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For those of you in customer success and sales, it’s nearly impossible to go a day without hearing words like “churn”, “retention”, and “revenue”. Those 3 phrases go hand-in-hand with ensuring that your organization is set up for long term success, and that your customers are happy with your products.
In the business of SaaS, churn, retention, and revenue are critical factors in measuring many other key aspects of business such as annual recurring revenue (ARR), monthly recurring revenue (MRR), and even projected growth rate.
In this first blog of a two-part series, we will explore 4 major calculations (that can also be found in this ebook) for determining customer health, which can be thought of in pairs of two, with each set containing a “positive” measurement and a “negative” measurement. For instance, one pair might measure churn as well as retention, which are opposite but complementary measurements. Let’s get started:
While both revenue retention and customer retention are important, many SaaS companies place a higher value on revenue retention because revenue is king in any SaaS business. For example, you may lose 10 customers with subscriptions of $10,000 each for a total of $100,000 in lost revenue, or one larger customer with a subscription of $150,000. In this case, it may be better to lose the 10 customers equaling $100k in ARR, rather than the one customer and $150k in ARR. Just keep in mind that the 10 lost smaller customers carry additional hidden costs as they may become negative advocates in the market.
Customer Retention Rate (CRR):
Definition: The percentage of customers retained over a given period of time. This is also referred to as “Logo Retention”.
Calculation: (1 - (customers churned in period/customers at the start of the period))
Customer Churn Rate (CCR):
Definition: The percentage of customers that are lost (i.e. cancel their subscription) over a given period time. This is also referred to as “Logo Churn.”
Calculation: (Customers churned in period/Customers at the start of the period)
This calculation reflects the amount of recurring revenue (ARR/MRR) a company is able to retain for any given period. Some refer to this metric as Dollar Revenue Retention (DRR).
Be sure to review both Gross Revenue Retention and Net Revenue Retention. Companies that only focus on net numbers will likely misjudge the true health of their business because the net results may mask the symptoms of churn. Revenue Retention Rate is also a very different metric than Renewal Rate, so be careful to distinguish between the two metrics and be sure to measure both.
Definition: Gross Revenue Retention only considers the starting revenue minus any revenue lost through downsell or churn.
Calculation: (Starting MRR - downsell - churn)/Starting MRR
Definition: Net Revenue Retention considers the offsetting revenue from expansion (upsell and/or cross-sell). Some refer to this metric as Dollar Revenue Retention (DRR).
Calculation: ((Starting MRR + expansion - downsell - churn)/Starting MRR)
There are countless resources available to help you and your team measure churn, retention, and overall customer health. Some customer success leaders may wonder if it’s necessary to measure so many different aspects of the customer journey. The list of potential metrics can be long and daunting, yes, but it is key to select a specific set of customer success metrics that will help to guide the organization moving forward.
If your organization were to use only one or two calculations to measure customer health, for instance, it’s possible to experience “false positives”, which means certain metrics may not be as healthy as they seem on paper. As a customer success leader, it’s important to work with your executive team and CSMs to select the most important churn and retention numbers for your organization and measure them continuously, using those metrics as a way to guide the future and measure the past.