Next to MRR, Churn is probably the most widely discussed subscription metric. Churn has no actual agreed-upon definition. In the end, you define churn in a way that works for your business and in a way that is defensible.
While there are many variations of churn, churn is always a measure of attrition or loss, and it can be lost customers, contracts, MRR, GAAP revenue, contract value, or bookings. Churn is most frequently expressed as a rate or ratio (churn rate of 12%), but churn can also be discussed as a whole number ("churned 10K of MRR" or "churned 2 customers").When discussed as a rate, Churn is the inverse of your renewal rate. An 80% renewal rate is the equivalent of a 20% churn rate.
In the finance function, Churn is used in or to:
A single churn number is good for chats with analysts, reporters, peers and other important but non-operational discussions. To optimize pricing, product planning, packaging, marketing and other decisions to maximize revenues and business performance, use a variety of more sophisticated churn numbers to help you understand the true performance of your business.
Define clear terms for your various churn metrics and then measure them consistently from period to period. Again, this requires well-defined and agreed to definitions and formulas for churn measurement.
Product management should look for potentially dramatic different churn numbers by dimensions such as these:
Given the importance of Churn to the underlying economics of the subscription model, Churn, like MRR, is more and more a consideration in sales compensation plans. However, measurement of Churn for sales compensation often requires a set of "exception" rules that are more complicated than those for Churn measurements performed for the purpose of assessing strategic business performance.
The primary issues typically involve the inclusion or exclusion of subscription records, the value of MRR, and the timing of transactions.
Top-level MRR performance is no less likely to include ALL MRR transactions than financial statements would all transactions that impact revenue and the balance sheet. Bad AR, write-offs, refunds, and credits are always accounted for in revenue reporting and balance sheets, as they should be in some way in board-level MRR reporting.
However, the sales function is often not accountable for many post-sale financial or contractual changes, such as early cancellations, collections issues, bankruptcies, concessions, and settlements. Therefore, changes in MRR performance due to issues such as these are often excepted out of the MRR performance reporting for the sales team.
In addition to complicated "sales exception rules" that factor in or out certain transactions, significant complication can also be introduced based on significant differences in the interpretation of timing of transactions.
Just as the sales function desires to take credit at the time of the order booking, the sales team will frequently measure cancellations as of the cancellation order date. From a financial metrics perspective, MRR, revenues, and even invoicing can continue on through the end of the term, even if a cancellation order comes in well before the actual end of the term. Many calculations, including Customer Lifetime Value, should be based on the effective end date, or the date the financial transactions cease to contribute to revenue or AR, not as of an order date.
In the subscription world, the word "churn" is an imprecise term subject to interpretation.
For most efficient business discussions, consider adopting specific and clearly defined "churn" metrics. Use terms such as MRR Churn, Churn Rate, Customer Churn rather than simply churn. Be sure everyone has a clear understanding of the definitions and methods used to calculate Churn, and encourage the organization to avoid abbreviations in written and verbal communications.
|MRR Churn||Revenue Churn|