This article will focus on Revenue Churn in general. I will talk in detail about:
What exactly SaaS Revenue Churn is,
Why having a high revenue churn rate could be more damaging than it seems,
How to calculate the annually and monthly churn rate of revenue,
And the best seven methods to improve your churn analysis and prevention.
So, without further ado, let's begin with the definition:
What Is Revenue Churn?
Revenue Churn is the number of dollars that you lose from your recurring revenue each month or year. In other words, it is the number of dollars churned within a certain time period, rather than the customer count. Although early stage companies tend to focus on customer churn more, keeping a keen eye on your monthly revenue churn can help you scale faster.
Companies and Startups are mostly valuated by their profitability. In most cases, profitability is measured with revenue retention.
👉 That is, if you want to grow as fast as possible and get investors' attention in the early stages, you had better optimize for having negative revenue churn.
Negative revenue is when you acquire more than your lost revenue. For instance, if you have constant customer losses, you can make up for it by:
Bringing in additional revenue options such as affiliate marketing or advertising,
Working on customer retention and increasing customer lifetimes, so that your subscription business has a low average churn rate.
Upselling to existing customers in order to keep the revenue wheel running.
If you ask why you should bother, here I have the answer:
How Revenue Churn Makes Your Company Look Bad
Yes, revenue churn causes you to lose money, but that's unfortunately not the only problem.
Here are the three most important reasons why revenue retention can become a critical metric rate over time:
1- Cuts the company growth rate
No matter how many customers you gain, unless you are able to make a profit out of those customers, you will have trouble growing.
Many startups can't set correct pricing plans but still focus on decreasing monthly customer churn rates without optimizing revenue churn metrics, and thus, can't grow enough.
To prevent this, you should provide annual plans and sign annual contracts with customers so that you can secure your revenue for at least twelve months, if not more.
2- Breaks investor trust
No investor will be willing to invest in a company that can't get its revenue up high in a short period of time.
The idea of investing relies on finding a business profitable. If you can't get a good month-over-month growth rate (which mainly depends on revenue), and don't have high customer retention rates, you will fall out of the market before even getting in.
3- Decreases internal company morale
Unfortunately, the previous two outcomes of low percentage of revenue creates an avalanche effect, and break the company from within.
Here is how it works:
The company can't make profit,
Thus, investors don't come close,
Thus, you lose social proof and can't even build a loyal customer base,
Thus, people working for the company lose hope and drive the company into another critical time where no one has the will to try harder.
How Is SaaS Revenue Churn Calculated?
Here is the basic revenue churn formula:
Let me clarify what this means with an example:
Let's say that you have a SaaS company named RC metric. You provide revenue churn analysis and consultancy, and you have 2 plans:
The "starter" plan only includes analytics and automated bot suggestions. This plan costs $100 per month.
The "professional" plan includes advisor checks and human suggestions. This plan costs $150 per month.
Now, let's imagine that last month you had 50 customers total, 35 on the starter plan and 15 on the professional plan.
You can see that last month your monthly recurring revenue was $5750 (100x35 + 150x15).
This month, you lost 4 starter plan subscribers and 3 professional plan subscribers because they switched to a cheaper alternative solution. Your total revenue loss from these customers has been $850 (100x4 + 150x3).
At the same time, you got 8 new starter plan customers, bringing you a total of $800 in revenue.
You lost $850 from 7 churned customers, and acquired $800 from 8 converted users.
If you do the math, you will see that you lost 7 customers, but acquired 8. So your customer base has increased, but your revenue decreased by $50.
This is what differentiates Revenue churn and customer attrition rate.
What is a good revenue churn rate?
According to Baremetrics, the average revenue churn among SaaS business model companies is between 4-8%. This rate is of course for the monthly churn rate, and is expected to be compensated by high customer acquisition and low customer acquisition costs. Also, tracking revenue churn along with revenue retention will give you a clearer idea about your expenses, and whether you should cut them.
So, how do you keep your revenue high and churn low?
Here are the 7 best tactics:
7 Ways to Quickly Improve Revenue Churn for SaaS
1- Track the Correct Key Metrics
The easiest way to get the most out of data is knowing what to look into and what not.
If you have a pile of data in your hands, or if you want to know what else to investigate to understand revenue churn, here is what you should track:
MRR-ARR to see how the money dynamics change over time.
Expansion MRR to see if you are actually growing.
Renewal rates to see how good you are doing at retention.
Promoter score (NPS), satisfaction score and engagement score to see whether your customers are willing to pay you more.
2- Analyze and Optimize Your Pricing
If a large portion of your revenue churn is due to customer downgrades, this could indicate that your pricing is incorrect.
But luckily, it is not difficult to detect.
The first thing you want to do is to compare your features and pricing with your customers. If there is a gap between the price-value proportion, give priority to fixing that.
If you get a lot of feedback like “too expensive” or “switching to a competitor”, don’t assume that means you need to lower your price. It could just be that you’re not providing enough value for the price you’re charging.
Therefore, create customer cohorts and user personas to categorize feedback, and give priority to the highest revenue-bringing segment.
3- Segmentate Your Customers And Create User Personas
As I mentioned above, segmenting your customers and creating user personas will make it easier to trach recurring patterns and work on them.
You could segmentate your customers according to:
And so on.
For example, if people who don't log in for a month don't pay a lot, you can start reaching out to people after inactive days of 20 and keep them within your loop, and later on, upsell to them.
4- Collect Valuable Feedback And Learn Your Key Drivers
It is as important to know why people retain as to know why they churn. Ask your customers:
⏺ What features do they like most?
⏺ What is the main reason they preferred you?
⏺ What would be a dealbreaker for them?
These questions, along with your satisfaction score, will help you improve your strengths as well as your weaknesses.
The answers will be your flashlight on the road to find what and how to upsell or cross-sell to current customers, thus, increasing retention.
5- Keep An Eye On The Positive And Negative Customer Attributes
This step is actually a combination of step 3 and step 4.
Looking at your strengths and weaknesses simultaneously could reveal some patterns as well. For instance, is there something that keeps some lower-paying customers loyal but simultaneously makes the big fish run away?
If there is, then you should reevaluate your product market fit, and talk to more customers about their thoughts.
6- Analyze Churn Along With Retention
As you may guess by far, analyzing churn alone won't get you far.
Instead, see retention reasons, retention rates, and retention-related tactics as well to figure out how you can reduce the monthly and annual churn rate.
7- Use Churn Prediction Tools
If you have a hard time putting together all the data you gathered, you can get help from churn prediction tools to get notified about possible churns.
Here are some recommendations:
Churnly is a machine learning software that is built for SaaS companies. By using Churnly, you can estimate customer churn beforehand. Thanks to its AI, customer data is gathered and analysis is being made in detail.
As a Predictive Sales Software, Qymatix aims to maintain customer success. Therefore, it is suitable for B2B companies to better understand their customers and revenue churn.
Trifacta serves as an open and interactive cloud. It is stated on their website that AI meets Human Intelligence and they work collaboratively. So you can gather your data and have a big picture of the revenue churn rates of your company.