In a world where markets move and change faster than ever and in ways we cant always anticipate it's critical to have a cash safety net for when the unexpected occurs. When you do, you're better able to adjust to market changes with confidence and invest in new strategies that keep your business moving forward.
This requires keeping your revenue churn rate low with tactics such as close monitoring, smart pricing, compelling upsell incentives and exceptional service (among others). In this blog, we'll cover them all - including how to calculate. To keep things simple, you can use our free on-page churn rate calculator.
What follows is a complete guide to revenue churn rate: what it is, how to calculate it, ways to monitor it and actionable ways to reduce it in an ongoing way.
Revenue churn rate measures the percentage of expected recurring revenue lost during a given time period. It can be measured monthly or annually, using monthly recurring revenue (MRR) and annual recurring revenue (ARR) as key benchmarks in the calculations.
According to a 2022 survey by KeyBanc Capital Market of more than 350 SaaS companies, average annual revenue churn rate for SaaS is about 14%, with the best performers staying under 10%. Our SaaS Statistics & Benchmarks guide shows that healthy monthly churn is much lower typically about 5-7%.
For SaaS companies and other subscription-based businesses, tracking revenue churn rate is essential for understanding the larger financial health of their organizations. It also informs important strategic decisions around product/service offerings, customer service and retention tactics, and budgeting and forecasting for the future.
The most practical and common way to measure revenue churn is using the net revenue churn rate formula. This requires taking your total churned revenue (product downgrades, cancellations, etc.), subtracting expansion revenue (upselling, product upgrades, etc.), dividing the difference by your starting MRR, then multiplying by 100.
Heres a visual of the revenue churn rate formula for clarity:
The net revenue churn rate formula makes the most sense because it accounts for added revenue that offsets churned revenue, giving companies the most complete picture of their recurring revenue health.
In some cases, however, you may want to calculate gross revenue churn rate, which does not subtract expanded revenue in the initial numerator in the formula above.
Lets use a hypothetical example to really make this clear. In this example, a company starts with $10 million MRR, then loses $3 million in churned revenue. During the same month, they also added $1 million in expanded revenue. Now let's look at the net revenue churn rate formula.
To calculate churn rate instantly, try our free calculator below. Simply enter the number of customers at the start, and then at the end. You'll be able to view your customer churn rate.
A commonly asked question around churn rate is which is more important: customer churn or revenue churn? Customer churn uses the same formulaic thinking as revenue churn, but aims to understand how many customers have been lost regardless of revenue flow.
So, for example, a company could experience high customer churn, but no revenue churn rate in a given month, if they earned enough expanded revenue to offset what was lost via cancellations.
Both are important metrics for SaaS and other subscription-based companies to measure, but they are distinctly separate and have different strategic implications. High revenue churn, for example, could suggest pricing issues or decreasing demand, while high customer churn is more indicative of customer experience issues think poor customer support or UX problems.
The first step to reducing revenue churn is to stay on top of monitoring it. Put processes in place and adopt the right FP&A tools to automate and streamline revenue churn rate reporting. Review revenue churn as a team. Set goals and benchmarks against which you will measure success. Report regularly on your progress and analyze trends over time.
The impact of taking these steps cant be understated. Sprout Social, for example, was able to build a brand new revenue model after implementing Vena Solutions one that reduced churn and helped their leaders chart a confident path forward, even amid uncertainty.
It really helped us look at the business from a different perspective, says Kristina Bittorf, Sprout Socials Senior Manager of Finance. Revenue is always top-of-mind, but now we can dive even deeper into our expenses and gross margin with KPIs such as efficiency ratios, customer acquisition cost, lifetime value and more. Thats the data we need to guide our retention strategy and big go-to-market initiatives.
Subscription-based pricing strategies are particularly flexible as far as how they're structured and the level of flexibility they offer. Optimizing your pricing is a sure way to keep your revenue churn rate low. When your price points are well-aligned with your target customers budget and the perceived value of your offerings, customers are less likely to churn.
Start by looking at any products, services or packages that may be experiencing churn at an unusually high rate. Look for the root cause and go straight to your customers if you need feedback.
We've all been there we plan to cancel a subscription, but just before we hit that final cancel button, we're offered a discount or incentive to stick around. Much of the time, these incentives work to reduce churn.
If you're seeing that much of your revenue churn is due to cancellations, consider an initial step of incentivizing your customers to stay. This, however, is only the stop-gap solution. Once you've slowed churn, expand your attention to why customers are canceling and look for ways to make customers want to stay.
Ask probing questions to help you get to the bottom of the problem:
Remember: Net revenue churn rate takes expanded revenue into account as it offsets lost revenue through upselling. At the same time you look to take direct action toward reducing churn, aim to also offset it by upselling in other areas.
Start with your best and happiest customers the ones most likely to want more of what you're offering. Then, look at your entire customer base and look for opportunities to make relevant and targeted offers to different segments.
Much of the time, revenue churn occurs simply because customers fail to realize the full potential value of your solutions. This often has nothing to do with the actual quality of your product. Its just that customers need more help figuring out how to make it valuable for them.
Take this on as your organizations responsibility. Make effective onboarding and exceptional customer support a prioritized part of your business's strategy to reduce the number of customers who even consider canceling.
Finally, check in with your customers. Even if you think they're happy overall, checking in builds a stronger relationship with your customers and makes it more likely that they'll reach out if they experience difficulties (vs. turning right to cancellation or downgrading).
Some churn is inevitable. But while it cant be totally avoided, you can reduce your revenue churn rate with smart financial planning, close monitoring and a commitment to creating the best experience possible for your customers.
To do this (and capitalize on other opportunities), you'll need to perform business-wide planning and maintain a full picture of your financial health at all times. You can do all this with FP&A software solutions like Vena.
Ricardo Trigueros, Sr. Financial Analyst for Vena client Lookout, recently shared the impact Venas platform has had on their revenue planning strategy:
I love how quickly we can iterate now and model any unique revenue scenario we can think of, Ricardo shared. Vena really resonated with me as a finance professional right from the start because any modeling I can do in Excel, I can do even better and faster in Vena.
Vena Complete Planning offers the flexibility of traditional Excel-based planning and the structure of a controlled application environment in a single, unified, cloud-based platform.
With Vena, you don't have to leave Excel behind to scale you can plan, forecast, collaborate and grow using best-of-both-worlds tools and capabilities.
Give your financial reporting processes a boost with these eight financial planning templates for Excel, designed especially for SaaS companies.
Want to learn how Vena can help you grow your SaaS business? Schedule your free demo today to get started.
