Battle of the Churns: Customer Churn vs Revenue Churn

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Editor’s Note: This post originally appeared on the Control blog here.

There’s no doubt that a subscription-based business needs to keep a close eye on its churn rate. But is it necessary to track both Customer Churn and Revenue Churn? And if your business decides to only track one churn metric, should it concern itself with Customer Churn Rate or Revenue Churn Rate?

To answer this question, we must properly understand each term and its purpose.

Customer Churn Rate = # of customers lost in a period / total # of customers at beginning of period
Revenue Churn Rate = revenue lost in a period / total revenue at beginning of period

Let’s dig a bit deeper into these terms with a couple of examples.

Only Using Customer Churn Rate

Imagine that you run a SaaS business with 1,000 subscribers. 90% of your customers are subscribed to your Blue service, while 10% are subscribed to your Red service.

Simple enough, right? But here’s where it gets interesting. Imagine that BLUE customers pay significantly less than your RED customers.

Based on this new paradigm, the total revenue distribution would look like this:

It’s a simple example that drives home an important idea: the idea that focusing only on Customers or only on Revenue can be very misleading.

Let’s say your business is only monitoring Customer Churn Rate. One month you notice that you have lost 10 customers. You feel comfortable with this number, though, as during that same time period you gained 25 new subscribers.

But what if all 10 of those customers were RED subscribers, and 24 of the 25 newcomers opted for BLUE? This might be indicative of a major problem with your RED subscription level. It will also have a significant effect on your company’s monthly revenue:

  • Before: $9,000 from BLUE and $20,000 from RED.
  • Total = $29,000.
  • After: With 24 new customers, you have $9,240 from BLUE.
  • With 9 fewer customers you have $18,200 from RED.
  • Total = $27,440.

Perhaps your customers are not receiving the value they expected. Or perhaps a competitor has released a new service that your users are migrating to. Whatever the case, you will not be able to consider this problem if you are only concerning yourself with Customer Churn Rate.

Before you think that the solution to all your problems is only using Revenue Churn Rate, let us take a look at the other side of the coin.

Only Using Revenue Churn Rate

Let us keep the same scenario as our previous section. RED still makes up the majority of your revenue, but BLUE makes up the majority of your customers.

Using the Revenue Churn Rate we would certainly be made aware of a large drop in RED subscribers, as described in the previous section of this post. But what if there was a significant decrease in BLUE subscribers?

What if in a single month, BLUE subscribers dropped by 105? Remember, BLUE subscribers only pay $10 a month.

But that’s over 10% of your entire customer base leaving — an alarming statistic by any measure.

But with the Revenue Churn Rate model, it’s more difficult to notice the significance of this drop. Imagine if 105 BLUE subscribers left, but at the same time 5 new RED subscribers arrived:

  • Before: $9,000 from BLUE and $20,000 from RED.
  • Total = $29,000.
  • After: With 105 fewer BLUE customers, you have $7,950.
  • With 5 more RED customers you have $21,000
  • Total = $28,950.

Based on the Revenue Churn Rate model there is little cause for concern — the two figures are almost equal. Now we would hope that a small-business owner has a good enough sense of his or her business to notice a dramatic loss in total customers. Or perhaps the shift from BLUE to RED is actually part of a larger business plan to phase out BLUE entirely and focus on higher value customers.

However, it is also possible that it’s indicative of a major pain-point facing BLUE subscribers, that your service has not properly addressed. Those BLUE subscribers, over time, could have become loyal customers who eventually upgraded to the RED level. You will never have the chance to see how this scenario plays out, though, if you are only watching the Revenue Churn Rate.

Is There a Clear Winner?

There is no clear winner in the debate of Customer Churn versus Revenue Churn. There are plausible scenarios in which each is significantly more valuable than the other when it comes to monitoring the health of your company — whether you are a SaaS company like Control, or something else entirely.

If you are swamped with metrics, and you are looking to follow only one metric, we would recommend Customer Churn. There are two reasons for this: the first is that Revenue is usually tracked closer by other metrics; the second is that customer churn may be indicative of a problem with your product or service, regardless of whether the customers who have left are low or high spenders. As a general rule of thumb regarding the health of your company, it is critical to properly track the customers who are coming and going.