The two prominent measures for churn are customer churn (also sometimes referred to as logo churn) and revenue churn. Their definitions are rather instinctive, with the former measuring the share of customers lost over a time period, while the latter measures the share of revenue lost over a time period. Simple right? Having the definitions laid out for us, the next natural question would be, which one is more important for a SaaS business.
In this blog post I discuss the pros and cons of measuring customer and revenue churn. Let the battle begin!
Customer (logo) churn = share of customers lost during a time period
Revenue churn = share of revenue lost during a time period
Let’s consider an example, where a SaaS business operates a two-tiered pricing model, with a basic plan at $10 a month and a premium plan at $100 a month. Let’s assume that the company currently has a total of 1,000 users, of which 60% (600) are basic tier customers and 40% (400) premium tier customers. The company’s MRR (monthly recurring revenue) therefore is $46,000 (400 users x $100 per month + 600 users x $10 per month).
The company’s representative tells you that their churn is 8.0% on a monthly basis. How do you think the company is performing?
If the churn rates expressed by the company representative refer to revenue churn, it implies that in atypical month, the company loses $3,680 of its existing revenue to churn (8% x $46,000). How many users does the company lose? No idea, from anywhere between 368 (all of the churners are basic tier users) and 37 (if all of the churners are premium tier users)1. Quite the difference?
On the other hand, if the 8.0% churn rate refers to customers, we know that 80 customers quit using the service. What is the revenue impact? Same answer in Alternative 1: we do not know. It can be from anywhere between $800 (80 basic users churning) and $8,000 (80 premium users churning). Quite the difference, once again, isn’t it?
Let’s analyze the alternatives a bit further. In this example, the revenue churn of 8% in Alternative 1 translates into a customer churn of between 3.7% and 36.8% (37 users and 368 users out of 1,000). In Alternative 2, a customer churn of 8% translates into a revenue churn of between 1.7% and 17.4% ($800 and $8,000 of the monthly MRR of $46,000). The wide ranges imply that following just one churn measure can give rise to a false sense of security.
For example, if the enterprise in our example would exclusively follow customer churn, and reported an improvement from 8% to 4%, the company's customer success team would deservedly receive a pat on the back from the management. If later on the company’s financial team noted an inexplicable dip in its revenue amid an improvement in churn rates, it could be revealed that the decrease in churn was caused by a shift in the mix of churners if only users with a premium subscription churned. Maybe a competitor had offered a feature exclusive to the premium users at a lower cost, resulting in fleeing premium customers? Or perhaps the company had offered notable discounts to potential churners to encourage them to stay on? Not following revenue churn alongside customer churn would hide the true nature of the events, and could result in incorrect conclusions.
Following exclusively revenue churn could have an equally hazardous outcome. Mass-cancellations among the basic plan customers could go unnoticed as their impact on revenue is limited, which could seriously hamper long-term growth prospects.
If I had to choose just one of the measures at gunpoint, I would choose customer churn. The explanation is, that revenue is often measured anyways through other means as well. Additionally, customer churn gives a better indication of a company’s long-term prospects. A stagnant or decreasing customer base leaves upselling as the only source for growth, while a growing customer base enables other options for growth as well.
1 Rounded up for simplicity
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