Revenue Churn Rate: A Key Performance Indicator in SaaS

In the relentless dynamics of the Software as a Service (SaaS) business model, understanding customer behavior and assessing business health are crucial for sustainability and growth. One of the pivotal Key Performance Indicators (KPIs) used to analyze a company's success in maintaining its customer base and revenue is the Revenue Churn Rate.

What Is Revenue Churn Rate?

The Revenue Churn Rate, also known as Monthly Recurring Revenue (MRR) Churn Rate, measures the percentage of subscription revenue your company has lost due to cancellations or downgrades during a particular period. This key metric brings vital insights into customer dissatisfaction, product-market fit, and the efficiency of customer retention strategies. A high Revenue Churn Rate is a red flag, signalling that your company might be having difficulty retaining its customers.

Tracking revenue churn helps SaaS businesses pinpoint the causes behind revenue loss and assess the financial impact of customer churn. It also helps in understanding if the company is losing more revenue from high value customers, or if the churn is widespread among all customers.

Calculating Revenue Churn Rate

To calculate the Revenue Churn Rate, one would need a chronicle of two pivotal variables: the beginning MRR for the observed period and the lost MRR due to churn during that same period.

The formula for calculating the Revenue Churn Rate is:

Revenue Churn Rate = (MRR at the beginning of the period - MRR at the end of the period) / MRR at the beginning of the period

In this formula, the MRR at the beginning of the period refers to the total subscription revenue at the start of the month or year, and MRR at the end of the period is the total remaining subscription at the end of the period after accounting for any cancellations or downgrades.

Importance of Revenue Churn Rate in SaaS

Revenue Churn Rate serves as an early warning system to help detect problems with customer satisfaction, product value, and loyalty. Keeping this KPI low is essential for SaaS companies as it's easier and more cost-effective to retain current customers than to acquire new ones.

Companies should aim for a negative Revenue Churn Rate, which indicates that the revenue from existing customers (through upsell and cross-sell) is growing faster than the revenue lost due to churn. Such a scenario is a positive sign demonstrating sustainable business health and customer satisfaction.