Churn, Retention, Revenue
For those of you in customer success and sales, it’s nearly impossible to go a day without hearing words like “churn”, “retention”, and “revenue”. Those 3 phrases go hand-in-hand with ensuring that your organization is set up for long term success, and that your customers are happy with your products.
In the business of SaaS, churn, retention, and revenue are critical factors in measuring many other key aspects of business such as annual recurring revenue (ARR), monthly recurring revenue (MRR), and even projected growth rate.
Two Part Series
In this first blog of a two-part series, we will explore 4 major calculations (that can also be found in our latest ebook) for determining customer health, which can be thought of in pairs of two, with each set containing a “positive” measurement and a “negative” measurement. For instance, one pair might measure churn as well as retention, which are opposite but complementary measurements. Let’s get started:
Calculation 1: Customer Retention Rate vs. Customer Churn Rate
While both revenue retention and customer retention are important, many SaaS companies place a higher value on revenue retention because revenue is king in any SaaS business. For example, you may lose 10 customers with subscriptions of $10,000 each for a total of $100,000 in lost revenue, or one larger customer with a subscription of $150,000. In this case, it may be better to lose the 10 customers equaling $100k in ARR, rather than the one customer and $150k in ARR. Just keep in mind that the 10 lost smaller customers carry additional hidden costs as they may become negative advocates in the market.
Customer Retention Rate (CRR)
The percentage of customers retained over a given period of time. This is also referred to as “Logo Retention”.
1 – (customers churned in period/customers at the start of the period)
Customer Churn Rate (CCR)
The percentage of customers that are lost (i.e. cancel their subscription) over a given period time. This is also referred to as “Logo Churn.”
Customers churned in period/Customers at the start of the period
Calculation 2: Gross Revenue Retention Rate vs. Net Revenue Retention Rate
This calculation reflects the amount of recurring revenue (ARR/MRR) a company is able to retain for any given period. Some refer to this metric as Dollar Revenue Retention (DRR).
Be sure to review both Gross Revenue Retention and Net Revenue Retention. Companies that only focus on net numbers will likely misjudge the true health of their business because the net results may mask the symptoms of churn. Revenue Retention Rate is also a very different metric than Renewal Rate, so be careful to distinguish between the two metrics and be sure to measure both.
Gross Revenue Retention Rate
Gross Revenue Retention only considers the starting revenue minus any revenue lost through downsell or churn.
(Starting MRR – downsell – churn)/Starting MRR
Net Revenue Retention Rate
Net Revenue Retention considers the offsetting revenue from expansion (upsell and/or cross-sell). Some refer to this metric as Dollar Revenue Retention (DRR).
(Starting MRR + expansion – downsell – churn)/Starting MRR
The Importance of Cross-Referencing Metrics
There are countless resources available to help you and your team measure churn, retention, and overall customer health. Some customer success leaders may wonder if it’s necessary to measure so many different aspects of the customer journey. The list of potential metrics can be long and daunting, yes, but it is key to select a specific set of customer success metrics that will help to guide the organization moving forward.
If your organization were to use only one or two calculations to measure customer health, for instance, it’s possible to experience “false positives”, which means certain metrics may not be as healthy as they seem on paper. As a customer success leader, it’s important to work with your executive team and CSMs to select the most important churn and retention numbers for your organization and measure them continuously, using those metrics as a way to guide the future and measure the past.
Without measurements, customer success leaders would be at a loss for how to determine the health of a business. But it’s also possible to be overwhelmed with metrics and calculations and forget the true reason for being metrics-driven: ensuring customer success.
In Part One of this two-part series, we explored some of the most prominent customer success metrics including revenue rate, churn rate, gross revenue retention rate, and net revenue retention rate (which can also be found in our latest ebook).
It’s critical to select a certain number of metrics that you use repeatedly as a guiding force, quarter after quarter. Without these metrics in place, it’s easy to use only 2 or 3 metrics which might be misleading if not compared against other customer success health metrics.
In this post, we’ll share 2 more calculations which again are contrasted against each other for a positive and negative affect. Let’s get started:
Calculation 3: Revenue Growth Rate vs. Revenue Churn Rate
Expansion Growth Rate (Upsell + Cross-sell)
Expansion growth rate can be one of the best indicators of the health of your business as typically customers who are purchasing more are getting high value and have a very high propensity to renew year over year.
New revenue from current customers as a result of selling more of the same product (upsell) and/or new products (cross-sell).
Expansion MRR /Previous Months MRR
Revenue Churn Rate (Gross and Net)
Understand your revenue (or dollar) churn rate and focus intently on driving it down. World-class SaaS companies have negative churn (or net growth).
Revenue Churn is simply the opposite of revenue retention – the percentage of recurring revenue (ARR/MRR) lost through downsell and/or churn in any given period.
Gross Revenue Churn only considers lost revenue whereas Net Revenue Churn includes any offsetting expansion revenue. When expansion revenue is greater than churn, that is often referred to as “negative churn.”
Gross Revenue Churn Calculation:
(Downsell + Churn) / Starting MRR
Net Revenue Churn Calculation:
(Downsell + Churn – Expansion) / Starting MRR
Calculation 4: Renewal Rate (Gross & Net)
Renewal Rate (Gross & Net)
Renewal rates specifically correlate to renewal transactions whereas revenue retention considers any increase or decrease of recurring revenue during a time period, including expansion, downsell and/or churn that may happen outside of a renewal (i.e., mid-term expansion, etc.). Renewal rates should always be calculated against the *renewable* book of business (RBOB) for the specific time period.
Gross Renewal Rate Definition:
The percentage of *renewable* revenue that actually renewed in a given period. Gross renewal rate only considers downsell and churn and does not include any offset from expansion revenue that happened at the time of the renewal. Gross renewal rate can never be greater than 100%.
Net Renewal Rate Definition:
The total revenue renewed and gained from the *renewable* book of business for a given time period. Net renewal rate includes any expansion revenue (upsell and/or cross-sell) added as part of the renewal transaction; therefore, it’s feasible that the new renewal rate could be greater than 100%.
Gross Renewal Rate Calculation (Option 1):
Renewable MRR – Downsell – Churn / Renewable MRR
Gross Renewal Rate Calculation (Option 2):
Renewed MRR / Renewable MRR
Net Renewal Rate Calculation (Option 1):
Renewable MRR – Downsell – Churn + Expansion / Renewable MRR
Net Renewal Rate Calculation (Option 2):
Renewed MRR + Expansion / Renewable MRR