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How to Calculate Churn

As any SaaS professional knows, churn is one of the single most important metrics in determining the day to day health of the business. Acquiring new customers is a costly affair, and the resulting growth is meaningless if you lose those customers.

Calculating this metric – tracking and benchmarking it can often lead to a great deal of confusion. A simple search for “SaaS churn” yields over 200K search results with many different opinions on the right formulas and benchmarks to consider.

Most businesses will typically track and measure three churn rates on an ongoing basis: customer churn, gross dollar churn and net dollar churn. Since each metric helps identify a different trend with your customers, it makes sense to track all three. In more early stage businesses, there will likely be a great deal of fluctuation in the churn numbers that will become more consistent as a business grows.

Customer Churn (Logo Churn)

Definition: This metric measures the number of customers you lose over a period of time.  A pretty simple formula:

(Customers Lost)/(Remaining Customers)

Tracking the reasons customers are leaving can be even more important than tracking this number itself. Particularly, when selling to early-stage startups, you may experience involuntary churn (ie – a customer goes out of business or gets acquired), which may wouldn’t be indicative of your offering. This churn is different from voluntary churn (ie – customer dislikes the product and chooses to move to a competitive solutions, or cancels), which is most important to mitigate.

Benchmarks: Customer churn metrics can vary significantly based on the type of customers you are acquiring (ie – the figures for a consumer facing subscription business would be very different than those of an Enterprise SaaS business selling to the Fortune 1000).

Gross Dollar Churn

Definition: This metric looks at your total lost revenue both from customers churning and from downsizing (e.g., your customer on the $1000/mo plan downgrades to the $100/mo plan).

The formula is here:

(Revenue Lost)/(Ending Revenue)

The difference between the customer (logo) and gross dollar churn figures also surfaces the importance of tracking both metrics. As you can imagine, a business might be good at retaining its $1000 MRR customers but then loses many of its larger $10,000 and $20,000 MRR businesses, important information you might not identify if you were only tracking customer churn.

Benchmarks: Ideal gross dollar churn in an Enterprise focused business is typically less than 1% on a monthly basis. It is important to note that at early stages of a smaller company when the number of customers is relatively small, there is often a great deal of variability in the figures until the business becomes more consistent and predictable.

Net Dollar Churn

Definition: This metric looks at the revenue you are losing from customers churning or downsizing less the gains from upsell (effectively, the change in your monthly recurring revenue excluding new bookings).

(Revenue Lost) + (Revenue Gained with Current Customers)/(Ending Revenue)

As many of you have probably seen, in months where there is more upsell than downsizing and churn, the result is a “negative” net dollar churn rate.

Benchmarks: The typical ideal benchmark for this metric is definitely a negative net dollar churn — companies can still grow even if they did not acquire a single new customer. I saw this at Bazaarvoice from time to time. Once a business purchased the core solution, that client could often increase spend with the product as they expanded initiatives throughout the company.  At a Series A or B company, by contrast, it may be a successful businesses that hasn’t yet experimented with pricing and packaging and may not see a negative net churn rate until they are further along.

As always, I hope you found this informative – please do ping me with any additional thoughts, or if you need more information on tools to manage your churn calculation!

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