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Calculating Churn in a SaaS Business

What is Churn?

Churn is one of the most widely discussed metrics used in the subscription industry, but it may surprise you that churn has no universal definition. Businesses define churn based on what is most relevant to their organization and on data that is supportable for potential investors.

While there are many variations of churn, churn is always a measure of attrition or loss. It can measure lost customers, contracts, MRR, GAAP revenue, contract value or bookings.

Churn is typically expressed as a rate or a ratio (churn rate of 12 percent) but can also be expressed as a whole number (churned 10K of MRR or churned two customers). When discussed as a rate, churn is the inverse of your renewal rate. An 80 percent renewal rate is the equivalent of a 20 percent churn rate.

What are the Most Common Churn Metrics for Subscriptions Businesses?

  • Customer Churn: Typically expressed as a count of customers lost.
  • MRR Churn: Typically expressed as a total of the MRR lost due to customer cancellations but can also represent a ratio of MRR lost as a percentage of renewals. When expressed as a ratio, churn can include MRR contraction from existing customers along with MRR churned from lost customers.
  • Revenue Churn: Typically, this is MRR churn as a percentage of GAAP revenue churn.
  • Average MRR Churn: Typically expressed as the average MRR decrease due to lost customers.
  • Bookings Churn: While MRR churn is becoming more and more popular, historically churn was calculated using data related to bookings.
  • Logo Churn: Calculated by the number of customers or subscriptions that were canceled as a percentage of renewals. This method works for monthly subscription businesses, early stage subscription businesses and term subscription businesses with few products.

How is Churn Used?

In the finance function, churn is used:

  • As a critical input to Customer Lifecycle Valuations
  • As a critical input of revenue, bookings, and cash flow projections

A single churn number is suitable for discussions with analysts, reporters, peers and other interested, non-operational audiences. However, to better inform key business decision-makers in product or service pricing, planning, packaging and marketing (among others), users employ a variety of more sophisticated churn metrics to help them understand the true performance of their organization and relative to their peers.

Users should define clear terms for each relevant churn metric and measure them consistently from period to period. Again, this requires well-defined and agreed upon definitions and metrics for churn measurement. Product management should look for potentially dramatic different churn numbers by cohorts and dimensions such as these:

  • Churn by marketing campaign
  • Churn by promotion
  • Churn by product
  • Churn by length of sales cycle
  • Churn by functional usage
  • Churn by licensed modules
  • Churn by sales channel or organization
  • Churn by industry or market segment
  • Churn by customer size
  • Churn by total customer revenue or contract size

Why is Churn Important for SaaS and Subscription Businesses?

“Churn is the scourge of subscription companies. It has two large effects. Losing a customer is a punch to the stomach and takes its toll on the morale and mojo of the company. No one wants their product or service to not bring value to a customer. The second effect is on growth and profitability, which affects a company’s value. A one-percent decrease in churn will add 12% to a company’s valuation in 5 years. Most companies worship entirely at the altar of new sales; ignoring churn comes at great risk to morale, profitability and value,” said You Mon Tsang, CEO of ChurnZero.

Related Terms:

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