What is Revenue Churn?
Revenue churn is a key metric that measures the percentage of subscription revenue a company loses from existing customers over a specific period. It essentially reflects a company's ability to retain the contract value of its customer base. Alongside customer churn (which tracks the loss of actual customer accounts or logos), revenue churn provides a critical lens through which to view the financial health and stability of a subscription-based business.
How to Calculate Revenue Churn?
There are several ways to measure revenue churn. A widely used metric is Net Revenue Retention (NRR). NRR considers a specific period and accounts for changes in account value due to:
- Expansion Revenue: Upsells or cross-sells to existing customers (e.g., upgrades to higher-tier plans, purchase of additional features).
- Contraction Revenue: Downsells or downgrades from existing customers (e.g., moving to a lower-tier plan).
- Churned Revenue: Lost revenue from customers who cancel their subscriptions.
To calculate NRR, you typically start with the recurring revenue at the beginning of the period, add any expansion revenue from upsells/cross-sells during the period, and subtract any contraction revenue from downgrades and churned revenue from cancellations. This final revenue figure is then compared to the starting revenue, often expressed as a percentage.
Where MRR stands for Monthly Recurring Revenue.
If the revenue gained from expansion (upsells) can offset or even exceed the revenue lost from contractions (downsells) and churned customers, the Net Revenue Retention Rate can surpass 100%. This scenario is often referred to as negative churn and is a strong indicator of a healthy, growing SaaS business. An NRR of 110% or higher is typically considered world-class in the SaaS industry.
Alternatively, Gross Revenue Churn focuses solely on the revenue lost during a period. It is calculated by summing the contraction revenue (from downgrades) and the churned revenue (from cancellations) and expressing this total loss as a percentage of the recurring revenue at the start of the period. This metric specifically highlights revenue erosion without factoring in expansion.
Should You Measure Revenue Churn or Customer Churn?
Both revenue churn and customer churn are vital metrics, and they offer different perspectives on business performance.
- Customer Churn (Logo Churn): Measures the rate at which customers are canceling their subscriptions. It tells you how many customers you're losing.
- Revenue Churn: Measures the rate at which revenue is being lost. It tells you the financial impact of those lost customers and changes in existing customer spending.
Comparing these two metrics can reveal important insights:
- High Customer Churn, Low Revenue Churn: This might indicate that you're losing many small customers, but your larger, higher-value customers are staying.
- Low Customer Churn, High Revenue Churn: This is a more alarming scenario, suggesting that you might be losing a few large, high-value customers, or existing customers are significantly downgrading their subscriptions.
By tracking both, an organization can gain a more comprehensive understanding of its customer base's health, prevent over-reliance on a single metric, and identify potential issues within specific customer segments before they become critical problems. Understanding both types of churn is crucial for sustainable growth and profitability.