You underestimate the impact of churn to your business at your peril.
In fact, that’s one of the biggest mistakes companies make when it comes to churn.
Sure, you know churn is expensive. But all churn is not created equal, and that’s a nuance that makes a big difference in the world of preventing churn. So let’s dig in! Some keys to getting ahead of churn include:
- Knowing your numbers, especially the different kinds of customer churn
- Understanding how those different kinds of churn uniquely hit your bottom line, and
- What to do about it (including calculating your numbers – see below for our handy churn calculator tool!)
Let’s dive in.
Customer churn is described as the ultimate leaky bucket for a reason. If you’re filling a bucket with water, and there’s a hole at the bottom, no matter how much water you pour in, it will keep leaking out.
This is especially true in recurring revenue companies. No matter how much effort you put into acquiring new customers, if you’re losing those customers – if you’re leaking. You’re draining revenue and making it impossible to reach your full potential.
The leaky bucket kills your growth.
Have you ever been in an executive or investor board meeting, having to explain why you’re missing your revenue targets (yet again)?
It’s not a fun exercise.
To truly grasp the impact of customer churn and develop effective strategies to stop churn in its tracks let’s start with the basics
Knowing Your Numbers
Your churn numbers may already be front-and-center at your company. If so, kudos!
But even at companies that are keeping an eagle eye on churn, there can be confusion about the different kinds of customer churn and how those differences uniquely impact your bottom line. Let’s get aligned before moving forward.
At its core, churn rate is a measurement of customers who stop doing business with you. In recurring revenue-based businesses, it’s evaluated as a percentage of customers who cancel their paid subscriptions.
There are different types of churn to consider:
- Logo Churn vs. Revenue Churn
- Monthly vs. Annual Churn
Each of these are important to understand and measure for different reasons.
Logo Churn vs. Revenue Churn:
Logo Churn measures the number of customers who have left. It treats all customers as equals, providing a straightforward look at how many customers you are losing.
Logo Churn Calculator
Your logo churn rate calculates the percentage of entities that stop doing business with your company over a given period of time. This is generally calculated monthly and/or annually.
Instructions:
- Enter the number of customers you had at the beginning of the period.
- Enter the number of customers lost during that period (churned customers).
- Click on Calculate to see the Logo Churn Rate.
Logo Churn Rate:
0%
Revenue Churn focuses on the financial impact of those lost customers. It gives you visibility into how much revenue you are losing due to churn, which is crucial for understanding the true cost.
In recurring revenue companies, Net Revenue Retention (NRR) is the key calculation for revenue churn, over a specific period, taking upsells and downsells into account. NRR only looks at recurring revenue. If your company has one-time revenue, such as an implementation fee, that’s not factored into the NRR calculation.
An NRR of 100% means you’re retaining all your revenue. A NRR of less than 100% means you’re losing revenue due to churn, and anything higher than 100% indicates overall revenue growth. The benchmark for SaaS companies is usually pegged at 120% NRR.
To illustrate the financial impact of churn, consider a SaaS company where customers pay $12K annually. When a customer churns, you don’t just lose $12K in subscription revenue. You also need to account for the cost of acquiring a new customer, which in many cases can be as high as 92% of the first-year revenue. So, losing a $12K customer actually costs you approximately $23K. That breaks down as the $11K in acquisition costs to get a new customer and fill the hole, plus the $12K lost revenue.
In other words, it’s not easy to hit that 120% NRR number if your company has a churn problem.
And it gets worse! Beyond the immediate revenue loss, high churn rates can erode profit margins, misallocate resources for internal justifications, generate negative word-of-mouth, and even negatively affect employee engagement and retention.
Revenue Churn/NRR Calculator
Revenue churn or Net Revenue Retention (NRR) considers the total change in recurring revenue from existing customers over a specific period, factoring in upsells and downsells.
Instructions:
- Enter the Annual Recurring Revenue (ARR) at the beginning of the period.
- Enter the additional revenue from upsells.
- Enter the reduced revenue from downsells.
- Enter the lost revenue from churned customers.
- Click on Calculate to see the NRR.
Annual NRR:
0%
Monthly Churn vs. Annual Churn
Sometimes I’ll talk to a Customer Success leader and they’ll tell me, with tremendous pride, that they have a 2% churn rate. Is that good?
It depends.
There’s a big difference between a monthly (short-term) churn rate and an annual (longer-term) churn rate.
If a company is only losing 2% of their customers each year, that’s an excellent result. It beats the pants off the benchmark for SaaS companies, which is less than 10% annually. On the other hand, a 2% monthly churn rate translates to losing almost 22% of your customers annually! Losing that many customers each year makes it almost impossible to grow, and nobody should be happy with that number.
So why would a customer success professional be bragging about a 2% monthly churn rate? Well, maybe they don’t understand the nuances at their company. In the world of B2B recurring revenue companies, perception matters. Both internally and in the larger world of reputation, companies want to send out a shiny message of success. And that’s OK, to a point. But not if you’re misleading your own team.
Both monthly churn and annual churn are valuable metrics.
Monthly churn gives you a granular view of customer retention trends and allows you to quickly identify and address issues as they crop up. Tracking monthly churn can be especially useful for tracking the impact of recent changes in customer service, product offerings, or pricing.
On the other hand, annual churn provides a broader perspective on customer retention over a longer period of time. It reflects the cumulative impact of retention efforts and overall customer satisfaction. This metric is useful for understanding long-term trends and the effectiveness of strategic initiatives aimed at improving customer loyalty. It helps companies assess the overall health of their customer base and predict future revenue more accurately. Annual churn is the number your board is probably using to evaluate your success.
Monthly and Annual churn metrics complement each other. Monthly churn is crucial for short-term tactical adjustments and immediate corrective actions, while annual churn provides a broader view of your retention efforts.
And misunderstanding any of your churn numbers is a costly mistake.
Churn Conversion Calculator
Monthly and Annual Churn help you understand different aspects of customer behavior. Monthly churn allows you to quickly identify and address issues in your business. Annual churn helps companies assess the overall health of their customer base and predict future revenue more accurately. Use this calculator to easily convert between Monthly Churn and Annual Churn numbers.
Instructions:
- Enter the Monthly Churn Rate.
- Enter the Annual Churn Rate.
- Click on Calculate to see the converted Churn Rate.
Annual Churn Rate:
Monthly Churn Rate:
For more information on churn conversion, click here.
Here’s Why It’s a Problem:
High customer churn rates can be catastrophic. They:
- Reduce profit margins
- Force resource reallocation for internal justifications and customer retention efforts
- Generate negative market perception
- Harm employee morale and retention
On the flip side, improving customer retention has many benefits. When you improve retention, your customers deliver more revenue to your company. Companies with effective retention strategies often see:
- Higher profit margins
- Lower average cost of customer acquisition
- More upsells and cross-sells
- Improved customer satisfaction and loyalty
- Enhanced reputation in the market
- Greater employee engagement and lower turnover
Here’s How To Fix It:
The foundation of reducing churn is building trust with customers so they want to stay longer, buy more and tell all their friends and colleagues. That requires a combination of what I call “Heart and Smart.” We’ll talk more about aspects of Heart in a later email. For now, let’s focus on the Smart of customer retention.
Knowing your numbers is one Smart way to prevent customer churn before it starts.
- Edwards Deming is famously quoted as saying, “You can’t manage what you don’t measure.”
Begin your journey to preventing customer churn by measuring the various types of churn:
- Logo Churn
- Revenue Churn/NRR
- Monthly Churn/Annual Churn Rate Converter
Then use each of these metrics to learn where your bucket is leaking.
- Are you losing logos overall?
- What can you learn about the revenue you’re losing? Is the impact coming more from small customers? Big customers? Or are you missing out on upsells & cross-sells?
- Is your churn number looking at the right length of time? Monthly churn and annual churn rates have unique stories to tell. More importantly, are you being honest with yourself about your annual churn rates?
To make evaluation easier for you, here are calculators for three key churn metrics. These calculators walk you through the formulas for each calculation, before giving you an easy way to input your numbers for instant results.
Knowing your numbers is the first step to avoiding the costly mistakes that lead to churn. And there’s so much more!
Dig into Mistake #2: Losing Customers Because of Fixable Sales and Marketing Issues for more insight and resources
OR
Partner with Alignmint for expert guidance.
Let Alignmint do the work to evaluate your business and give you the answers to stop customer churn before it starts with our Churn Slayer Audit.