Revenue Churn is a measure of the lost revenue. Like most subscription metrics, there is no universal definition. This metric is most often expressed as a whole number (rather than a ratio) but can be expressed as the actual lost revenue or more commonly, a normalized value such as ARR or MRR. Normalizing Revenue churn to a common denominator facilitates reporting and communicating of real changes much the way “same stores” sales reporting works in the retail industry. If all your contracts were the same length, say 12 months exactly, reporting your churn (lost revenue) could be reported as an annual number and make sense. However, if you have a mix of 6-month, 12-month, and 24-month agreements, normalizing the approximately monthly revenue that would be recognized provides a more informative churn number.
Revenue Churn can be reported in aggregate, but is often reported in categories or buckets, for example:
- Churn due to lost contracts/cancellations
- Churn due to downgrades
- Churn due to competitive losses
- Churn due to bankruptcies
At the highest levels in the organization (CEO and CFO), there are two revenue churn measurements that are typically important.
- Churn from lost/canceled customers – typically reported as the value of the term or contract had it renewed
- Churn from downgrades – typically reported as the net decrease in the value of the term or contract had it renewed at the previous term rate
As you move down and/or into other business units or functions, it is common to report churn at a more detailed level. For example, the sales team is frequently not held accountable nor given relief for cancellations due to bankruptcy and mergers, so you will often see this metric from lost/canceled customers broken down by reason codes.