Net Revenue Churn: Its Meaning, Calculation & Impact.

April 6th, 2024 by Felix Cheruiyot

Net Revenue Churn

How do you get your revenue churn when your subscriber base is in constant flux, with upgrades, downgrades, and cancellations happening simultaneously? Discover net revenue churn and learn how to calculate it.

Running a subscription business requires an astute understanding of revenue metrics. One of the most critical aspects is measuring the percentage of revenue you are losing month over month.

It's insufficient to solely track the number of customers lost, as the revenue landscape is dynamic. While some customers may churn, others might increase their spending. This results in a simultaneous contraction and expansion of revenue, albeit not in equal proportions.

So, it is essential to factor in revenue expansion when you crunch your numbers to learn how much revenue you are losing or gaining monthly.

In other words, knowing your gross churn rate is helpful, but the net churn rate is the metric that will give you the most complete insight into your revenue growth.

What is net revenue churn?

Net revenue churn measures recurring revenue lost from churned subscribers after accounting for revenue gained from existing customers.

Net revenue churn stands in contrast to gross revenue churn, as "net" incorporates both revenue contractions and expansions into the calculation.

Expansion revenue is revenue gained from add-ons and subscription upgrades, while contraction revenue is revenue loss due to downgrades to lower-value subscription tiers.

Why is it important to know your net revenue churn?

Understanding your net revenue churn provides insights into the revenue lost due to customer churn, enabling informed decisions aimed at customer retention and revenue expansion.

Many recurring revenue businesses only track gross revenue churn, but that metric does not give you a complete outlook on your business's revenue performance.

Gross revenue churn only identifies the percentage of subscriptions that did not renew because of cancellations or payment failures. It presents only part of the narrative, focusing solely on the expenses incurred from subscription cancellations and revenue contractions, while overlooking the impact of retained customers on revenue generation.

The net churn rate addresses this by showing the net effect of downgrade and upgrade churn on revenue. It puts the churn rate into a more practical perspective.

Achieving revenue growth without adding new customers is feasible with a positive churn rate, wherein revenue from subscription upgrades surpasses losses from cancellations and downgrades.

In such a scenario, relying solely on the gross revenue churn rate for revenue analysis can be misleading. This metric fails to provide insights into how your subscriber base has evolved over the reviewed period.

How do you calculate net revenue churn?

To calculate net revenue churn, you subtract revenue lost to subscription cancellations and downgrades from revenue gained from upgrades and add-ons. Then, divide that value by the total revenue from the preceding period and multiply by 100.

Here's the net revenue churn formula:

(revenue lost to cancellations and downgrades - expansion revenue)/total revenue from last period X 100.

Therefore, net revenue churn measures the rate of revenue contraction or expansion—the rate at which your recurring revenue is shrinking or expanding.

How to interpret net revenue churn.

A net negative revenue churn rate shows that you are expanding revenue with upgrades and add-ons more than you are losing it to customer churn. This is the ideal position.

A positive net revenue churn rate indicates a decline in revenue. This could be due to losing more subscribers than you retain, experiencing more downgrades than upgrades, or a combination of both factors. Immediate action is necessary to reverse this trend, as sustained positive net revenue churn could jeopardise the viability of your business.

Although you can measure net revenue churn for any period, it is best to track it monthly. Doing so will help you spot negative trends early and take corrective action to arrest further revenue shrinkage.

Like other subscription business KPIs, net revenue churn is a derivative of different metrics. You must measure other recurring revenue metrics first to calculate net revenue churn.

This includes obtaining your monthly recurring revenue from the previous period and ensuring you have accurate figures for both expansion revenue (from upgrades) and and downgrade revenue for the month under review.

Incorrect calculations of monthly recurring revenue (MRR), expansion revenue, and revenue churn will lead to inaccurate representation of your revenue performance through net revenue churn.

Customer churn vs revenue churn - what is the difference?

Indeed, "churn" has a connotation of agitation or upheaval, similar to its dictionary definition of vigorous shaking. In business, it describes the loss of customers or revenue, reflecting a disruptive effect on operations.

What should you be more concerned about between customer churn and revenue churn?

If you are a marketer, you probably think more like, 'How do we minimise customer churn?' There's nothing wrong with this mindset because customers are what generate revenue.

The irony for subscription businesses is that you can lose revenue without losing customers, showing why it is more strategic to prioritise reducing revenue churn over lowering customer churn.

Customer churn merely measures the percentage of customers lost since the beginning of the month or period under review. These are customers who cancelled or did not renew their subscriptions.

When customers churn, you lose all the revenue you expected from them. However, you also lose revenue when a customer does not cancel their subscription but downgrades it to a lower-value tier, meaning you will collect lesser revenue from them.

Customer churn may also be offset by expansion revenue from customers who upgraded to higher-value plans. Therefore, customer churn does not tell you all you need to know about your customers.

For instance, a monthly customer churn rate exceeding 7% might be less concerning if the revenue lost is outweighed by the month's expansion revenue. Additionally, if your downgrade revenue churn is minimal, you could still achieve a net negative revenue churn, indicating revenue growth.

That said, the ideal way to achieve a net negative revenue churn is to expand revenue while maintaining your subscriber base. While customer retention is a noble goal, you should strive to get more revenue from your existing customers.

Reduce revenue churn with billing automation.

Every recurring revenue business aims to achieve a net negative revenue churn. One of the many ways of doing this is by increasing your subscription sales through subscription upsells, add-ons, and other revenue expansion tactics.

Alternatively, you can preserve your existing revenue by reducing revenue churn due to subscription cancellations. Many subscribers don't cancel their subscriptions because they no longer need the service or product; instead, they do so because the subscription company creates barriers that make accessing the product difficult.

In other words, not all churn is due to active or voluntary cancellations. A significant portion of MRR churn is due to passive or involuntary churn.

For instance, if customers cannot renew their subscription because of a payment processing error, they have involuntarily churned. They constitute a form of revenue churn that you could prevent with a smoother subscription experience.

Automating your subscription workflows and processes—from billing, payment processing, account management, and dunning—is the most effective way to optimise customers' subscription experiences and minimise revenue churn.

Billing automation saves customers from manually renewing their subscriptions while enhancing payment security, reducing the potential for billing errors, and making it easy to manage their subscriptions.

Automation streamlines billing, subscription management, and dunning processing for the business. This saves time, enhances productivity, and improves revenue tracking and reporting. Importantly, automating dunning boosts customer retention, effectively improving your net revenue churn rate.

Your journey to a net negative revenue churn starts with Intasend. Sign up today to automate your billing and subscription management and plug the revenue leakages that are slowing your business's growth.

© 2024 IntaSend. All rights reserved.