To study churn, we need to look at a particular group of customers that signed up in a particular time period. We refer to these groups as cohorts. So you might have a Jan 2014 cohort which is comprised of all the customers that signed up in Jan 2014. We will then want to track how many customers we retain, and how the revenue for each cohort evolves over time. Here is a graph that shows what happens to the number of customers in a particular cohort over several years with three different monthly Customer Churn Rates.
Having a negative revenue churn rate, i.e. when the amount of your customers increases faster than the amount you are actively losing, is one of the few signs that a SaaS business is operating at its peak performance. Similarly, having a Revenue Retention Rate of greater than 100% indicates solid performance from both an operational standpoint as well as from a customer service perspective.
Revenue churn is the percentage of your total recurring revenue lost in a given month due to customers leaving or downgrading their subscription plans. It can be calculated by taking the total amount of money lost during the month divided by your total recurring revenue (ARR) at the start of that month. A negative revenue churn rate means that you have gained more money through new customers or upgraded plans than was lost due to cancellations or downgrades.
Revenue retention rate measures how much you are able to retain of your initial customer base in terms of monthly revenues over time and it is closely related to the revenue churn rate mentioned above. It can be calculated by taking your total recurring revenue at the end of a period—typically 12 months—and dividing it with your original ARR from 12 months prior and multiplying it by 100%. So if your ARRs remain consistent over those 12 months and don’t change more than +-2%, then your revenue retention rate should be greater than 100%.
To achieve high revenue retention rates there are several steps companies can take:
• Make sure customers understand exactly how they can benefit from using your product/service: Clarify any company process/details they need help understanding; talk about success stories within your particular industry area; promote usage & adoption across teams/segments etc.
• Create ‘stickiness’: Engage with customers regularly via email campaigns or notifications according to user behavior; ensure digital experiences meet expectations in terms of speed, support & resolution times, etc. Provide onboarding guidance documents & resources as well as ongoing optimization suggestions once your product/service has been deployed. You can create incentives such as discounts/rewards for loyal users in order to keep them engaged with no interruption in service etc. Another tactic you can implement is to set up referral systems whereby existing users bring on potential new ones.
• Delight customers with extra value: Offer exclusive content requested from loyal users first e.g., discounts / other relevant giveaways. Enhance customer experiences across channels through increased personalization (emailing existing clients about their product preferences received earlier). You can also offer bonuses for longer-term subscriptions similar to what Netflix did recently.
By keeping these tips top-of-mind companies will increase not just their customer loyalty but also their overall results in terms of generating recurring revenues with higher retention rates. As a result, you’ll eventually reach profitability faster!