Revenue churn – an introduction
Revenue churn (also known as revenue churn rate (RCR) and sometimes monthly recurring revenue churn) is one of the most important metrics that SaaS businesses need to track.
What is revenue churn?
Revenue churn is a measure of lost revenue from customers who cancel or downgrade their subscriptions within a given period. It reflects the rate at which a company loses its recurring revenue due to customer attrition or downgrades. Revenue churn is usually expressed as a percentage and is calculated on a monthly or annual basis. Revenue churn is often broken down further to understand the reasons i.e. whether it’s customer/logo churn or downgrades. Understanding more detail is helpful for revenue retention.
Revenue churn is a crucial metric for SaaS businesses – once a customer has been acquired, it’s all about maintaining the lifetime value of that customer. If a customer’s revenue churns, or decreases, that value ceases.
Why is revenue churn so important?
Revenue churn is a vital metric that can determine the success or failure of a SaaS business. A high churn rate indicates something isn’t working and that your business needs to take action. Effectively, a high churn rate means that a business needs to acquire more customers to maintain their growth rate, which can be expensive. Additionally, brand reputation can be damaged from churning customers. Low churn rates usually indicate that the product or service is valuable, and customers are happy.
In addition to revenue churn, it’s good practice to understand complementary metrics such as CAC, LTV, NPS and MRR, and look at revenue expansion opportunities. Growing existing revenue is often considered easier than acquiring new customers.
Investors and potential acquirers will consider churn rates when evaluating the valuation of a SaaS or tech business. A lower churn rate signifies a healthier business and may result in higher valuations.
Revenue churn can also be viewed on a cohort basis, so specific groups of customers who signed up for your service at the same time may follow a similar trend. For example, did a cohort receive a different onboarding experience that was more successful? This is an interesting question, as the onboarding experience can be pivotal to retaining customers.
What is a good revenue churn?
A good revenue churn rate varies significantly by industry and size of business but for a SaaS business, a good revenue churn rate could be seen as anything less than 3% per month.
A few examples of good revenue churn are:
- Small Business: A small SaaS company may target a monthly churn rate below 3%. However, these will be higher as they get closer to product-market fit.
- Medium Business: Medium-sized businesses should aim for a churn rate below 2%. Zendesk, a customer support platform, reported an annual churn rate of around 1.6% in 2021.
- Large Business: Large enterprises often have lower churn rates due to established customer relationships and greater resources. For example, Salesforce, a leading CRM provider, reported a quarterly churn rate of approximately 1% in 2021. Lower churn rates can also indicate it’s hard to move from one product to another.
Churn will vary within a sector depending on the size and stage in the lifecycle of that business, as well as varying product by product. Price and whether your product is B2B or B2C focused are also important factors when assessing an acceptable churn rate. Either way, it's important to understand what’s influencing your churn rate. For example, did you set yourself an assumed churn in your forecast? How have you performed against this? Can you research comparable companies to understand what their churn rate is?
What does revenue churn look like?
How do you calculate revenue churn?
The formula to calculate revenue churn is:
Revenue churn = Lost revenue in period / Starting revenue for period x 100
The result is expressed as a %.
Revenue churn worked example
If a SaaS business had £100,000 MRR at the beginning of a month, and lost £3,000 due to downgrades and £2,000 due to cancellations in the month, the (monthly) revenue churn would be calculated like this:
Revenue churn = (£3,000 + £2,000) / £100,000 x 100 = 5%
Revenue churn is a crucial metric for SaaS businesses that can determine their success or failure. By understanding what revenue churn is, why it’s important, what a good revenue churn rate is for your sector, and how to calculate it, SaaS businesses can take corrective measures to retain their customers and improve their profitability. By focusing on customer satisfaction and providing high-quality products and services, businesses can reduce their revenue churn rate, build a loyal customer base and command a higher valuation.