If you run a subscription based business where you gain monthly or periodically recurring revenue, Churn Rate is one of the important parameters to consider for forecasting your future revenues. This metric is not just a KPI for Sales & Marketing department but also directly impacts Finance department for their future financial forecasts as well as impacts Operations or Delivery department in order to plan for scaling up or scaling down of existing business operations or infrastructure.
What exactly is Churn rate then?
In Simple terms, as the name suggests, Churn rate signifies the rate at which you lose your recurring revenue. Churn Rate can be estimated either on revenue or on the user headcount numbers depending on the way your business operates. In the Software subscription (SaaS) Industry, Churn Rate is usually calculated on user base.
Hence if you have 100 users at the start of the month and you lost 5 users by the end of the month. It would mean your churn rate is 5%.
However, I would also suggest you should keep a tab on Churn rate based on Revenue. This is because subscription rates of different types of users may differ based on the complexity of your business model and hence the user based Churn rate calculation may not give you an accurate view.
Churn Rate based on Revenue can be calculated similarly. If your Monthly Recurring Revenue (MRR) was 100,000 USD at the beginning of the month and by the end of the month you lost some 5 users who contributed 20,000 USD to your MRR. Then your Churn Rate would be 20%.
Why is it Important?
Churn Rate directly impacts your revenue and financials and is also an indicator of how dissatisfied are your customers. If you observe a series of increasing Churn Rate month over month, then it should definitely raise a flag and you need to accept that there is something definitely wrong which is leading to a spike in number of users opting out of your subscription or rental service.
Also, in order to stay in the game, your business should sustain for long.
What would happen if you fill a bucket with 1 mug of water every second but the bucket has a hole which keeps leaking 1.1 mug of water every second?
 |
| Leaking bucket of Water |
You would never reach your goal of filling your bucket completely. Similarly, for your business to stay sustainable, its Customer Acquisition Rate should more than the Churn Rate. Otherwise you know what would happen.
Hope you liked reading this post. In the next post, I shall bring to you some tips to reduce your Churn Rate. Stay tuned and do subscribe us our Social Media Channels.
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