Revenue churn is a core SaaS metric that measures the change of overall revenue from customers, indicated as a percentage of either gross revenue churn or net revenue churn.
Gross revenue churn is commonly expressed as a percentage of total annual revenue lost from contracts that your customers canceled. Net revenue churn is most often conveyed as a percentage of total annual revenue lost from canceled contracts less any additional revenue from upgrades or service expansions from your remaining customers.
How to calculate gross revenue churn
The formula to calculate Gross Revenue Churn is as follows:
How to calculate net revenue churn
The formula to calculate net revenue churn is as follows:
Net revenue churn gives you a clearer picture of what revenue changes you can expect from your current customer base. Furthermore, it is critical to track both logo churn and net revenue churn, as they gain more meaning when analyzed together. For example, if you lose 10% of your customers in a given period, but your overall revenue from existing customers increases to offset that loss, then on a net basis your revenue will stay the same.
How to track and analyze revenue churn
It’s crucial for SaaS companies to track and analyze revenue churn – this data can help guide strategic decision-making and boost investor confidence. Most fast growing companies with a subscription business model rely on cloud-based SaaS subscription revenue management software that tracks revenue churn and automates calculations with real-time data in a SaaS metrics dashboard.
If your revenue churn rate is high, this might be an indication of a poor product-market fit. To lower net revenue churn, you could pursue different SaaS product-market fit strategies that better reflect your customer usage needs or try to expand your business with each of your existing customers. If you achieve a negative revenue churn, this means each month you are managing to generate an increasing amount of revenue per customer. This internal expansion can happen in many ways.
How to track and analyze revenue churn
- Adjust your SaaS pricing strategyThe last thing you want to do is irritate your loyal customers by overpricing your product offerings, but the second-to-last thing you want to do is leave money on the table!It can be hard to know when to raise prices; after all, if you raise prices in a vacuum, your logo churn might increase. As with most SaaS metrics, the balanced, pragmatic approach is to test out different pricing options and allow time to assess the impact. There are also a few solid indicators that can help guide you in adjusting SaaS prices. If your customers are not negotiating prices, you can likely increase prices without getting too many complaints. Furthermore, if you have developed new features for your software without increasing the price and your product offers a high ROI, your customers would probably be fine with a price rise.If you fear losing customers and increasing logo churn, there are different ways to go about raising prices. One option is to charge new customers a higher subscription price while letting existing customers continue with the original price until the contract comes time for a renewal when you can adjust pricing at that time. Another option is to stipulate price increases in your subscription contracts. For example, Salesforce locks customers into a 7% price increase for each subscription renewal.
- Develop and release new products or servicesThe primary way SaaS companies can gain new business from current customers is through developing new products. If you can create complementary products to the primary subscription that got your customer to sign up in the first place, you will be taking a big first step to address revenue churn. Many successful SaaS businesses utilize a “land and expand” approach, where customers sign up for a primary software offering and then eventually add on additional products and services as they see the value to their businesses.
- Create SaaS membership tiersAnother way to expand with your customers is to create different membership tiers that offer varying features. For companies using a subscription business model, a smart tactic to get customers to sign up for an expensive annual subscription is to offer free trials, customer perks, or limited membership models that allow them to try out your software. After developing trust in your SaaS solution, they might be willing to scale up their subscription.
- Offer discountsOne last strategy that can help lower your revenue churn and logo churn is to offer exclusive promotions and discounts. By doing so, you are providing additional benefits to your existing customers that they may not be able to obtain elsewhere. If these exclusive offers are truly beneficial to your customers, the likelihood that they will continue to be your customer increases. Further, discounts might also incentivize them to purchase additional products or sign up for a more expensive subscription, ultimately expanding your business with them.
Know your revenue recognition requirements
Companies who use a subscription business model to bill customers must follow specific subscription revenue accounting requirements, meaning revenue needs to be calculated differently than for traditional businesses. In 2019, new subscription revenue accounting requirements referred to as ASC 606 were enacted. The Association of International Certified Professional Accountants (AICPA) covers the history behind these requirements and how they impact public entities, here.
Contract amendments, upsells, downsells, and renewals can quickly outgrow spreadsheets and manual accounting processes, leading many growing SaaS companies to automate revenue recognition as part of their overall revenue recognition and accounting processes.