How To Calculate Churn Rate for Impactful Decisions [Calculator]

In a world where markets change unexpectedly, cash is a critical safety net to weather those rapid shifts. Given these conditions, companies must prioritize both customer acquisition and retention. To make informed decisions based on changes in your customer base, you’ll want to keep a close eye on your churn rate.

Churn rate measures the rate at which a business loses (aka churns) customers in a given period. It can also be adjusted to measure revenue loss, employee loss, and other financial metrics. 

In this blog, we’ll focus on revenue churn rate, which is particularly helpful for SaaS companies and start-ups who may not have a solid customer base yet. Read on for a complete guide to churn rate: what it is, how to calculate it, ways to monitor it, and actionable ways to reduce it.

Key Takeaways

• Churn rate definition: the percentage of expected customer loss during a set time period.
• Churn rate can measure other metrics, such as revenue loss.
• There are two primary types of revenue churn rate: net revenue churn, which accounts for new revenue, and gross revenue churn, which does not.
• To reduce revenue churn, you’ll want to closely monitor leading indicators of customer attrition and consider optimizing pricing, creating incentives to prevent cancellation, prioritizing upselling and providing quality customer support.

What Is Revenue Churn Rate?

Churn rate measures the percentage of expected recurring revenue lost during a given 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 Vena SaaS data study, the average churn rate for SaaS companies is 5-7%. They keep revenue churn rates low with close monitoring, smart pricing, compelling upsell incentives and exceptional service (among others). For SaaS companies and other subscription-based businesses, tracking revenue churn rate in addition to other markers like the Rule of 40 or is essential for understanding the larger financial health of your organization. 

Churn rate helps inform: 

• Strategic decisions around product or service offerings
• Customer retention and service tactics
• Budgeting and forecasting for the future.

How To Calculate Revenue Churn Rate

The most common way to measure revenue churn is using the net revenue churn rate formula:

Net Monthly Recurring Revenue (MRR) Churn = 
(Monthly Revenue Loss - Monthly Revenue Gain) / (Starting MRR)

The process of calculating churn rate requires:

1. Adding up your total churned revenue (product downgrades, cancellations, etc.)
2. Subtracting expansion revenue (upselling, product upgrades, etc.)
3. Dividing the difference by your starting MRR
4. Multiplying by 100

The net revenue churn rate formula gives companies a more accurate picture of their recurring revenue health because it accounts for growth that may offset the churn. Gross revenue churn rate can be helpful to measure exactly how much revenue you’re losing because it doesn’t account for new revenue.

Here’s a visual of the net revenue churn rate formula for clarity:

Let’s use a hypothetical example to show how we calculate net revenue churn rate and gross revenue churn rate. In this example, a company has the following metrics for the given month:

• $10 million MRR
• $700,000 in churned revenue
• $200,000 in expanded revenue

Net Revenue Churn Rate Formula

• Step 1: ($700,000 - $200,000) = $500,000
• Step 2: $500,000 / $10,000,000 = 0.05
• Step 3: 0.05 x 100 = 5%
• Net revenue churn rate = 5%

Gross Revenue Churn Rate Formula

• Step 1: $700,000 / $10,000,000 = 0.07
• Step 2: 0.07 x 100 = 7%
• Gross revenue churn rate = 7%

Revenue Churn Rate vs. 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 formula as revenue churn but measures how many customers the company has lost regardless of revenue flow.

So, for example, a company could experience high customer churn but no change in revenue churn rate if they earned enough expanded revenue to offset what was lost via cancellations.

Both customer and revenue churn rates are important financial metrics for SaaS and other subscription-based companies with different strategic implications respectively. For example, high revenue churn could suggest pricing issues or decreasing demand. On the other hand, high customer churn is more indicative of customer experience issues such as poor customer support or UX problems. 

Customer Churn Rate Calculator

To calculate churn rate instantly via the customer churn rate method, 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.

5 Ways To Reduce Revenue Churn Rate

As your company calculates churn rate, here are some strategies you can adopt to help bring it down and strengthen revenue.

1. Monitor Revenue Churn Rate and Set Goals

Actively monitoring revenue churn rate and identifying leading indicators like low customer engagement, low team adoption, or declining customer satisfaction (CSAT) is crucial. By proactively addressing these issues, you can prevent significant revenue loss and maintain a healthy customer base.

As April Oman, the Chief Customer Officer at Resilinc, points out in an episode of The CFO Show on building effective business partnerships between Chief Financial Officers and Chief Customer Officers, “You’ll want to start identifying patterns. And if you identify patterns, that is going to help you with forecasting. That is going to help you with planning.”

Adopt the right financial planning & analysis (FP&A) software to automate and streamline revenue churn rate reporting. Review revenue churn as a team and set goals such as an improved CSAT score to measure success. Report regularly on your progress and analyze trends over time.

Sprout Social, for example, built a brand new revenue model after implementing Vena — one that reduced churn and helped its leaders chart a confident path forward, even amid uncertainty.

“It really helped us look at the business from a different perspective. 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. That’s the data we need to guide our retention strategy and big go-to-market initiatives.”

- Kristina Bittorf, Senior Manager of Finance, Sprout Social

2. Analyze and Optimize Pricing Models

Churn rate is particularly responsive to subscription-based pricing strategies because they’re more flexible than other pricing models. Optimizing your pricing is a reliable strategy to lower revenue churn rate. 

When your pricing is 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 experience an unusually high churn rate. When in doubt, survey your customers to investigate if it’s an issue related to pricing, customer service, or the product.

3. Offer Incentives To Prevent Cancellation

We've all been there — we plan to cancel a subscription, but just before we hit that final cancel button, we're offered an irresistible incentive to stick around. Much of the time, these incentives are effective and help reduce churn.

If you're seeing that much of your revenue churn is due to cancellations, consider incentivizing your customers to stay as a temporary solution. Once you've slowed churn, investigate 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:

• Is there a certain point in the customer relationship when cancellations jump?
• Does a particular trigger event cause cancellations?
• What kind of feedback are customers providing when they cancel? (If you aren't collecting feedback already, now is the time to start.)

4. Prioritize Upselling

If you want to reduce your net revenue churn rate, upselling and creating new revenue can offset the effects of your churn. As you investigate why your company is experiencing more churn, you can upsell stronger products or services to maintain financial stability.

Start with your happiest customers — they’re most likely to want more of what you're offering. This gives you time to investigate your customer base for opportunities to upsell to other segments.

5. Help Customers Maximize Value

Revenue churn often happens because customers don’t realize the full potential value of your solutions. This often has nothing to do with the quality of your product—it’s just that customers need more help figuring out how to make it valuable for them.

Take this on as your organization’s responsibility. Make effective onboarding and exceptional customer support a priority to boost customer experience, so fewer customers even consider canceling.

Finally, check in regularly with your customers. Even if you think they're happy, this builds stronger customer relationships. The next time a customer has an issue, they’re more likely to reach out to their customer success representative before canceling or downsizing their account.

April Oman also suggests creating an opportunity for customers to interact with other customers and your staff. “If you can build a sense of community with your customers helping each other,” she says, “it just makes your brand stronger. It makes your product stronger.”

Maximize Revenue Retention With Smarter Financial Reporting

Some churn is inevitable. It can’t be totally avoided, but by gaining a clearer view into your financial data with Vena, you can proactively identify and address potential churn risks.

With pre-configured reporting templates tailored to the unique needs of SaaS businesses, you can easily monitor key revenue and engagement metrics. This proactive approach empowers you to take timely actions to minimize churn and maximize revenue.

Vena 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 the best of both worlds.

Give your financial reporting processes a boost with these eight financial planning templates for Excel, designed especially for SaaS companies.