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Customer Churn vs Revenue Churn

Learn about the two types of churn rates

What is Customer Churn vs Revenue Churn?

Every company operating under the SaaS business model must track a significant number of metrics, including customer churn vs revenue churn. Reporting and analysis of all metrics is extremely time-consuming and not an ideal solution in most cases. Eventually, every SaaS company faces a dilemma on which metrics are vital for the business and which are not.

 

Customer Churn vs. Revenue Churn

 

Churn rate indicates the rate at which a company loses its customers or revenues due to various circumstances. Generally, the churn rate is one of the most critical metrics for SaaS companies. Churn rate can be measured either in terms of lost customers (customer churn rate) or revenue (revenue churn rate).

 

What is Customer Churn Rate?

Customer churn rate is a measure of the rate at which a company’s customers cease their subscriptions to its products or services. Companies tend to track customer churn rate because of the high costs of acquisition of new customers. Thus, if a company experiences a high customer churn rate, its operating costs can rise significantly because it must spend more to acquire more new customers.

Customer churn rate can be calculated using the following formula:

 

Customer Churn Rate

 

Note that for some companies, the number of customers within a period can vary significantly. Thus, the companies use the average number of customers within a period instead of the number of customers at the beginning of a period. In such a case, the formula for the customer churn rate will look like the one below:

 

Customer Churn Rate - Modified Formula

 

The key advantage of using customer churn rate is that the metric shows the exact percentage of the customers who terminated their subscriptions in a given period. In addition, customer churn rate can indicate the problems with a company’s product or service.

 

What is Revenue Churn Rate?

Revenue churn rate, also known as MRR churn rate, measures the rate at which a company loses revenue as a result of churned customers or downgraded subscriptions.

The formula for calculating the revenue churn rate is the following:

 

Revenue Churn Rate

 

The main benefit of using revenue churn rate is that it allows tracking churn rate between high and low spenders. Essentially, if a company offers multiple pricing plans, revenue churn rate can help a company identify which customer segment contributes the most to the churn. Thus, this variation of the churn rate is essential for those companies with significant discrepancies in contract values of customers.

 

Related Readings

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • Customer Acquisition Cost (CAC)
  • Monthly Recurring Revenue (MRR)
  • Unearned Revenue
  • Startup Valuation Metrics