Churn Definition
Churn is a measure of client attrition. It is a form of renewal rate typically presented in the “negative.” Depending on the context, churn maybe expressed as a rate or ratio, or discussed as a whole number. As a ratio or percentage, churn may be calculated based on renewal bookings or based on contract counts.
The Good News about Churn
Churn is a widely used term with no actual definition. Churn is arbitrary. Churn is made up. Churn is a favorite SaaS discussion point for bloggers.
There are no audit standards for churn. There is no industry or regulatory definition of churn, or “churn rate” as it is sometimes called. Churn has evolved as a widely used SaaS industry term that makes it easier for industry people to discuss disparate business that share the SaaS model. In SaaS, you define a churn rate however you want. The biggest issue you will have with churn is the internal debate on how to define it.
What do you do with Churn?
If you sell/license one solution at one price with one contract to a homogeneous set of clients, and you have enough clients so that the “law of large numbers” might apply, then you can use a single churn rate as input to important decision making. Otherwise, a single churn number is good for chats with analysts, reporters, peers and other important but non-operational discussion.
To make the best pricing, packaging, marketing, product planning, and other decisions to maximize customer revenues throughout the customer life cycle, you need a spectrum of churn numbers that represent unique customer and market segment behaviors. Understanding segment cancellation and renewal patterns enables you to respond with appropriate and targeted measures.
To make solid business decisions, measure churn in as many dimensions as possible, such as:
- Churn by sales channel
- Churn by industry
- Churn by revenue size of client
- Churn contract value
- Churn by marketing campaign
- Churn by promotion
- Churn by buying investment time (measured in time from lead to close)
- Churn by licensed functions/modules
- Churn by functions used
And don’t forget that in addition to variance in churn by these and other dimensions, there is also the dimension of time. Is a client coming up for the third renewal as likely to cancel as an identical profile client coming up for its first year of renewal? Upon analysis, many SaaS companies find a wide range of distinct Life Cycle Renewal Rate curves within the customer base.
How do you measure churn? Join the discussion at the SaaS Optics community.