SaaS companies need to know how much revenue their customers are bringing in, and — even more important for strategic decision-making — how that number is changing over time as customers cancel or fail to renew their subscriptions. Revenue churn is a metric that measures that change.
Revenue churn is somewhat different than logo churn, which is the measure of how many customers a company loses in a given period. Below we look at how to calculate, track and analyze this metric for your SaaS company.
What is revenue churn?
Revenue churn is a measure of how much revenue a company loses in a set period as customers fall away. There are two types:
Gross revenue churn: The portion of total monthly revenue that is lost when customers cancel or fail to renew subscriptions.
Net revenue churn: The portion of of total monthly revenue that is lost when customers cancel or fail to renew subscriptions, reduced by any additional revenue captured via upgrades or service expansions from remaining customers.
Net revenue churn is more useful than gross revenue churn, as it provides a more complete picture of how your revenue relates to your actual customer base.
How to calculate revenue churn
You calculate net revenue churn by taking the net revenue lost from existing customers in a given period and dividing it by total revenue at the beginning of that period.
You’ll end up with a number between 0 and 1, which is expressed as a percentage.
For example, say you started out a given year with $100,000 in revenue from existing customers. You lost $10,000 of that over the course of the year as people canceled subscriptions, then gained back $2,000 as a few existing customers upgraded. In this scenario, your net revenue lost would be $8,000, and your net revenue churn would be 0.08, or 8%.
Analyzing your subscriber and revenue numbers
It’s best to look at net revenue churn and logo churn in relation to each other, since this will tell you the most about your situation. What you want to judge is how changes in your subscriber numbers correlate with changes in your revenue numbers. It may not always be a one-to-one relationship.
An example may be that you lose 5% of your customers, accounting for 5% of your revenue in a given month, but your revenue from the remaining customers also goes up 5% as they upgrade into a new feature set. So your net revenue churn for that period is actually 0 despite your logo churn being 5%.
“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 churn rate should not be so high that it stunts your potential growth. As the revenue churn rate inches closer to your capital burn rate, you have “a recipe for a treadmill that makes it harder and harder to post strong growth numbers,” says Talerico.