February 22, 2023

Embracing the Insights of Churn to Better Understand Your Customers and Revenue

Mandy Leavell
Director of Marketing

When reviewing your business, the word "churn" can often cause your stomach to, well...churn. After all, who wants to take a deep dive into the metric that details the number of customers or revenue you've lost? However, a better understanding of your churn can actually provide some positive insights into the impact of changes you've made, as well as help guide you to acquiring the best, most ideal customers for your business.

What is Churn?

Churn refers to the number of customers or the revenue your company loses within a specific time frame. Churn rate is, then, is the percentage of customers or revenue lost. An increase in churn rate should be a red flag, triggering an investigation into how or why you are losing business. Many of the SaaS metrics are dedicated to decreasing churn and, in turn, increasing retention.

Churn is important because, as we know, recurring revenue is the "backbone of the SaaS industry". One of the biggest benefits of the SaaS business model is having reliable, predictable revenue. If your customers are churning, that's not just one lost sale; that is years of lost revenue, depending on the liftetime of your customer.

How to Calculate Churn for B2B SaaS

There are 2 kinds of Churn: lost customers and lost revenue.  When calculating revenue, you’ll need to either calculate gross or net. While we've included both definitions formulas below, we recommend defaulting to net, and using gross  to understand which type of customers are leaving.

Calculating Customer Churn

As you might guess, customer churn shows how many users or customers were lost in a period of time. Customer Churn rate can be calculated by dividing your number of churned clients over the year by the total number of customers at the beginning of the year. If you started the year with 200 customers, and 10 of them churned over the year, your churn rate (10 churned ÷ 200 total) would be .05, or 5%.

Calculating Gross Revenue Churn

Gross revenue churn is the total lost revenue in a period. This allows you to see and analyze the monetary impact of your customers leaving. You can calculate this type of churn by dividing your revenue from churned clients by your total revenue. Let's say of the 10 churned customers above, 7 of Customer Type A accounted for $2k each in revenue ($14k total) and 3 of Customer Type B accounted for $4k each in revenue ($12k total). Across both types of customers, your total lost revenue is $26k. If your total revenue is $600k, that's a gross revenue churn of 4.3%.

Gross Revenue Churn = revenue lost in period ÷ revenue at beginning of the period

The importance of calculating gross revenue churn is, especially when you have different pricing for different customers, that you're able to put into perspective if the customers that are churning are taking a proportionally larger amount of revenue. In this case, since the majority of the churn is coming from customers that have a lower contract value, your total revenue is not as impacted as if, say, you were losing 7 customers from Group B! While, of course, we want to reduce churn from all customer types, understanding which customers are churning can put into perspective whether a certain type is not sticky, or where you need to put in more customer success efforts.

Calculating Net Revenue Churn

Net Revenue Churn is similar to you Gross Revenue Churn, except that it takes into account your expansion revenue: the revenue you've gained from upsells and other expansions within your current customer base. This is important because it includes any lost revenue within the context of other customer success efforts. If you've been particularly focused on upselling, churned revenue may not have as much of a net impact. Net Revenue Churn is calculated the same way as Gross Revenue Churn above, except you'll subtract expansion revenue from churned revenue before dividing by total revenue. In considering the example data above, let's say your expansion revenue for the period is $10k. While you have $26k in churned revenue, in this calculation, that is offset by the $10k in revenue from upsells and other expansion activities.

Net Revenue Churn = (churned revenue - expansion revenue) ÷ total revenue at beginning of the period.

When is the Moment of Churn?

Once a client/user’s subscription ends, they have churned. Churn is not when they submit notice or tell you they’re not resigning, it’s the moment they no longer have access to your product or service.

Keep new clients churn at a higher rate than clients who have been with you for awhile. If you're a newer company or in growth mode, your churn rate may seem higher than expected. Don't fret! Focus on improving your retention and understanding who will be the stickiest customers with the least obstacles to acquire.

Why Churn is Important

Churn is directly related to your company becoming profitable. It is five times more expensive to acquire a new customer than to retain a current one. It’s like playing catch up, if your churn is high, you'll have to acquire more clients each month to replace those who churned before you can even begin to add net new users and grow.

Churn Benchmarks

Getting as close to $0 net MRR churn is difficult but should always be the aim. If you want to see where you stack up, read about SaaS benchmarks from Point 9 Capital's Clement Vouillon. Otherwise, benchmarking can be difficult for early-stage companies that do not yet have product fit because you're not sure who the best clients for your solution are. Keep in mind though, if your revenue churn is between 7-8% month over month, it will be nearly impossible for your company to grow.

Other than shooting for zero MRR churn, one of the most powerful metrics to focus on when building a growth engine is net negative MRR churn. What is negative churn? It’s when the expansion revenue from existing accounts more than offsets the revenue lost from churned accounts. It means that your revenue will not only sustain itself month over month but if you had a down month in sales or for clarity's sake, didn't bring on any new users or clients, you'd still grow. For more depth on negative churn, this is good continued reading from Tomasz Tunguz.

There are a few nuances to negative churn that you can read about here from Inference VC. Most importantly, the 80/20 rule of power distribution. 20% of clients, in theory, will carry 80% of the companies revenue. It’s possible that one client would be able to create negative churn but since you could still be losing a majority of your customer base. It’s important to consider account churn and revenue churn to avoid the smokescreen the power distribution can create.

Negative churn can accelerate growth, which means it’s worth building your business in a way that there are many opportunities to grow existing accounts. The main ways of growing current accounts are through seat expansions, service expansions if there is a services aspect to your business, and cross-selling. Once your business set up this way, your customer success team will own expanding accounts to achieve negative churn.

How to Reduce Churn in SaaS

Before getting into how, let this serve as a reminder that churn is the symptom of a bigger root issue.

If you're trying to improve a churn problem, it would be helpful to calculate churn by customer segment. You'll be able to pinpoint which types of clients you're struggling to keep and can build a retention strategy that is tailored to the at-risk clients.

Most tactics revolve around 2 themes; Pricing structure and Customer Success.

Offer an incentive if on a freemium model or have different packages. If someone is canceling, offer a discount or a free upgrade. It buys you time to win them over again. It’s only helpful if they can find the value in that time frame, help them get the most from your product or service before the next renewal period comes.

Offer discounts on annual billing. Not only will this help you guarantee clients will be around for a year, which will help your cash flow but since they're locked in for a whole year, you're giving them plenty of time to get familiar with your product or service and make it part of their routine.

Raise prices.

“It sounds crazy, but when I dug into the churn data by payment level I found that our churn rates for our lowest price tier were about 5x that of our next tier. So, we raised prices (without offering anything new) and our churn plummeted.”

“I have consistently found that your lowest paying customers churn the most and take up most of your support time.”

— John Doherty, Founder and CEO of Credo

Tailor on-boarding. Make sure your clients know which features and benefits will help them. Only show what is relevant but make sure to ask enough questions to know everything they'll be using your tool for.

Be professional relationship builders. Reach out to new clients and have checkpoints along the way. Help your clients and users see you as humans they like and want to do business with. A handwritten holiday card or grabbing coffee if you're in town goes a long way. People buy and do business from people they like; go the extra mile.

Make clients sticky. Make your offering part of their routine and invite them to interact with your product or service as often as possible. John Warrillow writes in The Automatic Customer “Your biggest competitor for your subscription business is not the rival service; it is your customer’s inertia in not using your service.”

Ask for feedback and act on it. Whether you make a habit of sending surveys throughout the year or target low usage and power users individually; ask and you shall receive. Once you start getting common themes, make a plan to implement them.

Monitor activity. If you're noticing a client's usage is decreasing, they're becoming more at risk. This would be a good time to check in with them and see why. Maybe there was a change in who is using your tool and they may need to be on-boarded.

Turn your customer success team into master expanders. It is possible to achieve negative churn. Another approach if you have a churn issue is to put more effort into expanding the current customer base as you work on pinpointing the cause of the churn issue.

Be product-led. This is a new-ish term coined by OpenView Partners. It’s when growth and expansion come from users driving adoption of a product because they love it, rely on it, and can’t remember what life was like before it. The basics: build an incredible product around what users want and they’ll be your marketing, sales, and customer success teams for you.

There are many ways to reduce churn, whichever you decide to implement, don't forget to put a system in place. Ticketing tools are helpful, and make it clear to your team that it’s everyone's job to reduce churn. Anyone who has interaction with clients or prospects can positively or negatively impact churn.

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