If you are a subscription company, churn is your worst enemy. If a company is not able to keep up with its subscriber base, it will start losing customers. For this reason, the growth rate of subscribers must exceed the churn rate. Don’t worry, we got you covered. As we go along in this article, we will understand the difference between customer churn vs revenue churn.
So if you have 100 subscribers to a software-as-a-service product, and 10 of them cancel their subscriptions in one month then your churn rate is 10%. Let’s dig into the difference between customer churn vs revenue churn.
Customer Churn vs Revenue Churn
In order to fully understand the difference between customer churn vs revenue churn, we need to not only look at the number of customers that have left our service but also how much revenue they represent. Customer Churn refers to customers who’ve discontinued their subscription on a given period and Revenue Churn is about understanding what those lost customers mean in terms of revenue.
With this type of sale, you will be making at least $400K from your 40% gross margin.
You don’t want to just focus on one thing, like revenue or customers. You have to take care of both numbers.
If you have a product that costs $10month and another that costs $100, then it’s better to lose 5 customers who pay for the cheaper plan than one customer on the more expensive plan.
Expansion vs Contraction
In the business world, it is common to think that if you gain customers then your company is growing and vice versa. But this isn’t always true.
A subscription business can be very lucrative because it doesn’t have to worry about customers leaving for discounts, refunds, or credits.
If you don’t want to spend time and money on acquiring new customers, it is possible to grow your revenue by up-selling existing customers (offering them a more advanced version of the product), cross-selling additional products or services (giving their contact information away for free) or increasing use rates.
Part of understanding the difference between customer churn vs revenue churn is pricing. When pricing your product, it is best to price according to usage. These are some examples of products that have prices that scale with the amount used:
- HubSpot: the overall number of users
- Dropbox: disk space in use
- AWS: hours of cloud computing
- Aweber: number of users on lists
You might want to track the success of your salespeople with these metrics separately. Let’s know the difference between customer churn vs revenue churn in terms of measuring it.
Part of understanding the difference between customer churn vs revenue churn is measuring sales performance. One of the best ways to measure sales performance is by tracking how much money you make from new customers and existing ones. That’s why it’s important to know ARPA (Average Revenue per Account) for both types.
Another way to measure performance is by using cohort analysis. This involves looking at the number of customers you have over a certain time period, say for one month. Cohort analysis can help identify patterns in customer behavior- these could be acquired from specific channels or after releasing new features.
So if you notice that customers who signed up in August are more likely to stay as subscribers for a longer period than those who signed up in July, then it might be worth looking into how the two groups of customers differ and adapting your product or sales strategy accordingly.
There you have it. Those are the differences between customer churn vs revenue churn.