4 Ways to Measure Churn & Retention – Part 2
Without measurements, customer success leaders would be at a loss for how to determine the health of a business. But it’s also possible to be overwhelmed with metrics and calculations and forget the true reason for being metrics-driven: ensuring customer success.
In our previous blog post, Part 1 of this 2-part series, we explored some of the most prominent customer success metrics including revenue rate, churn rate, gross revenue retention rate, and net revenue retention rate (which can also be found in our latest ebook).
It’s critical to select a certain number of metrics that you use repeatedly as a guiding force, quarter after quarter. Without these metrics in place, it’s easy to use only 2 or 3 metrics which might be misleading if not compared against other customer success health metrics.
In this post, we’ll share 2 more calculations which again are contrasted against each other for a positive and negative affect. Let’s get started:
Calculation 3: Revenue Growth Rate vs. Revenue Churn Rate
Expansion Growth Rate (Upsell + Cross-sell)
Expansion growth rate can be one of the best indicators of the health of your business as typically customers who are purchasing more are getting high value and have a very high propensity to renew year over year.
New revenue from current customers as a result of selling more of the same product (upsell) and/or new products (cross-sell).
Expansion MRR /Previous Months MRR
Revenue Churn Rate (Gross and Net)
Understand your revenue (or dollar) churn rate and focus intently on driving it down. World-class SaaS companies have negative churn (or net growth).
Revenue Churn is simply the opposite of revenue retention – the percentage of recurring revenue (ARR/MRR) lost through downsell and/or churn in any given period.
Gross Revenue Churn only considers lost revenue whereas Net Revenue Churn includes any offsetting expansion revenue. When expansion revenue is greater than churn, that is often referred to as “negative churn.”
Gross Revenue Churn Calculation:
(Downsell + Churn) / Starting MRR
Net Revenue Churn Calculation:
(Downsell + Churn – Expansion) / Starting MRR
Calculation 4: Renewal Rate (Gross & Net)
Renewal Rate (Gross & Net)
Renewal rates specifically correlate to renewal transactions whereas revenue retention considers any increase or decrease of recurring revenue during a time period, including expansion, downsell and/or churn that may happen outside of a renewal (i.e., mid-term expansion, etc.). Renewal rates should always be calculated against the *renewable* book of business (RBOB) for the specific time period.
Gross Renewal Rate Definition:
The percentage of *renewable* revenue that actually renewed in a given period. Gross renewal rate only considers downsell and churn and does not include any offset from expansion revenue that happened at the time of the renewal. Gross renewal rate can never be greater than 100%.
Net Renewal Rate Definition:
The total revenue renewed and gained from the *renewable* book of business for a given time period. Net renewal rate includes any expansion revenue (upsell and/or cross-sell) added as part of the renewal transaction; therefore, it’s feasible that the new renewal rate could be greater than 100%.
Gross Renewal Rate Calculation (Option 1):
Renewable MRR – Downsell – Churn / Renewable MRR
Gross Renewal Rate Calculation (Option 2):
Renewed MRR / Renewable MRR
Net Renewal Rate Calculation (Option 1):
Renewable MRR – Downsell – Churn + Expansion / Renewable MRR
Net Renewal Rate Calculation (Option 2):
Renewed MRR + Expansion / Renewable MRR
Check out our resources below for more customer success best practices and insights for how your organization can approach customer success with the customer at the center:
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