TL;DR
- Grasp the significance of the net revenue churn formula for gauging the financial stability and customer retention of your SaaS company.
- Recognize that net revenue churn is more telling than gross revenue churn as it reflects the true impact of customer behavior on your revenue.
- Understand the differences between customer churn and revenue churn and the revenue impact of customer departures.
- Learn the net revenue churn formula: (MRR lost - MRR gained) / Starting MRR x 100 to determine the percentage of revenue change.
- Identify the best net revenue churn rate for your business by benchmarking against past performance and industry peers.
- Calculating both gross and net revenue churn rates is important for a comprehensive view of financial health.
- Combat revenue churn by analyzing pricing strategies, engaging with churned customers, incentivizing upgrades, and enhancing user onboarding.
- Togai's pricing implementation platform plays a vital role in reducing churn and optimizing revenue streams.
How do you measure the success of your business? Through your profits, your growth, or your clients? Without a doubt, there are vital parameters for measuring business success. But did you know that your revenue churn is also an essential criterion? Let’s learn more about net revenue churn.
Understanding Net Revenue Churn
The SaaS business model relies heavily on revenue churn as one of its key performance indicators. Here’s why: SaaS businesses must know how much revenue their customers bring in and how and why the number changes when customers cancel or fail to subscribe for longer.
In this scenario, revenue churn is the metric that helps measure this change. Although many SaaS businesses fail to give revenue churn the importance it deserves, the concept is fundamental to knowing the growth and success of the company.
Let’s Define Revenue Churn
Revenue churn refers to the amount of money a company loses when customers leave within a particular period. The reasons for revenue churn include:
- Subscription cancellations by customers
- Customers who do not renew their subscriptions
- Customers downgrading their accounts
For SaaS companies, revenue churn shows whether your retention strategies are working and whether your offering is well perceived by customers. It signals how stable your clientele is.
Types of Revenue Churn
Revenue churn can be categorized into two types:
1. Gross revenue churn, which refers to a part of the monthly revenue that you lose when customers cancel your subscription or fail to renew it.
2. Net revenue churn, is the percentage of monthly revenue that is lost when customers cancel or do not renew their subscriptions. This figure takes into account any additional revenue gained from existing customers through upgrades or expanding services. Essentially, it measures the overall impact of customer attrition on your total revenue.
Of the two, net revenue churn carries more significance because it accurately represents the relationships between your revenue and your existing customer base.
Why Does Revenue Churn Occur?
Two main reasons are contributing to revenue churn:
1. When customers leave your company or cancel your subscription. It shows the value you may have earned if your customer had renewed their subscription.
2. Revenue churn due to contract downgrades refers to the revenue lost when customers downgrade their subscription plans, resulting in a decrease in MRR. This metric specifically measures the MRR that is lost as a result of lower subscription costs compared to the prior month.
So, how will you know how much revenue churn has occurred in your company? Here are the comprehensive details.
Also read: Understanding Accrued Revenue: Definition, Examples, and Recording Methods
Calculating Revenue Churn Rate With Net Revenue Churn Formula
Revenue churn is the ratio of the revenue lost when customers cancel your subscription during a given period versus the revenue available at the beginning of the same period. Net revenue churn is expressed as a percentage.
Hence, the formula for revenue churn is:
Revenue Churn = (Churned MRR)/(MRR at the start of the period).
Before we proceed with the calculation, it's important to note that you have the option to calculate either the gross or net revenue churn rate, based on the specific insights you wish to obtain.
How to calculate gross revenue churn
Gross revenue churn refers to the total MRR lost during a specific period. This metric focuses solely on the revenue lost through customer cancellations and does not take into account any additional revenue gained from existing customers within the same timeframe. In essence, gross revenue churn highlights what has been lost without considering the actions taken to mitigate it.
The formula for gross revenue churn rate is:
MRR lost due to downgrades & cancellations & in the previous month / MRR at the beginning of the month x hundred
How to calculate net revenue churn
Net revenue churn is the loss of MRR plus newly generated revenue from existing customers. These can be from upselling or cross-selling, or from add-ons. Net revenue churn takes into account the amount of payment coming from the remaining customers while showcasing the effect of downgrades, cancellations, and charge failures.
The formula for net revenue churn is:
MRR lost in the past month - MRR expanded in the current month/Previous month’s MRR X 100
Here’s an example that demonstrates net revenue churn better:
For instance, consider a company’s MRR for May:
- $750,000 MRR at the beginning of May
- $650,000 at the end of the month
- $160,000 MRR in upgrades from existing customers
Now let’s calculate its gross revenue churn rate and net revenue churn rate:
Gross revenue churn rate = $100,000/ $750,000 x 100 = 13.33%
Net revenue churn rate = $100,000 - $160,000/$750,000 x 100= -8%
In this, the negative sign indicates that the company earned revenue in May, despite its gross revenue churn rate of 13.33%.
A declining revenue churn rate and lowering the churn rate are two of the biggest objectives for all SaaS businesses.
When your subscription-based company experiences a decline in revenue and loses loyal customers, it's crucial to take immediate action to address the issue. One powerful tool for understanding and combating this problem is analyzing the revenue churn of your business using the formulas we previously discussed.
By calculating the revenue churn rates, you can gain valuable insights into the health of your business and identify areas where improvements can be made. It serves as a guide, offering hints on what actions to take and what pitfalls to avoid. Ideally, you should aim to keep the revenue churn rate as low as possible to minimize revenue loss and retain valuable customers.
What is an excellent net revenue churn rate?
Finding the ideal revenue churn rate can be challenging, as it varies across different businesses and industries. To identify the right number for your company, it is essential to conduct both internal and external benchmarking.
Internally, you can benchmark your monthly revenue churn rate against previous months or specific timeframes to assess any fluctuations or trends. This helps you understand the performance of your customer retention efforts over time and identify areas that need improvement.
Externally, you can compare your revenue churn rate with industry competitors or similar businesses. This provides valuable insights into how your churn rate measures up against industry standards or best practices. You can gather this information through market research, industry reports, or networking with peers.
So, how does customer churn differ from revenue churn? Read on.
Customer Churn Versus Revenue Churn: The Differences
Let’s check out how they differ in definition, calculation, and reduction.
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Definition
The customer churn rate represents the percentage of customers who have cancelled their subscriptions within a specific period. It focuses solely on the number of customers lost.
On the other hand, the revenue churn rate measures the percentage of lost revenue from your existing customers during the same period. It takes into account not only the number of customers who churned but also the revenue impact associated with their departure.
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Calculation
Customer churn= (Churned customers within a specific period) / (Total customers at the start of the same period)
Revenue churn= (Churned MRR) / (MRR at the start of the given period)
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Reduction
Customer churn means you are losing customers to a competitor. This attrition could mean severe implications for the health of your SaaS company. Therefore, taking adequate measures to reign in your customer churn is important.
On the other hand, for revenue churn, you can increase your expansion revenue to gain more income from your existing customers.
Retaining as much of your monthly revenue is a primary goal in the SaaS industry because it fuels your growth. Regardless of your current revenue churn rate, you can look for ways to improve revenue and reduce churn.
4 Clever Tips to Reduce Revenue Churn
1. Analyze your ongoing pricing technique
You can do this by listing subscription packages with exceptionally high gross revenue churn rates. Next, assess your underlying causes and use these insights to optimize pricing.
2. Reduce contract cancellations
To prevent customers from canceling on you, you can reach out to those who have already withdrawn their contract before the end of their subscription period. This effort may sweeten the deal and make them return to your company.
3. Offer attractive incentives
Another solution is to encourage a shift in the mindset of your customers by offering cross-sells and contract upgrades. Redirect your attention to increase revenue from existing customers instead of preventing customers from canceling their contracts.
4. Focus on user onboarding and experience
You must demonstrate to your users how to derive maximum value from your product. You can capitalize on articles, eBooks, tutorials, and newsletters to encourage user onboarding.
Wrapping Up
In conclusion, we have delved into the concept of revenue churn and emphasized its importance in regular tracking. By understanding how to calculate revenue churn and differentiating it from customer churn, you can gain valuable insights into the health of your SaaS business. It is crucial to take proactive steps in improving your churn numbers, identifying any issues early on, and swiftly implementing necessary actions to steer your business in the right direction. At Togai, our pricing implementation platform is designed to help you tackle churn effectively and optimize your revenue streams. Take the first step towards reducing churn and maximizing your SaaS success by scheduling a free demo with us today. We can help you implement your pricing strategy 10x faster, in less than a day!
