Calculating Churn in a SaaS Business
What is Churn?
While there are many variations of churn, churn is always a measure of attrition or loss and is the most widely tracked and discussed SaaS and subscription metric. Churn can measure lost customers, contracts, ARR, MRR, GAAP revenue, contract value, or bookings.
Churn is typically expressed as a rate or a ratio (churn rate of 12 percent), but can also be expressed as a whole number (“we churned 12K of ARR” or “we churned two customers”). When discussed as a rate, churn is the inverse of your renewal rate. An 80 percent renewal rate is the equivalent of a 20 percent churn rate.
SaaS and other subscription businesses define churn based on their unique view of the world and using rules that are acceptable to stakeholders and potential stakeholders.
What are the Most Common Churn Metrics for Subscriptions Businesses?
- Customer Churn and Logo Churn:: Lost customers, expressed as a percentage/rate as well as an absolute count. Customer Churn is an important part of the overall CLV calculation process.
- Recurring Revenue (ARR/MRR) Churn: Typically expressed as a ratio of MRR lost as a percentage of renewals candidates, but can also be expressed as the total MRR or ARR value lost to customer cancellations and attrition.
- Revenue Churn: GAAP revenue, MRR or ARR churn, typically reported as a ratio. Slightly broader than recurring revenue churn in that it can include lost non-recurring revenue
- Average Recurring Revenue Churn: Typically expressed as the average ARR/MRR decrease due to lost customers.
- Bookings Churn: A traditional approach to measuring churn in software companies, this approach has been replaced using ARR and MRR churn ratios.
How is Churn Used?
In the finance function, churn is used:
- As a critical input to Customer Lifecycle Valuations
- As a critical input of revenue, bookings, and cash flow projections
A single churn number is suitable for discussions with analysts, press, peers, and other interested, non-operational audiences. However, to better inform key business decision-makers in product or service pricing, planning, packaging, and marketing (among others), SaaS businesses employ a variety of more sophisticated churn metrics to help them understand the true performance of their business and relative to their peers.
SaaS businesses should define clear terms for each relevant churn metric and measure them consistently from period to period. Again, this requires well-defined and agreed-upon definitions and metrics for churn measurement. Product management should look for potentially dramatic different churn numbers by cohorts and dimensions such as these:
- Churn by marketing campaign
- Churn by promotion
- Churn by product
- Churn by length of sales cycle
- Churn by functional usage
- Churn by licensed modules
- Churn by sales channel or organization
- Churn by industry or market segment
- Churn by customer size or segmentation
- Churn by total customer revenue or contract size