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Before you measure your churn rate, first define what constitutes an actual churn event for your business.

11 months ago | From getcontrol | Author: getcontrol

There’s no doubt that a subscription-based business needs to keep a close eye on its churn rate. But is it necessary to track both Customer Churn and Revenue Churn? And if your business decides to only track one churn metric, should it concern itself with Customer Churn Rate or Revenue Churn Rate?

Why You Should Track Customer Churn and Revenue Churn
by
Kathryn Loewen
| | |

There’s no doubt that a subscription-based business needs to keep a close eye on its churn rate. But is it necessary to track both Customer Churn and Revenue Churn? And if your business decides to only track one churn metric, should it concern itself with Customer Churn Rate or Revenue Churn Rate?
To answer this question, we must properly understand each term and its purpose.
Customer Churn Rate = number of customers lost in a period / total number of customers at beginning of period
Revenue Churn Rate = revenue lost in a period / total revenue at beginning of period
Let’s dig a bit deeper into these terms with a couple of examples.
Only Using Customer Churn Rate
Imagine that you run a SaaS business with 1000 subscribers. 90% of your customers are subscribed to your Blue service, while 10% are subscribed to your Red service.
Understanding Churn graph - 900 blue, 100 red
Simple enough, right? But here’s where it gets interesting. Imagine that BLUE customers pay significantly less than your RED customers.

Red pays $200 / month, Blue pays $10 / month

Based on this new paradigm, the total revenue distribution would look like this:
Understanding Churn graph - $9000 blue, $20000 red

It’s a simple example that drives home an important idea: the idea that focusing only on Customers or only on Revenue can be very misleading.
Let’s say your business is only monitoring Customer Churn Rate. One month you notice that you have lost 10 customers. You feel comfortable with this number, though, as during that same time period you gained 25 new subscribers.
But what if all 10 of those customers were RED subscribers, and 24 of the 25 newcomers opted for BLUE? This might be indicative of a major problem with your RED subscription level. It will also have a significant effect on your company’s monthly revenue.

Perhaps your customers are not receiving the value they expected. Or perhaps a competitor has released a new service that your users are migrating to. Whatever the case, you will not be able to consider this problem if you are only concerning yourself with Customer Churn Rate.
Before you think that the solution to all your problems is only using Revenue Churn Rate, let us take a look at the other side of the coin.

Why You Should Track Customer Churn and Revenue Churn
by
Kathryn Loewen
| | |

There’s no doubt that a subscription-based business needs to keep a close eye on its churn rate. But is it necessary to track both Customer Churn and Revenue Churn? And if your business decides to only track one churn metric, should it concern itself with Customer Churn Rate or Revenue Churn Rate?
To answer this question, we must properly understand each term and its purpose.
Customer Churn Rate = number of customers lost in a period / total number of customers at beginning of period
Revenue Churn Rate = revenue lost in a period / total revenue at beginning of period
Let’s dig a bit deeper into these terms with a couple of examples.
Only Using Customer Churn Rate
Imagine that you run a SaaS business with 1000 subscribers. 90% of your customers are subscribed to your Blue service, while 10% are subscribed to your Red service.
Understanding Churn graph - 900 blue, 100 red
Simple enough, right? But here’s where it gets interesting. Imagine that BLUE customers pay significantly less than your RED customers.

Red pays $200 / month, Blue pays $10 / month

Based on this new paradigm, the total revenue distribution would look like this:
Understanding Churn graph - $9000 blue, $20000 red

It’s a simple example that drives home an important idea: the idea that focusing only on Customers or only on Revenue can be very misleading.
Let’s say your business is only monitoring Customer Churn Rate. One month you notice that you have lost 10 customers. You feel comfortable with this number, though, as during that same time period you gained 25 new subscribers.
But what if all 10 of those customers were RED subscribers, and 24 of the 25 newcomers opted for BLUE? This might be indicative of a major problem with your RED subscription level. It will also have a significant effect on your company’s monthly revenue:
Before: $9,000 from BLUE and $20,000 from RED.
Total = $29,000.
After: With 24 new customers, you have $9,240 from BLUE.
With 9 fewer customers you have $18,200 from RED.
Total = $27,440.
Perhaps your customers are not receiving the value they expected. Or perhaps a competitor has released a new service that your users are migrating to. Whatever the case, you will not be able to consider this problem if you are only concerning yourself with Customer Churn Rate.
Before you think that the solution to all your problems is only using Revenue Churn Rate, let us take a look at the other side of the coin.

Only Using Revenue Churn Rate
Let us keep the same scenario as our previous section. RED still makes up the majority of your revenue, but BLUE makes up the majority of your customers.
Understanding Churn graph - 900 blue, 100 red

Understanding Churn graph - $9000 blue, $20000 red

Using the Revenue Churn Rate we would certainly be made aware of a large drop in RED subscribers, as described in the previous section of this post. But what if there was a significant decrease in BLUE subscribers?
What if in a single month, BLUE subscribers dropped by 105? Remember, BLUE subscribers only pay $10 a month. But that’s over 10% of your entire customer base leaving — an alarming statistic by any measure.
But with the Revenue Churn Rate model, it’s more difficult to notice the significance of this drop. Imagine if 105 BLUE subscribers left, but at the same time 5 new RED subscribers arrived.

       

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