Boost Profits by Understanding Revenue vs Customer Churn Rate
Your subscription-based business is reliant on retaining your existing clients and adding new clients to keep your revenue stream growing.
But one of the biggest determinants of your success is the rate at which you are holding on to those clients, and the rate at which losing clients affects your bottom line. The rate at which you lose customers is referred to as the customer churn, and the rate at which losing those customers takes away from your bottom line is known as revenue churn.
As the owner of a subscription-based business, you must understand how customer churn and revenue churn can affect the long-term prospects of your business, and the ways in which you can shore up your clients to prevent losses that can force you out of your industry.
Subscribers who decide that they no longer want the services youre offering, or dont want them on a monthly or annual basis, will discontinue their subscriptions, which is a loss to you, but maybe not as damaging as you think, depending on the amount that customer was spending on your services.
The simplest way to calculate customer churn rate is to take the number of active customers you had at the beginning of whatever period you are evaluating, then subtracting the number of customers you had at the end of that period and dividing that number by the number of customers from the beginning of the period you evaluated.
Churn Rate = # of customers at beginning of period – # of customers at end of period # of customers at beginning of period
So if you had 200 customers at the beginning of an evaluation period, and you had 150 at the end of that period, the churn rate formula would be:
200-150/200 = 25% churn rate
In its simplest terms, revenue churn refers to the amount of revenue that each lost customer represents for your business.
There are many different ways to calculate revenue churn, and the truth is, the calculation you use will be unique to your goals, but the most important thing to remember about revenue churn is that one size does not fit all.
What this means is that you cant make a direct correlation between customer churn and revenue churn, because it all depends on the subscription model that was lost.
So for example, losing 10 clients who are on a subscription model of $9.99 a month is a lot more sustainable than losing one client who is paying $199.99 a month for services. In other words, its important that you analyze the customer churn to see what type of subscribers you are losing.
If you are losing customers who are on a lower-tier subscription model, but you are retaining your high-tier subscription model clients, then even a churn rate of 30 percent may not be as alarming as it seems on paper.
Applying the Differences In Churn Rates
Its also important to understand that you may experience a high revenue churn without a high customer churn, because revenue isnt just tied to gaining customers, its also tied to loss-leaders such as discounts and credits in a given time period. So even though your revenue churn may be high, you may not see a corresponding increase in customer churn.
You may also experience a high customer churn with a low revenue churn in a given time period due to the fact that some of your high-tier subscription model customers have upgrade their services or purchased more services. That will often result in increased revenue even as you are losing low-tier subscription model customers.
Benefits of Understanding Churn
In business terms, churn simply means change, and thats one of the most important aspects of understanding and measuring churn: Whats changing in your business?
Churn lets you determine whether the price points for your various subscription models are in line with what customers are willing to pay. It also lets you analyze whether revenue growth is due to existing customers who are purchasing more of your services, or new customers who are opting for your higher-end subscription models.
And by measuring churn during specific time periods, you can determine whether there are specific months in the year during which your customers are more likely to discontinue their services, or more likely to sign up for your services.
For example, the holiday season is often a time in which consumers are more willing to sign up for services because of discounts and specials. But by measuring churn, you can determine how long these holiday subscribers stick with your services, and decide if its worth taking that revenue hit during the holiday season.
Read more about How To Prepare For The New Revenue Recognition Standards