Churn: The Churn Rate Formula and Definition

Churn Rate is a metric for measuring retention. It is commonly used for both employee and customer retention. In the context of startups, the term is most frequently used when discussing customer retention. As a customer retention metric, it is like MRR, in that it is only applicable to companies that provide services to their customers through an ongoing contractual relationship.

The Churn Rate Definition:

There are two different types of customer-related churn:

Customer Churn: Customer Churn measures how many customers were lost over a certain time period. This metric should be reported as a percentage. The percentage can be zero or positive. It cannot be a negative percentage, because it does not include new customers obtained in the equation.

The Customer Churn Rate Formula:

To calculate the Customer Churn Rate, subtract the number of lost customers during a certain time period from the total number of active customers at the beginning of that time period, and divide it by the total number of active customers at the beginning of that time period. New customers obtained during the period should not be included in this calculation; hence, this percentage must be zero or positive.

EXAMPLE

If Company X has 550 customers at the beginning of the quarter and 500 at the end of the quarter, its Customer Churn Rate would be:

(550-500)/500 = 50/500 = 10%

Revenue Churn: Revenue Churn measures how much MRR (For more on MRR, read my previous post: MRR – The Definition and Formula for Monthly Recurring Revenue) was gained or lost over a certain time period. There are two types of Revenue Churn:

Net Revenue Churn (also referred to as Net MRR Churn)Net Revenue Churn measures both lost revenue from canceling customers and gained revenue from current customers. This metric is reported as a percentage. The percentage can be zero, positive or negative. A negative Net Revenue Churn Rate indicates an increase in MRR during the period.

To calculate, subtract all revenue obtained from new customers during the period and all revenue gained due to upgrades or additional revenue from existing customers during the period from the MRR at the end of the period. (Additional revenue is subtracted in order to calculate the total revenue lost and new revenue from existing customers gained.) Then, divide the MRR at the beginning of the period from the number that was just calculated.

EXAMPLE:

Company X had $800,000 of MRR at the beginning of the month and $650,000 of MRR at the end. It also secured $50,000 of MRR in upgrades from existing customers that month. Its Net Revenue Churn Rate would be:

($800,000 – $650,000 – $50,000)/$800,000 = 12.5% Net Revenue Churn Rate

In this instance, the company saw a 12.5% decline in MRR for the month.

Gross Revenue Churn (also referred to as Gross MRR Churn)

Gross Revenue Churn measures lost revenue from downgrading and canceling customers without taking into account revenue earned from upgrading customers. This metric is reported as a percentage. The percentage can be zero, positive or negative. A negative Gross Revenue Churn Rate indicates an increase in MRR during the period. Unlike Net Revenue Churn, Gross Revenue Churn excludes additional revenue obtained from existing customers. It is the best metric to use to determine revenue loss from unsatisfied customers.

To calculate, subtract the MRR at the beginning of the period from the MRR at the end of the period. Then, divide the MRR at the beginning of the period from the number that was just calculated.

EXAMPLE:

Company X had $800,000 of MRR at the beginning of the month and $650,000 of MRR at the end. Its Gross Revenue Churn Rate would be:

($800,000 – $650,000)/$800,000 = 18.75% Gross Revenue Churn

In this instance, the company saw a 18.75% decline in MRR due to customer downgrades and cancellations.