What is a revenue churn rate?
Definition: Revenue churn rate is a metric that measures the percentage of lost recurring revenue over a period.
It shows how much recurring revenue a business loses due to customer canceling their subscriptions or downgrading their paid plan.
Businesses use it to determine how well they retain customers and make changes to their pricing, customer experience, product, and growth.
How to calculate revenue churn rate?
Before calculating the revenue churn rate, a time period for its measurement has to be selected, usually months, quarters, or years.
It is calculated by dividing the total recurring revenue lost over that period (without calculating expansions/upgrades from current customers) by a business's recurring revenue at the start of the same period.
Revenue Churn Rate = ((Recurring Revenue Beginning of Period - Recurring Revenue End of Period) - Expansion Recurring Revenue) / Recurring Revenue Beginning of Period x 100
For example, a business had $10,000 in MRR at the beginning of the month. It ended with $9,000, meaning it lost $1,000 due to churn. They also had 20 customers upgrade to the premium plan resulting in a $600 expansion MRR.
RCR = ((10,000-9,000) - 600) / 10,000 x 100
RCR = 4% of the business's total MRR was lost in the past month due to churn.
Note: If the revenue churn rate is negative, the business gained revenue over the period. This happens when expansions are higher than lost revenue.
Gross revenue churn vs. Net revenue churn
Gross revenue churn measures the total revenue lost due to customer churn or downgrades without accounting for new revenue gained.
Net revenue churn measures the total revenue lost due to churn, but it considers new revenue gains from expansions and upgrades.
Example:
A business began the month with $50,000 in MRR and lost $5,000 due to churn in the same month, but they also gained $2,500 worth of revenue from upgrades.
GRC = MRR Lost / MRR Begining of Month
GRC = 5,000 / 50,000 = 10%
NRC = (MRR Lost - MRR Upgrades) / MRR Begining of Month
NRC = (5,000 - 2,500) / 50,000 = 5%
Net revenue churn gives a more accurate measure of what a business can expect from its customer base.
Main reasons for revenue churn
- Poor onboarding results in the customer not understanding the product and how it can help them achieve their goals.
- Inadequate customer support frustrates customers if their issues aren’t resolved quickly and their feedback isn’t heard.
- Lack of features and product issues cause customers to lose interest due to their not seeing improvement over time.
- Pricing changes impact revenue churn in two ways. Increasing prices make customers stop their subscriptions, but lowering prices also impact short-term revenue churn as customers pay less, but long-term lower prices attract new customers.
- Competitors can attract a portion of the customer base, making them stop using the current product.
- Changes in customer needs happen over time, making them lose the need for the product they are using.
