All organisations look at revenue and customers in totally different ways, so why don’t you when it comes to churn? We unpack the differences in customer churn vs revenue churn.
So, you have just lost another customer. What does that mean for you and for your organisation? What impact will that have on your revenue?
Churn is a factor that you are going to have to come to terms with in your organisation. Not all customers are forever. In fact, most customers will eventually drop off at some point.
Churn, especially for subscription based organisations, simply means that the organisation itself needs to ensure that the revenue stream from existing customers is constant. You can either put efforts into retaining customers or throw your weight behind constantly trying to attract new ones to replace the customers that are dropping off.
The difference, however, comes in with how organisations look at customer churn vs revenue churn. There are many similarities between the two, but in essence, these two types of churn are totally different. Not only do you have to analyse the two separately, but you have to manage them differently and calculate them individually.
We look at the differences of customer churn vs revenue churn and the main differences in the way that your handling of churn could have an impact on your organisation’s success.
How You View Customer Churn vs Revenue Churn
Let’s get the basic definition out if the way. Customer churn is the loss of the customer, while revenue churn is the loss of a stream of revenue. Seems simple?
Look at it this way. You could lose one low paying client in one month and not really feel a large impact on your balance sheet.
Losing a large client however, is something totally different. This could be your monthly bread and butter client that has decided to drop off. If the client that you are losing is only worth $99 per month, while there is a risk of you losing the client that’s work $999 a month, you are simply going to be more concerned with losing the bigger client.
It’s like losing a client like Coca Cola compared to losing the local grocery store around the corner. You simply cannot compare. You will need to keep this in mind when you are looking at your reports on churn at the end of each month.
Even though your customer churn report states that you have lost three customers over the month, your revenue churn report could show a somewhat marginal difference in revenue. It could then look totally skewed when the customer churn report states that one customer has cancelled, and there is a huge dent in the monthly revenue.
Let’s then dig a little deeper into the actual calculations.
How You Calculate Customer Churn vs Revenue Churn
We will start with customer churn as it is a little bit easier to calculate than revenue churn. Calculating customer churn will give you a good idea of the drop off rate you have during a given period.
It is up to you to decide what the period is, but for this example, we will use a month.
The calculation for customer churn is: number of churned customers/total customers.
So, if out of 100 customers, six cancel in a month, you are sitting on 6% churn. Although there is no set international standard on what is the “right” amount of churn, you can rely on industry benchmarks. With a bit of research, you can determine what the average churn rate is for your competitors and organisations in your industry.
Revenue calculation, on the other hand, can get a bit tricker.
The calculation is digging deeper into your monthly recurring revenue churn: churned MRR / total MRR.
Translated, this is your recurring revenue (MRR) figure at the beginning of the month and dividing it by the monthly recurring revenue you lost that month. Keep in mind to minus any upgrades or additional revenue from existing customers.
What you have to also keep in mind in both cases, is that new sales, and new customers don’t particularly count for the report in that month. New customer sales will only start being included in the revenue and customer reports from the month after they have signed up.
This happens because first-month cancels aren’t actually churn since they have too little impact on company revenue.
Upselling could essentially skew your revenue and customer churn reports and this needs to be considered in your analysis. Should a client choose to take a higher package, or you convince them to take the next step in their services, you are going to have to keep in mind that your customer churn report will remain unchanged, while your revenue will change.
The same will go if they decrease their package.
How You Manage Customer Churn vs Revenue Churn
We now have a look at how each need to be managed totally differently. It is important to understand that you are going to take a totally different approach to the revenue and customer aspects.
Let’s take a look at the earlier example. Losing a large client like Coca Cola is going to have much more of an impact on your organisation than losing your smaller clients.
Smaller clients churn a lot quicker than your larger clients, so while your customer churn reports look very concerning, the actual numbers can be seen in the revenue report.
Therefore, you should manage the relationships differently and put more efforts into keeping your big clients on board. Brand loyalty is a vital aspect in customer retention and the most important factor here is giving them a good customer experience.
Putting more resources behind keeping your customer happy could pay off more in the long run than putting more of the resources behind permanently trying to attract new customers to fill the gaps of customers dropping off.
It is also vital to keep in mind that customer churn calculations are important for your staff and their targets, while the revenue churn is a key insight into the financial health of your organisation.
Low customer churn could mean that your organisation focuses highly on customer low revenue churn could mean a deeper level of business success. Keep this in mind next time you are looking at your reports. A Churn Dashboard could assist you in gathering the data you need to put together accurate reports for your organisation.