but losing revenue doesn’t always mean you lost a customer. There’s a complex dynamic between customers and revenue in a subscription-based SaaS business, and you gain valuable knowledge by looking at both metrics together.
Understanding the relationship between customer and revenue churn
The dynamic between revenue churn (specifically, net revenue churn) and customer churn tells you the most about your business. Changes in your subscriber numbers aren’t usually congruent with changes in revenue.
For example, say you lose 5% of your customers, who account for 5% of your revenue in a given month. Fortunately, your remaining customers upgrade to a new feature set you launched and revenue from those accounts increases 5%.
So, your net revenue churn for that period is actually 0 despite having 5% customer churn.
“Revenue churn is a huge indicator of growth potential,” writes Justin Talerico, co-founder of SaaS advisory Beacon9. “That’s because, even when companies have significant customer churn, they can overcome it with expansion revenue.”
It’s hard to say what revenue churn rate you should aim for. As Talerico would have it, your churn rate would ideally be zero at most. However, “If you are in positive churn territory, what’s acceptable depends on your market, price point, and much more.”
The most important thing is that your revenue churn rate should not be so high that it stunts your potential growth — as your revenue churn rate approaches your cash burn rate, you’ll begin to feel like Sisyphus pushing a rock up a hill, finding it harder and harder to gain traction.
Analyzing SaaS churn
As a general rule, it’s not good to have a high level of customer or revenue churn; however, losing customers is only meaningful if it affects your business’s bottom line.
To see this and understand what’s really happening in your business, look at customer churn and net revenue churn in concert. What you want to assess is how changes in your customer numbers correlate with changes in your revenue numbers, since it’s not always a one-to-one relationship.
Imagine a scenario where your customer churn is very high one month, because you raised your product’s prices at the beginning of that month. Losing customers seems bad. When you calculate your net revenue churn, though, you realize that you’re generating about the same amount of revenue from your remaining customers (who are paying the higher prices) as you were with more customers paying lower prices.
In the above example, your customer churn is higher than your net revenue churn. Analyzing both metrics together offers a better understanding of what is happening in your business, and knowing how they interact will ensure you make smarter strategic decisions.
Get the Founder's Guide to SaaS Growth Metrics
It's our most popular founder resource! Grab your copy of SaaS Startup Growth Metrics: 8 KPIs to Show Investors Your Business is Primed for Success. Using simple examples, we show you how to calculate each metric and why specific indicators are important to investors.