Churn, Baby, Churn
The ever important and sometimes depressing topic of churn. Simply put, churn is existing business lost to a company. This can be measured based on customer count or revenue. The measurement will be based on the business model.
Client churn is based on customer count and is sometimes referred to as logo churn. It is presented in a percentage by dividing lost customers by the prior periods total. It can either be simply calculated on a monthly basis to gain a high level understanding or it can be drilled down deeper in an effort to more accurately investigate retention issues. This is accomplished by grouping customers into cohorts. This will serve as the base of customers and as months pass, you are able to track who is still transacting and further investigate why others are not.Logo churn is especially good for consumer companies to understand given the repeatable nature of the business model.
Simple Client Churn: Lost Customers / Prior Period’s Customer Base
Cohort Churn: Customers in Cohort Still Transacting / Selected Customer Cohort
Churn based on revenue is sometimes referred to as dollar churn and is an important KPI for business models that target enterprise customers. This churn metric can be stated in a gross or net manner. Gross dollar churn is MRR lost as a percentage of revenue and is calculated by dividing MRR lost in a month by MRR recognized at the beginning of the same month. Net churn is giving the business credit for the expansion of customer relationships to offset MRR lost in the month. This is calculated by subtracting upsell MRR from MRR lost during the period and then dividing that by MRR at the beginning of the month. Negative churn refers to a company that has more upsells than MRR lost, demonstrating a negative net churn. The two dollar churn methods are very different and have their place for use. Commonly you will see a company experience high gross churn with negative net churn, suggesting that the company has found product/market fit with a specific target market and is intentionally churning out customers.
Gross Dollar Churn: MRR Lost / Previously Recognized MRR
Net Dollar Churn: (MRR Lost — Upsell MRR) / Previously Recognized MRR
Churn is an important part of a business and can offer extraordinary insights into target markets. No one expects to have zero churn in a business but investors expect reasonable churn based on the target market. In a consumer business, churn can be reasonably experienced up to 30%. Churn at 20% is acceptable for SMB business. The highest standard is 10% for enterprise but should be acceptable to all parties given the sales cycle and expected stickness of the product.
Lots of ways to look at churn but they all make sense for different times and businesses.