In its simplest form, churn signals the end of the customer lifecycle. In a traditional brick-and-mortar store with simpler transactions, tracking customer churn can be difficult. Fortunately, this kind of tracking is easier, and helpful, in an e-commerce or subscription business.
Churn is a good indicator of the viability of your business. If your customers are satisfied with your practices and the product you deliver, they will continue their relationship with you. If they aren’t happy, they aren’t going to want to continue paying for your service month after month.
Because churn can start small, with a customer terminating their subscription, it’s easy to overlook the true danger. Often, it isn’t until the churn rate increases that businesses recognize it as a problem. By then, it takes significant effort to identify and address the contributing factors.
Reducing churn is essential for any business since it leads to increased revenues and longer Customer Lifetime Values (CLVs). The urgency to maintain customers is critical, as statistics suggest that it costs five times more to attract a new customer than to retain a current customer.
Two kinds of churn and four ways to measure it
While churn can be sneaky, it is easier to spot when you know what to look for. There are two different types of churn:
Voluntary churn takes place when a customer decides to end a subscription. There are many possible reasons for voluntary churn, from a change in the perceived value of your product to a poor customer relationship.
Involuntary churn refers to a subscription getting terminated without a customer’s awareness. The cause can be as simple as a failed payment. With as much as half of all initial failed payments succeeding with a second attempt, this is one source of churn that can easily be mitigated.
When looking at churn in a broad sense, it’s important to ask several questions.
- How many subscribers do I have?
- What is the average customer lifecycle?
- What is the average Customer Lifetime Value?
- What was the churn rate last billing period?
- What was the churn rate at the same time last year?
All of these factors contribute to tracking churn: the number of customers and contracts you had, versus those you lost.
There are several metrics with which to measure churn; each is instrumental in understanding the dynamics at play. Looking at the different metrics allows you to shift your point of view and hone in on exactly what you need to accomplish.
1. Subscriber Churn
Subscriber churn, also called customer or logo churn, is the actual number of customers that leave a business.
To calculate the subscriber churn rate, take the number of customers that no longer have a relationship with your company, and divide that by the total number of customers you had at the beginning of that billing period.
Subscriber churn rate = (Subscribers at the beginning of a period - Subscribers at the end of that period) / Subscribers at the beginning of the period
So, if you have 200 subscribers and 10 churned out, the calculation is:
Subscriber churn rate = 5%
Generally, subscriber churn is calculated on a monthly basis. While acceptable churn varies by industry, a 2%-4% churn rate in e-commerce business is typically deemed sustainable.
However, customer churn also has to be offset by new or expanded business to stay profitable. If not, businesses can run the risk of undervaluing monthly customer churn.
For example, if 2% of a customer base churns out every month, it might not seem like a big deal. However, if 2% of customers churn out every month without being replaced for a year, that stacks up to a 24% annual churn rate.
Suddenly, what seemed like ‘normal’ loss equates to almost a quarter of your customer base if your business has not expanded in other ways.
2. Monthly Recurring Revenue (MRR) Churn
While having a solid customer base is critical, MRR is also important for the success of a company, as it measures the predictable and recurring revenue of your subscription business. A growing awareness of the importance of MRR is fueling the uptake of the subscription model in business.
MRR churn is the sum of any canceled contracts within a certain period. Where subscriber churn is a calculation of customers lost, MRR churn is a financial measurement. Not only is it important to measure the number of subscriptions that are lost over a month, it’s also critical to measure any monetary deficits through lost revenue or delinquent payments.
To calculate MRR churn rate, add up the MRR that was lost and divide it by the total MRR over the previous period. Omit any new business that was acquired over that same period.
MRR Churn = Lost MRR / MRR over the previous period
So, if you had $35,000 of MRR in February, but lost $500 of total MRR the next month, the calculation is:
500/35000 = 0.014
MRR Churn Rate: 1.4%
If you have contracts of varying rates, it’s also important to track those up for renewal at that point.
MRR Churn can be further broken down between gross and net MRR churn, which takes into account the four types of MRR:
- New business MRR, or revenue from new customers
- Expansion MRR, new revenue from customers that upgrade their subscriptions
- Contraction MRR, revenue lost when customers downgrade their subscriptions
- Churned MRR (MRR Churn), revenue lost when a customer terminates their subscription, whether voluntarily or involuntarily
3. Gross MRR Churn
The gross MRR churn rate is the total amount of revenue lost from contracts your customers cancelled or downgraded over a specific time period—whether quarterly, monthly, etc. It gives you a higher level, no-frills view of lost revenue within your installed customer base.
To calculate gross MRR, combine the MRR lost from both cancelled or downgraded subscriptions (MRR churn and contraction MRR). Next, divide that by the MRR within that same period.
Gross MRR Churn = (MRR Churn + Contraction MRR) / Total MRR at the start of the period
If you have $50,000 MRR over a period and lost $1,500 with downgraded subscriptions and $500 in cancelled subscriptions, the calculation is:
2,000/50,000 = 0.04
Gross MRR Churn Rate: 4%
4. Net MRR Churn
Net MRR churn digs a little deeper into the nitty-gritty compared to gross MRR churn. This figure is the total MRR lost from terminated contracts, with other factors taken into account. This can include additional revenue from upgrades or other contract modifications from remaining customers.
This figure gives you a better view of predictable income from your current customer base.
To determine your net MRR churn rate, take the sum of all cancelled or downgraded contracts (MRR churn and contraction MRR). From that figure, subtract any revenue generated during that period by contract upgrades (expansion MRR). Then, take that number and divide it by your MRR at the beginning of that period.
Net MRR Churn = (MRR Churn + Contraction MRR - Expansion MRR)/MRR at the start of the billing period
So if your total MRR that period was $5,000 and you lost $50 in MRR churn and $50 in contraction MRR BUT gained $75 in expansion MRR that month, the calculation is:
(50+50-75)/5000 = 0.005
Net MRR Churn Rate: 0.5%
Planning your churn mitigation strategy
When businesses look to mitigate churn, they employ many different methods. Some work well and some are expensive and largely ineffective.
One method to mitigate lost revenue through churn is to put more effort into attracting new customers. However, with customer acquisition costs much higher than the cost of retention, this is an expensive proposition. In fact, some figures suggest that the costs to acquire each new customer equate to 15 months of contract value for a current customer.
Another approach SaaS businesses have employed is putting more effort into upselling to their existing users. Since businesses already have a relationship with their customers, offering new or additional features tempts users to upgrade their subscriptions and increases MRR.
If you have determined that customers are churning out due to dissatisfaction with your business practices, it’s time to invest in improving your processes. Train your support staff to become more customer-centric, and work quickly to address issues. If a customer feels valued, they're more apt to stay faithful to your business.
You can also employ a subscription management and recurring billing software to streamline your process and increase efficiencies with functions such as:
- intelligent card retries, cutting involuntary churn rates by as much as half
- dunning management, improving customer communication surrounding account changes and potential payment issues
- credit card management, giving customers the power to manage their own payment preferences
- account status implementation, synching account and customer status, and
- metrics and reports, allowing you to calculate LTV (Lifetime Value), MRR, and churn.
Using churn metrics to improve business practices
Why are these different churn metrics so important? Because they give businesses valuable insights into their product and financial health.
There are some early indicators of churn: customers putting off payments, decreased usage of your product, and an increase or decrease of support tickets. These indicators could signal that customers need more help with your product than usual … or that they simply don’t care anymore.
Sometimes, if the warning signs go unheeded, customers decide to stop doing business with you.
If customers are churning out, it’s imperative to take a good look at your product and determine what can be done to prevent them from leaving.
- Are customers happy with the product?
- Are customers happy with your business?
- What changes need to be made to reduce churn?
- Do you need to invest in the right customer success management (CSM) roles to influence your MRR?
One way to get to the bottom of these questions is to ask your customers. Create a survey to measure their satisfaction in different facets of the business, from product to customer service. Once you have identified issues, take action to mitigate those problems.
Churn is inevitable, but a healthy, forward-facing business won’t allow it to become the status quo. Instead, they will be prepared to face whatever questions arise and make whatever moves necessary to keep the customer lifecycle healthy now, and in the future.