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Churn: The Silent Revenue Killer and How to Combat It

While recurring revenue models provide great cashflow predictability, there is a threat that can erode that predictable revenue stream - customer churn. Churn is when customers cancel their subscriptions and it's the silent revenue killer that startups and subscription businesses must understand and work to manage.

There are different types of churn to monitor:

Customer Churn Rate

This tracks the percentage of customers that cancel their subscriptions over a period of time. To calculate:

Customer Churn Rate = Customers Churned in Period / Total Customers at Start of Period

For example, if you started a month with 5,000 customers and had 100 cancellations, your monthly customer churn rate would be 2%.

Revenue Churn Rate

This metric looks at the revenue lost from churned customers as a percentage of total revenue at the period start. The calculation:

Revenue Churn Rate = MRR Churned in Period / Total MRR at Start of Period

Using the example of 100 churned customers above, if those customers represented $5,000 in MRR and your total starting MRR was $250,000, your revenue churn rate would be 2%.

Gross Churn vs Net Churn

Gross churn tracks total cancellations, while net churn accounts for any expansions/upgrades from existing customers. For example, if you had $5,000 in MRR churn but $2,000 in expansion MRR, your net churn would be $3,000.

Churn rate benchmarks can vary by industry and business model, but generally:

  • <3% monthly customer churn rate is good

  • 5-7% is average/cause for concern

  • 10% is very poor and makes growth very difficult

The lower your churn rate, the easier it is to grow. A 2% monthly churn means regaining those churned customers every 4 years. At 10%, you'd need to re-acquire your entire customer base every 10 months!

Reducing churn should be the top priority for any subscription business. Strategies include:

  • Investing in customer onboarding and education

  • Monitoring engagement/usage metrics to identify potential churn

  • Leveraging incentives for longer term commitments

  • Delivering amazing customer support and value

  • Understanding why customers cancel through surveys/analysis

Churn is inevitable, but proactively managing it is essential. In the next post, we'll cover the LTV:CAC ratio, which ties acquisition costs to customer lifetime value.

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