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What is Revenue Churn?
Revenue churn measures the percentage of recurring revenue a company loses over a given period as a result of its customers canceling or downgrading services. Along with customer churn, it’s a key metric for evaluating a company’s sustainability, product offering, and customer base.
There are two types of churn: gross churn and net churn.
- Gross churn — the total amount of revenue lost due to cancellations
- Net churn — the net change in revenue, taking into account both cancellations and upgrades
A critical difference between revenue churn and other revenue metrics is it only focuses on current customers. Hence, your revenue churn rate could be a negative percentage if more customers upgrade or spend more with the company than cancel.
- Revenue churn rate
- MRR churn
Importance of Measuring Revenue Churn
At its core, revenue churn can be seen as an indication of how well a company retains its customers. Companies that have a high revenue churn rate typically have an issue with customer retention, product-market fit, or their product itself.
Adds context to customer churn
Most companies measure customer attrition to understand how their subscriber base is changing. On its own, the customer churn rate isn’t enough to get a complete picture of retention efforts.
Although it’s a good indicator of customer satisfaction and product-market fit, customer churn doesn’t describe the value of a company’s lost customers. At first glance, a high customer churn rate might look bad. If most of that churn comes from lower-value subscribers, revenue churn would be lower than if the same number of customers left higher subscription tiers.
This distinction is important because it shows businesses the true impact of customer churn on their bottom line. Depending on the business, a higher customer churn rate might not necessarily equate to a large amount of revenue lost.
Underscores product performance
A low/negative revenue churn rate indicates current customers are expanding their product use (or, at the very least, sticking around). When plenty of customers are upgrading or renewing their contracts, it suggests the product is adding intrinsic value.
Since most subscription companies have some sort of seat- or usage-based pricing built into their plans, many of them could theoretically achieve a negative churn rate without adding any new customers — if they have a good product, that is.
Unless it’s because of a planned repositioning, companies with a revenue churn rate above 0% typically need to go back to the drawing board to find out why they’re losing money.
Shows stakeholders future performance and sustainability
When subscription-based companies can retain subscribers (i.e., revenue), they don’t have to worry about the unpredictable peaks and valleys of one-time sales. Revenue churn is a key metric to determine if a company can sustain itself in this model.
Its ability to highlight future performance makes it a focal point for investors as well. Most companies that successfully scale to M&A or IPO have negative revenue churn.
How to Calculate Revenue Churn
As mentioned above, there are two types of revenue churn. Calculating both is straightforward — you just have to understand your monthly recurring revenue (MRR).
Let’s take a look at the revenue churn formula.
Gross Revenue Churn
Gross revenue churn measures lost revenue due to customers downgrading or canceling their subscriptions.
Gross Revenue Churn (%) = ((Churn MRR + Downgrade MRR) / MRR at the end of the previous month) * 100
For example, a software company with $30 million MRR at the end of last month experienced $2 million in MRR churn and $1 million in downgrade MRR this month. Their gross revenue churn rate is:
((2 + 1) / 30) * 100 = 11%
Net Revenue Churn
Net revenue churn takes into account both upgrades and downgrades.
Net Revenue Churn (%) = ((Churn MRR + Downgrade MRR - Upgrade MRR) / MRR at the end of the previous month) * 100
If that same company with $30 million in MRR experienced an additional $2 million in upgrades this month, their net revenue churn rate is:
((2 + 1 - 2) / 30) * 100 = 3%
What is a Negative Revenue Churn Rate?
It’s possible (and ideal) for a company to have a negative revenue churn rate. This means that more customers upgraded or spent more than canceled, resulting in an overall increase in recurring revenue without adding any additional customers.
Negative revenue churn rates don’t necessarily mean the customer base is growing — a company can have a negative rate with flat growth as long as their upgrades and renewals outpace churns. They do, however, reflect positively on the product.
Tips for Reducing Revenue Churn Rate
Businesses can improve their revenue churn rate by optimizing three areas: pricing, customer success/support, and product-market fit.
Identify Causes of Churn
The first step to reducing revenue churn is finding what’s causing customers to leave. The easiest way to do this is by creating a survey funnel in your subscription management or marketing automation software.
This funnel should consist of two types of surveys — a survey for customers who renew their subscriptions and a cancellation survey for those that cancel. The goal is to understand why customers have decided to stay or go, respectively.
For your cancellation survey, you can ask simple, structured questions that help your customers rate their experience with your product on a scale from 1-5. That will make it easy to quantify your answers and know right away what the root of the problem was.
- How satisfied were you with Product X?
- How easy was Product X to use?
- How effectively did Product X solve your problems?
- How well does Product X meet the demands of Industry Y?
- Rate the onboarding/training process
- Rate your customer support experience
You should also add a few questions that allow for long-form feedback to understand the customer experience on a granular level. Ask questions like:
- What did you like most/least about Product X?
- Why did you decide to leave/renew your subscription with us?
- If you could change anything about Product X, what would it be?
It also helps to look on review sites like G2 and Capterra to see what customers are saying about your product. Look for reviews segmented by keywords, then figure out which problems customers report the most.
Meet Customer Needs
Once you know what’s working, refine your approach. This could include:
- Improving your marketing messaging and ad targeting to attract better marketing qualified leads (MQLs)
- Refining your sales prospecting and qualification process to better identify and convert the right customers
- Adjusting your pricing structure to better reflect your customers’ perceived value of your product
- Improving onboarding and customer success processes to ensure a smooth transition for new customers
- Offering faster or more engaged customer support when customers have issues.
- Building feature requests that meet customer needs, such as custom reporting or automation tools
Many of these fixes are easy, believe it or not. Creating a continuous feedback loop with customer data can help you turn meeting subscriber needs into a continuous and iterative process.
As a subscription company, pricing plans are never straightforward. Software companies, in particular, have it tough.
Since most use a combination of seat- or usage-based pricing, flat-rate pricing, and completely quote-based models (for enterprise customers), finding the perfect price for their value isn’t an exact science.
Price optimization is also tricky because product pricing isn’t something companies can A/B test (definitely don’t give some customers higher rates for the same plans).
Here are a few things companies can do:
- Look at your competitors. Although your competitors’ products are inherently different, you can use their pricing strategies as a benchmark for what works in your market.
- Offer multiple price tiers. If you haven’t already, offer basic, intermediate, and advanced plans. Customers can choose the best plan for their needs without sacrificing value.
- Talk to your customers. Believe it or not, you can learn a lot about what other customers would be willing to pay just by asking.
- Monitor usage data. Track how much customers use your product, then see if there’s an opportunity to increase revenue by offering more premium plans for higher levels of usage.
Incentivize Upgrades and Cross-Sells
Upselling and cross-selling are important because they allow you to grow your revenue without increasing your customer base. Aside from raising your prices over time, upsells and cross-sells are the only ways to achieve negative revenue churn.
A few ideas to get customers to upgrade their subscriptions:
- Strategically add features to price tiers. The most common way subscription companies do this is with the freemium model, which gives customers a bare-bones version of their product for free, then offers additional features with upgraded pricing tiers. Many companies also create a lower price tier to make the middle one seem the most attractive.
- Show new ways to use your product. If you send your customers new product updates, cool “hacks” of your product, and use cases/tutorials, they might find a new way to use your product.
- Give early adopters access to new features. It’s human nature — everyone wants to feel like they’re getting something special. Control that urge by giving early adopters exclusive access to beta features in your product roadmap. They might end up using your product more, and they will sometimes buy the feature when it’s released.
Reward Customer Loyalty
It’s important to offer discounts sparingly. Customers sometimes see them as “salesy” — they won’t value a product as highly if it’s continuously on sale.
When offering a discount, focus the offer on customer loyalty. The best way to do this is by securing a year of revenue upfront. Give customers one month free if they pay for a full year of service. That way, customers get the discount they want and you’re guaranteed an entire year of revenue retention.
Ensure High-Quality Products and Services
Of course, retention is impossible without a good product. Eventually, companies must focus on improving their product and services.
Take the time to look through customer feedback and make sure your product meets their needs. It’s also important to have a well-oiled customer success team that can assist customers who run into issues with onboarding, training, or troubleshooting.
Improve User Experience
User experience (UX) defines how users interact with your product. Good UX means:
- user adoption is fast and seamless.
- there won’t be any ongoing issues that frustrate customers.
- users will enjoy using your product.
- customers will continue to get more value out of the product over time.
What constitutes “good UX” exactly varies wildly, but general product design principles include:
- Keep the interface simple and intuitive. Not too many colors, buttons, or features.
- Make sure the product is responsive across different devices.
- Offer educational resources to help customers learn your product’s features/functionality.
- Make sure the core features are front and center and easy to use.
- Make the product mobile-friendly, if possible.
- Collect usage data to understand how customers use the product in real-time.
When it comes to UX, testing is the most important part. It’s impossible to predict exactly how customers will navigate your product. A/B tests, small focus groups, and customer surveys are all valuable sources of insights into how customers use your product and where improvements can be made.
Increase Renewal Rate
Boosting contract renewals isn’t as difficult as it seems. Many subscribers simply forget to renew. To automate the process, all you need is subscription management software.
Briefly, a renewal workflow functions like this:
- With subscription data available in subscription management and CRM, customers with upcoming subscriptions automatically receive a renewal reminder.
- The subscriber is shown their current subscription plan and given the option to renew or upgrade it.
- If they choose to renew, they pay with their preferred payment method.
- If they don’t respond, the software sends an automatic follow-up at a later date.
- If they continue not to respond, data flow between integrated company software will show sales they need to reach out.
Companies can also incentivize customers to renew with continuous communication. Marketing, email, and social media can all keep customers engaged, improving the likelihood of renewal.
How Technology Helps Reduce Revenue Churn
Through process automation and increasingly accurate insights, technology is a powerful tool in reducing revenue churn. Without it, companies wouldn’t even know what their current revenue churn rate is.
AI and Predictive Analytics
Predictive analytics help revenue teams spot growth trends and understand customer behavior. AI-driven models can identify the leading indicators of churn, such as usage patterns or changing subscription plans.
With predictive analytics, companies can accurately forecast future revenue, communicate it to stakeholders, and find new market opportunities. With increasingly better targeting, businesses can close more of the right customers.
Of all the customer retention strategies out there, few are as effective as simply adding subscription management software to the tech stack. It makes it easier to:
- accept payments and identify missed ones.
- track monthly revenue across all subscribers.
- segment customers and interpret revenue data and trends.
- automate the renewal process.
- track customer usage and identify at-risk customers early.
With subscription management, companies dramatically reduce their risk of involuntary churn and missed payments. They can also communicate with their buyers at a higher level, creating personalized messages that encourage customers to stay for longer.
Configure, Price, Quote (CPQ)
Among its many features for sales process optimization, CPQ software reduces revenue churn by enabling customer self-service. Even for complex subscription packages, CPQ can handle price estimates, automated quoting, and product selection.
If the company website has a customer portal, customers can easily select the exact product or service they need and make chances to it whenever. CPQ automatically tells sales reps and buyers whether or not a configuration is possible, so there isn’t any back-and-forth that could ruin the customer experience.
Billing software helps businesses manage the entire revenue lifecycle. With subscription management, most features of billing software are completely integrated. But there are a few others, such as payment gateway integrations and revenue reconciliation, that need to be handled separately.
Billing software makes it easier to track customer payments and understand the customer’s billing history. With an error-free and automated billing process, subscribers will continue to trust the company and do business with them.
People Also Ask
What’s the difference between revenue churn and customer churn?
Customer churn measures customer attrition and is calculated as total customers lost in a given period of time. Revenue churn measures the monetary value of those customers to add context. Revenue churn, in that sense, is a better descriptor of the real impact customer attrition has on a business.
What is a good revenue churn rate?
An ideal revenue churn rate is 0% or lower. Even though companies will always have some customer churn, they should strive for zero or negative revenue churn through upgrades, cross-sells, and customers that add to their subscriptions.
What metrics indicate churn?
Metrics that indicate churn include customer lifetime value (CLV), average revenue per user (ARPU), net promoter score (NPS), and customer satisfaction scores. All of these metrics can be used to track customer sentiment and identify potential churn risk early on.