For this week’s tip we want to look at customer churn and revenue churn. Much like the fish in the photo, on the surface they look similar when in fact they are very different. That being said, they are both important to running your business. While churn may not be a tip to help you engage customers, it is a method for measuring the impact of customer engagement, so we thought we should talk about it some.
First let’s define what they are:
Customer Churn – this is the attrition rate of your customers over time. For example, if you have 100 customers at the beginning of the month and 90 customers at the end of the month, your customer churn rate is:
(100-90)/100 = 10%
Revenue Churn – Instead of looking at customers, you look at the revenue they bring in and what the attrition rate is over time. For example, if you have $100,000 in monthly reoccurring revenue at the beginning of the month and $90,000 at the end, your revenue churn rate is:
($100,000 - $90,000) / $100,000 = 10%
While they may appear similar, especially in the example above where they’re both 10%, they are not interchangeable, meaning when you hear 10% customer churn, that does not mean there was a 10% revenue churn. This is easily illustrated if you have 2 product lines with very different prices:
Product 1 – 1000 customers; $50/month in revenue
Product 2 – 50 customers; $1000/month in revenue
If product 1 loses 20 customers and product 2 looses 5 customers, we get the following:
(20 + 5) / (1000 + 50) = 2.4%
As you can see, when reporting churn across both products, the two numbers are very different. It gets even more complicated if you offer variable discounts on your product as you can have many customers on the same product paying different amounts.
Either one can be used as a base line to measure the impact of customer engagement. For example, you start to communicate with customers in real-time, in context and over the next few months you can watch customer or revenue churn to see if the real-time communications had any impact. However, they each also have a unique strength the other doesn’t.
For revenue churn, it’s that you’re measuring the impact on your bottom line. Therefore, when you start to forecast revenue, create financial models, talk with investors, or measure the impact of customer engagement on revenue, you’ll want to use revenue churn. I also personally believe revenue churn is a more accurate assessment of the health of your customer base as it weights each customer based on how much they pay instead of treating each customer the same as you do in customer churn.
If revenue churn more accurately reflects the health of your customer base and reports the impact on the bottom line, which is what everyone cares about, then why would you care to calculate customer churn? Well, you need to know customer churn so you can better predict staffing and development needs. No matter how much you charge a customer, your account managers can only manage so many customers at a time, so when modeling out staffing needs, it’s very important to correctly estimate how many actual customers you’ll have, regardless of revenue. The same is true with development when it comes to load balancing. A server can only handle so much traffic and data at once, so you need to know customer churn in order to accurately predict growth of your resources.
Hopefully this week’s tip helped explain the different kinds of churn and why you need them both. If you’d like to learn more about churn, including how to determine what product usage can predict churn, you might want to check out our simple guide to churn analysis.