Revenue churn is a metric that is crucial to know as a founder, CFO or Customer Success leader. This is the metric you get asked about when speaking with your board or potential investors when fundraising.
It’s a critical indicator of the health of a SaaS company and helps in understanding the financial health of your customer base. Seen in numbers, net revenue is the percentage of revenue you have lost from existing customers in a given period.
Net revenue churn is calculated by the revenue lost from existing customers minus any upgrades (i.e. in subscription plan) or additional revenue from existing customers in a specific period, divided by the total revenue at the beginning of a period.
This calculation considers upsells, downgrades and churn. If you would like to see a more complete idea of your recurring revenue you can read about it here.
A negative revenue churn number is good
Looking at the net revenue churn, negative numbers represent a healthy customer base and positive numbers represent an unhealthy customer base. A negative net revenue churn means a company’s revenue can increase even without new sales.
If the net revenue churn is close to 0, it is an indicator that the churn cancels out the growth from the upsells. Which means that all growth must come from new customers.
As mentioned, positive revenue churn has a negative impact on your business. This churn can occur through lack of customer engagement, lack of education, or lack of providing appropriate content or resources.
When the net revenue churn is positive, your customer success team should focus on working towards an improvement in customer churn. Read more about how to improve churn here.
An increasing revenue churn can become a serious problem. Your Business Intelligence (BI) tool helps you track revenue churn over time.
How to calculate revenue churn
To calculate your revenue churn, you can use the MRR churn. The MRR churn is the Monthly Recurring Revenue lost from canceled contracts during that month i.e. the revenue churn for a specific month. For example:
Revenue churn rate would be:
($400,000 – $350,000 – $55,000)/$400,000
= (-$5,000)/$400,000 = -1%
Keep in mind that the negative churn number means you have gained revenue that month. When you want to track the revenue churn over time your BI tool helps you visualize the data. Here you can see the revenue churn over two quarters created in Chartio, your data analytics software that will allow you to join your accounting software, Salesforce and product data together.
When you are tracking revenue churn, it is also important to have a look at your customer churn rate.
Watching the trend of your revenue churn rate on a high level shows you the success of your product/service. You can actively prevent churn at an early stage. Read about it here. Lastly, remember that negative percentages of revenue churn show a gain in revenue. But what is an acceptable revenue churn? Bessemer Venture Partners state that an acceptable annual rate is 5% – 7%. Translated to a monthly average, we can say 0.45% – 0.59% is acceptable.