Churn: Revenue Churn

This is part 3 of our series on Churn, previous segments are available in our archives.

Yesterday, we covered how you can calculate your churn based on the customers you gain and lose over time. However, not all customers are created equal! If a customer that pays you $10 per month is lost, that is not as significant as losing a customer that pays you $1,000 per month! In fact, it is common to have high retention among low price customers and low retention among high-price customers. This would be hidden by the churn calculations we discussed yesterday.

Revenue Churn is another way of thinking about churn that focuses on how well you are retaining revenue from customers. If you have a wide variety of pricing across your customers, this can be a much more useful way to think about churn.

Your first instinct in calculating revenue churn might be to approach it just like our customer churn formula from yesterday:

churn_rev

However, counting revenue is different than counting customers since any given customer may start paying you more or less during a given month. We will need to get more specific about what “Revenue Lost” means:

churn_rev2

We’ve replaced “Revenue Lost” with a simple equation that starts with the total revenue on the first day of the month, subtracts the revenue from those same customers on the last day of the month (to give us the lost revenue) and then subtracts the value of upgrades. We need to subtract upgrades because they might hide the loss of customers if your customer up selling is very effective.

An interesting side effect of this equation is that if your rate of customer upgrades is higher than the rate of customer loss, your Revenue Churn rate can be negative! This is considered very good, as a negative Revenue Churn rate is a key factor in building a high growth business [1].

So far this week, most of our churn calculations have assumed it’s easy to track how much revenue you make from each customer every month, which is common for subscription businesses. It can be harder to measure churn for transactional businesses, like e-commerce, but it is still possible. Tomorrow we’ll cover how to do just that!

Do you need help understanding your customers? Outlier is a product designed to help! Outlier looks deep into who your customers are and how they behave to highlight changes that might indicate potential causes of churn. If you’re interested in seeing a demo, schedule a time to talk to us.

 

[1] For a great overview of Negative Revenue Churn and how it creates high growth, I recommend Tomasz Tunguz’s post.

 

Quote of the Day: For a long time, negative solutions to problems were considered ‘false’.” – From the history of Negative Numbers on Wikipedia