Churn
What is Churn?
Churn is the number or percent (churn rate) of customers or revenue lost within a specific time frame.
How to Calculate Churn
There are 2 kinds of Churn: Customer and Revenue, but when calculating revenue you’ll either calculate gross or net. Both definitions and formulas are below, we recommend defaulting to net but use gross when wanting to understand which type of customers are leaving.
Definition: User / Customer Churn (aka logo churn) - how many users or customers were lost in a period.
Formula: User/Customer Churn = churned customers during a period ÷ total customers at the beginning of period
Definition: Gross Revenue Churn - a % of revenue that is lost in a period
Formula: Gross Revenue Churn = revenue quit in period ÷ revenue at beginning of the period
Definition: Net Revenue Churn - a % of revenue lost (or gained) from customers in a period.
Formula: Net Revenue Churn = (churned revenue - revenue from up-sells and expansions + revenue from contractions) ÷ 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 in mind - new clients churn at a higher rate than clients who have been with you for a while so if you're a newer company or in growth mode, your churn rate will seem higher than it really is.
Why Churn is Important
Churn is directly related to your company becoming profitable. New clients are 5 times more expensive to acquire versus keeping existing clients. 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.”
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.
TL;DR
Churn is when money or clients leave you. It’s not a good thing so shoot for zero or even negative churn by providing the best onboarding, customer service, and build your business in a way where your customer success team has opportunities to up-sell and cross-sell.
If you have questions about churn or other metrics, connect with us below.