During a meeting with a venture capitalist on Sand Hill Road this week, I mentioned our annual Customer Churn was 5% and our Revenue Churn was -1%.
While we both agreed a 5% annual customer churn was excellent, the VC was not impressed with our revenue churn stat. On the other hand, I was under the impression our revenue churn was above the fold.
This blog post is about clearing up confusion for myself (and hopefully others) what revenue churn is and how to gauge it.
Heading south to Menlo Park pic.twitter.com/jAoMJOGWSI
— Hoala Greevy (@HoalaGreevy) July 16, 2018
What is Revenue Churn?
Revenue Churn is a measure of lost revenue, usually as a result of churned customers and downgraded subscriptions. It is different from Customer Churn (Logo Churn), which is a measure of lost customers.
Both are equally important to have as KPIs in your SaaS business.
How is Revenue Churn Calculated?
The basic formula for monthly Revenue Churn (MRR Churn) is:
(Churned MRR – Expansion MRR) / Previous Month’s MRR = Revenue Churn
For example, if you began a month with $10,000 in MRR, lost $300 in MRR, and did not expand MRR with any existing customers over the course of the month, you would have:
(300 – 0)/ 10,000 = 3%
Net Negative Churn
Net Negative Churn occurs when you expand MRR with existing accounts at a rate greater than the MRR you lost in a given month.
For example, if you began a month with $10,000 in MRR; lost $400 in MRR via non-renewals and customer downgrades; and expanded MRR by $750 with existing customers, you would have:
(300 – 750)/ 10,000 = -4.5%
How do you read Revenue Churn?
According Jason Lemkin, looking at monthly Revenue Churn as a whole is confusing. Instead, you should segment churn into three categories: Very Small SMB, SMB, and Enterprise.
It’s ok to have positive revenue churn for Very Small SMB and SMB. For your Enterprise segment, it should always be net negative churn.
Isn’t Revenue Churn just the Inverse of Growth?
No, it’s not. Revenue Churn looks at how your existing customers performed, from a revenue basis, in a given month.
Growth accounts for new customer revenue added during a given month, in addition to how existing customers performed.
Why is New Customer Growth excluded?
Similar to the preceding question, new customer growth is excluded from Revenue Churn calculations because the goal is to analyze trends on existing customer revenue.
If I told you I have a SaaS Company whose Revenue Churn is 2%, what does that mean?
According to SaaS authority David Skok in his post SaaS Metrics 2.0 – A Guide to Measuring and Improving what Matters:
“If your Net Revenue Churn is high (above 2% per month) it is an indicator that there is something wrong in your business. At 2% monthly churn, you are losing about 22% of your revenue every year. That is nearly a quarter of your revenue! It’s a clear indication that there is something wrong with the business. As the business gets bigger, this will become a major drag on growth.”
What is a good metric for Revenue Churn?
Combined with annual contracts that pay upfront, negative revenue churn is a powerful growth mechanism.
According to Jason Lemkin in his post, How Much Churn is “Too Much”?, an initial good rule of thumb for tracking revenue churn is to break it into three cohorts:
- Very Small SMBs (single seat licenses): 20% annual revenue churn
- SMB and Mid-Market: 5% annual revenue churn
- Enterprise: Best in class is -20% net negative churn annually
A -1% monthly revenue churn is certainly better than a positive revenue churn, but overall needs further analysis.
We will be segmenting revenue churn within our business starting next week.