As a business owner, you’re always looking for ways to improve your bottom line. But what’s more important: customer churn vs revenue churn?
It’s a tough question, and there isn’t necessarily a right answer. After all, both types of churn can have a significant impact on your business. But if you had to choose one, which would be more important between customer churn vs revenue churn?
Customer Churn vs Revenue Churn
Customer churn is the percentage of customers who stop doing business with a company over a given period. Revenue churn is the percentage of a company’s revenue that is lost over a given period due to customer churn.
To grow your business, you need to acquire new, paying customers and minimize your rate of customer loss.
The formula for customer attrition below allows you to monitor the rate at which you’re losing your customers.
$$\text{% Customer churn rate}=\frac{\text{Customers that churned in period t}}{\text{Total customers at the start of period t}}$$
Let’s say we had 20 paying customers in January and then a month later we lost 2 of those customers to churn. Our customer churn rate would be 10%.
In other words, during February, we lost 10% of our customer base to churn.
$$\text{January: 20 customers}$$
$$\text{February: 18 customers}$$
$$\text{% Customer churn rate}=\frac{(20-18)}{20}=\frac{2}{20}=10\%$$
Churn is a really important metric in Saas, but which is more important?
Revenue or customer turnover?
In this article, I’m going to look at the difference between two common SaaS Metrics, and show you how to use each to monitor and improve your growth.
Revenue Churn
The “revenue-churn” metric is used to measure how much MRR is lost to downgrades and cancellations.
The formula for calculating your revenue churn rate is:
$$ \text{% Churn Rate}= \frac{ \textrm{churned} }{ \textrm {previous} }{ \textrm {month} }{ \textrm {MRRs} }$$
In our previous example, the churn rate for the month of February was 10%. This is due to the loss of 2 customers, which resulted in a loss of 10% of monthly recurring revenue.
$$20 \times 200 = 4,000$$
$$18 \times 200 = 3600 \text{MRR}$$
$$10\%=(4,000-3,600)4,000$$
It might be tempting to focus on just one metric but it’s crucial to keep an eye on both customer churn and revenue churn.
Revenue churn tells you how much revenue you’re losing from customers who leave.
Ideally, you want low numbers for both. But if you have to choose one to focus on, customer churn is generally more important than revenue churn. That’s because it’s easier to increase revenue from existing customers than it is to acquire new ones.
How well are you at keeping your customers?
Both customer retention and revenue growth are important to any business. Both tell you how well you are at keeping customers and how much money they are spending.
Keeping your customers happy is how you measure your customer retention.
These terms are closely related, but they aren’t the same.
The example we provided above was very simple: 10% of customers leaving results in 10% of lost revenue. However, in reality, things can get complicated when calculating lost business due to additional seats and storage, or varying price points.
Customer and revenue churn don’t always do a good job at forecasting each other.
Three Ways to Reduce Revenue Churn
How can you improve your customer retention?
Churn is a huge problem for businesses, but there are ways to combat it. These tips will help you reduce customer turnover.
1. Make Revenue Churn Visible to All Team Members
Improving the satisfaction of your customers is a collaborative effort. From sales to customer success to product, everyone plays a key role in ensuring customers are getting the most out of their subscription.
If you want your team to be on the same page, make sure you’re tracking all of your important key performance indicators (KPIs). Having all of your data in one centralized place makes it easy to see the big picture and can help inform day-to-day decision-making.
The Geckoboard dashboard is a great way to see all of your KPIs in one place. By gathering data from multiple sources, you can easily track progress and make informed decisions.
2. Onboard Customers Properly
The customer experience doesn’t stop after a customer pays you. It’s important to engage them right away and make sure they know how to use your product.
That’s where onboarding emails come in.
Onboarding emails are a great tool for engaging and delighting customers from their very first day as your client. They can also help to increase client lifetime value, and preemptively answer any inquiries about your product, which eliminates the need for resources in the future.
Take a look at this template for a standout Welcome email, which should be sent out to new customers within 24 hours of them signing up for your service.
The key components of this outreach email are a friendly, personalized opening, links to useful resources on the company website, and a call to action. The tone is friendly and conversational.
Your welcome email is the most important one to send, as on average, it has over a 60% open rate.
3. Use a Dunning Management System to Prevent Failed Charges
I have some bad news for you.
Even if you have an excellent KPI dashboard and create a great onboarding email sequence, your business could still experience revenue churn due to failed charges.
Failed charges happen for three reasons:
When a call fails, it’s typically due to one of three reasons:
- Insufficient funds
- Expired credit cards
- Incorrect payment information
By using a dunning management system, you can help prevent failed charges and keep your churn rate low.
Typically, following up on unpaid invoices and contacting delinquent accounts would fall within the realm of an Accounts Receivables department. However, doing this by hand is tedious and ineffective.
When a payment is missed, dunning management systems automate the follow-up, increasing the chance that the delinquent customer will pay.
By adopting a proactive customer service approach, you can reduce the likelihood of customers experiencing any interruptions in service.
Conclusion
It’s tough to say which is more important: customer churn vs revenue churn. Both can have a significant impact on your business. But if you had to choose one, customer churn might be the slightly more important metric to focus on.
