Churn negates your acquisition efforts. But in this post, we’re not talking about the customer churn rate (tracking customer loss). Let’s discuss the revenue churn rate or simply the financial impact of losing customers.

As the revenue churn goes up, earnings go down. The numbers show it:

  • Most startup companies have a very high churn rate of around 60%
  • Those making over $10 million have an average churn rate is 8.5%
  • And companies making under $10 million have an average churn of 20%

So put simply, leaving churn without doing anything is the “silent killer” of subscription revenue.
Today, let’s dissect its formula and impact and look at five practical strategies to tackle them head-on. 

Understanding revenue churn

Customer support agent looking at charts of net revenue churn and monthly recurring revenue

Revenue churn rate measures the recurring revenue (usually in terms of MRR) lost from existing customers either by downgrading plans, canceling their subscription, or switching to competitors over a given period. Please take note that this is a rate, so this is expressed as a percentage.

There are two main ways to look at how to to calculate revenue churn rate:

Gross revenue churn

This is the simplest calculation and just focuses on the lost revenue. Here’s the formula:

(MRR at the beginning of the period – MRR at the end of the period) / MRR at the beginning of the period * 100

For example, let’s say a subscription service generated $20,000 in MRR but ended the month with $18,000 in MRR due to customer cancellations and downgrades.

Gross revenue churn rate = ($20,000 – $18,000) / $10,000 * 100 = 20%

Net revenue churn

Now this takes a step further. Here, we count both lost revenue and any revenue gained from existing customers upgrading their plans—thus we call it the (expansion revenue).

This is the net revenue churn formula:

(MRR loss from downgrades & cancellations – Expansion MRR) / MRR at the beginning of the period * 100

Using the same example from above, let’s say the company also had $1,000 in expansion MRR from existing customers upgrading their plans.

Net revenue churn rate = ($2,000 – $1,000) / $10,000 * 100 = 10%

Now, a good question is, “When it comes to revenue, is gross churn vs net churn important?”. 

The direct answer is yes. While the gross and net churn tells you how leaky your revenue bucket is, the net churn estimates if the bucket is overflowing or drying up—despite the leaks. By tracking both, you better understand your customer health and can make informed decisions to minimize churn and boost your revenue stream.

The impact of revenue churn

Customer support team looking at graphs and charts of net mrr churn and revenue lost

From the revenue churn formula above, you can conclude that a lower customer turnover (logo churn) is generally better. But to give you a more vivid picture, here’s a breakdown of why it’s important:

Revenue churn is direct revenue loss

One of the most significant impacts of high revenue churn is the direct loss of the revenue from existing customers. When customers cancel or downgrade their plans, the company loses the recurring revenue stream associated with those customers. So, this means revenue churn directly affects lifetime value (CLTV) because you’re losing out on those customers’ potential future cash flow.

It has a compound effect on the overall business and financial situation

With declining revenue, companies are forced to cut costs through layoffs, cutting back product development, scaling back customer support, and marketing efforts. These cost-cutting measures can weaken the brand’s value, as the product quality, customer service, and reputation suffer. Result? More customers could leave and that’s even greater revenue loss.

It can even demotivate employees

Yes, high revenue churn can be especially demotivating for employees when they feel like their efforts to acquire and retain customers are futile. Despite the hard work put in by employees to acquire new customers and provide excellent service, if those customers end up churning, this can be demoralizing for the workforce. Did you know disengaged employees have higher absenteeism, lower productivity, and lower profitability? Actually, that’s losing approximately 34% of the salary of a disengaged worker.

Given the severe consequences of [high] revenue churn, you must address this issue proactively for the long-term success and profitability of your business. ( And in a short while, we’ll give five practical strategies for tackling revenue churn)

Identifying the causes of revenue churn

Various factors can trigger both revenue growth or churn, but here are some common causes:

  1. Poor product-market fit: If the company’s products or services aren’t really suitable for the target market, then customers will leave. As of 2021, only 80% of startups made it past the first year—and market misfit is one of the reasons.
  2. Customer dissatisfaction: Issues such as poor quality, lack of adoption, lack of features or functionality, and inadequate customer support (like slow response times) upset customers. If customers think the value isn’t worth the cost, they churn.
  3. Changes in customer specifications: As customer needs shift, the product or service they originally subscribed to may no longer fit their needs. For example, a company may outgrow a software solution or require additional features not provided by the existing vendor.
  4. Your industry says so: Different industries may experience revenue churn differently due to varying customer expectations, competitive landscapes, and business models. For example—SaaS customers have many choices and can easily switch to alternative solutions if their needs. 

To effectively manage revenue churn, businesses need to maintain a healthy recurring revenue stream by implementing targeted strategies. Some examples are:

5 practical strategies for tackling revenue churn

Team discussing strategies to battle revenue churn

If you rely on recurring revenue streams, you must prepare some effective strategies and tactics to tackle customer churn that directly affects revenue churn:

1. Improve customer onboarding and adoption:

Think of onboarding your new customers like welcoming them. You must make them feel valued and supported from the get-go. Simple things you can do: 

  • Greet customers with a welcome email, express your excitement to have them onboard, and tease them about what they can expect. Highlight how they’ll change into superheroes using your product.
  • Provide clear and easy-to-follow instructions on how to use your product or service. Think step-by-step guides, video tutorials, or even interactive tours within the product itself.
  • Help them achieve quick wins early on to motivate them to explore further. That task can be as simple as setting up a basic feature.

Example: Encharge, a marketing automation platform, has a friendly welcome email that includes steps to effectively use the platform.

2. Focus on customer success and proactive support:

It should be your number one focus to help your customers on a journey with your platform. So, be proactive in reaching them to ensure customer success in no time. Here are some ways to make their goals your priority:

  • Don’t wait for customers to come to you: Instead of being reactive and only addressing customer issues or concerns when they arise, schedule regular check-ins.
  • Create a library of helpful articles, webinars, or video tutorials that address common questions and also illustrate advanced features.
  • Sometimes, a nudge is all it takes. Implement in-app guides, contextual help menus, or walkthroughs within your product to help users.

Example: Salesforce aims to better support users by proactively reaching out and attaching helpful resources. 

3. Continuously improve the product:

To stay on top, your product features need to be exciting. And you can be if you keep on improving! You can continuously enhance your offering by:

  • Gathering customer feedback. Use surveys, interviews, and other support interactions to understand their needs, wants, and pain points.
  • Based on customer feedback, pick the features you’d like to develop. 
  • A/B test. Putting different product versions or features to the test allows you to experiment and see which resonates best with your customer base.

Example: RedTrack, an ad-tracking solution, strives to see customer behavior and improve its products based on customer feedback continuously.

4. Offer win-back incentives:

Loyal customers are the backbone of any recurring revenue business. So, designing a customer loyalty and customer retention program that keeps them happy and coming back makes sense. Suggested tactics:

  • Create different membership tiers with increasing benefits based on customer engagement or spending.  
  • Award points for actions like purchases, referrals, or reviews.  These points can be redeemed for discounts, free products, or exclusive experiences.
  • Offer exclusive benefits to loyal customers, like early access to new features, invitations to special events, or priority customer support.   

Example: Adobe offers discounted pricing and exclusive resources for its Creative Cloud members.

5. Respond to competitive threats:

Keeping an eye on what your rivals are up to is key to decreasing revenue churn. How to smartly watch them? Here are some tips:

  • Start by defining your competitive landscape. Who are the businesses offering similar products or services to your target audience?
  • Track their online presence: Analyze their websites, social media channels, and marketing campaigns to understand their messaging and pricing strategies. Read industry reports and publications to stay updated on market trends and competitor news.
  • Respond strategically—not in a price war. Try differentiating yourself by highlighting superior customer experience. Leverage your insights to improve your own offerings.

Example: With the rise of streaming competitors, Netflix doubled down on original content creation and personalized recommendations.

Measuring and monitoring revenue churn

Team looking at some graphs and charts of customer churn on a computer screen

Now that we’ve covered some strategies for tackling revenue churn, it’s time to talk about how to actually manage it. In the end, you can’t manage what you don’t measure, can you?

Measuring and monitoring your revenue churn rate is super important because it gives you a clear picture of how much revenue you’re losing from lost customers. And let’s be real: losing revenue is never fun.

But by monitoring this metric closely, you can curb churn and turn things around.

  • Are you seeing spikes in churn after pricing changes or product updates? 
  • Or maybe there’s a particular customer segment that’s more prone to churning? 
  • Are there specific features or product areas driving churn?

The more you can learn about what’s driving churn, the better equipped you’ll be to address it. You’ll also want to leverage various metrics and tools like:

  1. Monthly Recurring Revenue (MRR): Tracking MRR helps businesses understand whether their monthly revenue performance is steadily positive or starting to be negative.
  2. Customer Churn Rate: Measuring customer churn rates (the percentage of customers lost) can provide insights into customer retention and acquisition efforts.
  3. Average Customer Lifetime Value (LTV): LTV represents the total revenue you can expect from a customer throughout their relationship.
  4. Customer Feedback and Sentiment Analysis: Collecting and analyzing customer feedback through customer surveys, support interactions, and social media can provide valuable insights into the drivers of churn and other areas for improvement.
  5. Analytics and reporting tools: Software solutions like customer relationship management (CRM) systems and business intelligence tools help track, visualize, and analyze revenue churn data more effectively.

Stem revenue churn and maximize customer lifetime value 

Revenue churn is tricky. An unchecked high revenue churn rate can damage your revenue stream and will only make it harder to maintain financial stability. But you don’t have to leave your churning revenue as it is—there are ways to tackle it. 

Try the strategies enlisted and see the magic yourself. It’s also important to note that, in addition to voluntary churn, your businesses can also face involuntary churn—be it due to failed payments or other billing issues. Though it can’t be completely avoided, you can minimize it.

If you’re struggling with it, professional support from specialists like Recover Payments is a big help. We can work with you to streamline payment recovery efforts, minimize revenue loss, and ensure a smoother customer experience. Book a call today for a free consultation.