What is Revenue Churn?
Revenue Churn measures the percentage of recurring revenue that a company lost due to customer cancellations, non-renewals, and account downgrades in a given period.
How to Calculate Revenue Churn Rate (Step-by-Step)
In the context of SaaS companies, the gross revenue churn rate represents the losses resulting from existing customers either canceling their subscriptions or refusing to renew a contract.
Subscription-based companies aim to maximize their recurring revenue, which is achieved by ensuring that their customer churn (and revenue churn) remains low.
Customer churn and revenue churn are two of the most important metrics for SaaS companies to track, but revenue churn tends to be more informative in terms of understanding the monetization of the user base.
- Customer Churn → “What percentage of customers were lost since the beginning of the period?”
- Revenue Churn → “What percentage of a company’s monthly recurring revenue was lost since the beginning of the period?”
For instance, a company could be losing customers, which would typically be perceived negatively (and a cause for concern).
Yet, the company’s recurring revenue in such a case could still be growing as a result of obtaining greater revenue from its existing customers.
Revenue Churn Formula: Gross vs. Net MRR Churn
The monthly recurring revenue (MRR) refers to the proportion of a company’s total revenue per month that is considered predictable due to being contractual, i.e. from a subscription-based pricing plan.
If a subscriber decides to cancel or downgrade an existing subscription, the provider’s MRR would subsequently decline.
MRR is arguably the most critical key performance indicator (KPI) for SaaS companies, so it makes sense that churn must ideally be kept to a minimum.
There are two methods to measure churn, either on a gross or net basis:
- Gross Revenue Churn → The percentage of recurring revenue a company lost from cancellations, non-renewals, or contractions (i.e. downgrade to a lower-tier account) in a specific period.
- Net Revenue Churn → Instead of only considering the percentage of recurring revenue a company lost from cancellations, this metric factors in expansion revenue.
To expand further on the latter point, expansion revenue can come in numerous forms, such as the following:
- Price Raising (Tier-Based)
For example, if a SaaS company with $20 million in MRR lost $5 million in that specific month, the gross churn is 25%.
- Gross Revenue Churn = $5 million ÷ $20 million = 0.25, or 25%
Unlike the prior metric, which only considers the MRR lost from existing contracts, the net churn factors in expansion revenue.
Continuing from the previous example, let’s say that the SaaS company was able to bring in $3 million in expansion revenue.
In that case, the net churn is 10% instead of the 25% gross churn.
- Net Revenue Churn = ($5 million – $3 million) ÷ $20 million
Expansion revenue must be netted against price decreases or downgrades to a lower tier account by existing customers, so the $3 million in expansion revenue offset some losses from customer cancellations.
Customer churn shows how well a company can retain customers, while gross churn shows how well a company can continue producing revenue from its customers.
But net churn expands upon the gross churn by factoring in how well a company can increase the revenue contributed per customer.