Customer churn is an important metric for businesses to analyse, particularly those which rely on recurring revenue (such as SaaS businesses). It quantifies the impact of lost customers across the period.
Why is customer churn important?
The cost to acquire a new customer is typically higher than the cost of retaining existing customers.
If the customer churn rate is high (and particularly where it exceeds new customer wins), businesses need to quickly analyze why customers are leaving and consider what they can do to boost retention. Example actions include incentivizing customers to remain loyal, changing the existing proposition or improving customer service levels.
Types of churn calculation
There are a number of ways to calculate churn, but the explanation on this page (and downloadable Excel file) will focus on gross revenue churn calculated for a full financial period. Note that the principal behind the calculation remains the same when calculating both annual or monthly churn.
In addition to churn based on revenue, you can also calculate churn in relation to customer volume or annual recurring revenue (ARR). Again, the principal behind these calculations remains the same.
Customer churn rate calculation
Customer churn is calculated as the amount of revenue generated by a customer in the period prior to loss divided by the total revenue in the prior period.
It’s important that you remember to use the prior period, as that is the period in which the lost customers last generated revenue. If you divided by the total revenue generated in the current period, the calculation would not properly align as the lost customers generated no revenue in the current period.
Similarly, if you were to do a monthly revenue churn calculation, you would take the revenue generated in the month prior to loss, divided by the prior months revenue.