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If you're here for butter, you're in the wrong place. We're talking the type of churn that gives shudders across companies. Customer churn.
What is Churn?
Churn rate, most commonly known as churn, is the number of customers that cease using the product or service over a specified period.
Typically, it's the number of customers you lose from your customer base in a year though it can also be measured by month. So you take the customers you lost over the course of the time period and divide by the customers you had at the beginning of the time period.
In B2B SaaS, there is a distinction between customer churn and revenue churn. Customer churn is measured using the count of customers you lose over the time period. Whereas revenue churn is measured using the amount of revenue you lose over the time period.
How is Churn Calculated?
Customer Churn Rate = (Lost Customers ÷ Total Customers at the Start of Time Period)
Let's look at a fun little example. BestSaasEvr is a technology company that starts the year with 2,000 customers. By the end of the year, 400 of those 2,000 customers have left, leaving the company with 1,600 of the initial group. So we have a customer churn rate of 20%. (Also note that for the purposes of calculating annual churn rate, we ignore newly onboarded customers after the beginning of the year. They would be included in calculations for future cohorts.)
- Customer Churn Rate = (Lost Customers ÷ Total Customers at the Start of Time Period)
- Customer Churn Rate = (400 ÷ 2,000)
- Customer Churn Rate = 20%
But what if your revenue isn't evenly split amongst customers? Sure, you want to limit how many customers leave, but really you want the fewest dollars leaving the door. So let's look at the example again, but say that BestSaasEvr has $4M in revenue from their 2000 customers, and of the 400 that leave, they represent $400k. So their revenue churn is actually 10%.
- Revenue Churn Rate = (Lost Revenue ÷ Total Revenue at the Start of Time Period)
- Revenue Churn Rate = (400,000 ÷ 4,000,000)
- Revenue Churn Rate = 10%
As you can see, those are wildly different numbers and may each mean different things for the business.
Should Zero Churn Be the Goal?
The most important question to ask yourself when measuring a metric is "what am I optimizing for?"
When you optimize for zero churn, you are optimizing for losing zero customers. It means that anyone that signs on is expected to stay.
What are the consequences of optimizing for zero churn? Well, on the plus side, you never lose a dollar (in theory) because no one will ever leave you. On the downside, you are doing whatever you can to retain that customer which includes making payment sacrifices, adding custom features, or other conciliatory actions. And sometimes, you want customers to leave because they are bad customers! They'll take a lot of your team's time, not pay their bills on time, and be hard to deal with. Maybe they don't fit your use case. In these instances, it's probably okay to let them go.
Some places argue for tracking voluntary vs involuntary churn. Voluntary churn is when a customer stops using the service due to reasons that are within their control like they don't want to keep paying the same price or they found a different option. Involuntary churn is when a customer discontinues service due to non-payment like an expired credit card.
We at RevenueOx don't think the voluntary vs involuntary split goes far enough. If you measure voluntary churn, you could still be including customers that leave that were never a good fit for your product. And involuntary churn just shows that the product wasn't that important to them anyway if they didn't bother to update payment information.
We recommend creating a strict set of rules for instances where you will allow a customer to churn and rules for when you will not. For example, perhaps you're willing to negotiate on price down to 25% but you will not for any reason build a custom feature for a client that is not on the product roadmap. In this example, you should track the reason why a customer churns and then compare customers you could have kept as a client and decided not to compromise versus customers you would have liked to keep but they decided to leave. We like to call this
Optimizing for zero churn is unrealistic and overly simplistic. One should use the lessons of why customers are leaving to inform the decisions they make about the ideal customer and product roadmap and not try to keep every customer at all costs.
