By analyzing your customer churn (i.e. cancellation) rate is a great way to gain insights into the state of your business and to identify the true cost of customer churn. As a primer, there are two common metrics tracked by Customer Success teams – churn by volume and churn by net revenue. What’s the difference? Here’s quick rundown of how these two percentages are calculated.
Churn by volume
Take all the customers you loose during a time frame, such as a month, and divide it by the total number of customers you had at the beginning of that period.
Churn by net revenue
Take your monthly reoccurring revenue (MRR) at the beginning of a time frame and divide it by the reoccurring revenue you lost that period, minus any additional revenue from existing customers.
A useful breakdown of each type of churn, including examples, can be found here (the author calls churn by volume customer churn; churn by net revenue revenue churn).
Some considerations when calculating churn
Your SaaS customer churn rates are a snapshot of your business during a certain period of time. If your customers are on yearly contracts and all renew in the final 3 months of the year, then your churn for the first 9 months is likely to be very favorably skewed. For this reason, it is often beneficial to look at churn on a yearly basis. It is very important to set a solid baseline for your churn calculations, which can be harder than it sounds. For instance, if you have a MSA that allows you to work with multiple companies under one parent organization, should those companies be counted as just one customer in your churn by volume?
Percentages for churn by volume and net revenue can be very different, and your churn by net revenue could even be a negative number (meaning revenue increased from your baseline). Example: if you lost a lot of small clients, but your largest partners brought in record revenue, your churn by volume will be high but your churn by net revenue will be low. Finally, don’t include revenue from new deals in your churn rates unless they were an upsell of an existing client. When the leadership team is setting KPIs around churn they should keep in mind what kind of upsell opportunities the customer success team has at its disposal (more about that later).
Start analyzing your customer churn
Now that you’ve calculated your churn rates, it’s time to start digging to see what trends you can uncover. Depending on what kind of business you’re in, you may or may not find the analyses below useful.
- Churn by cohort grouping partners on when they launched (more info on how to calculate churn by cohort here)
- Break down churn rates by partner industry and size to see which types of partnerships are most likely to be successful and lucrative
- Weigh the investment from the Sales, Customer Success, Support, and Product teams that go into obtaining and managing customers that you have determined are less likely to succeed.
+Share this info with the executive team and sales management to hopefully dissuade them from pursuing customers that are not likely to be successful (or happy) with your product
- Any insights into which customers are most likely to be a drain on team resources and be “difficult”?
+Is there a correlation with the product they use?
+Is there a correlation with which sales person closed the deal?
Below are a few examples of the types of trends you might uncover by analyzing your customer churn and revenue data. From the results in “Graph #1″ (above) we can assume that although Publishers made up 50% of all churn during this time period, there were more Publisher partners to begin with and only 18% of these partners churned. “Graph #2″ (below) shows that medium sized partners present a great revenue opportunity to be captured from variable costs versus licensing fees. Finally, “Graph #3″ (below) shows that the customer segment that brings in the most revenue is large Yellow Page companies.