You run a concert venue. It’s a big place — you have 15,000 available seats.
Some seats are premium, some are middle-tier seats, and some are cheap seats. The artist you’ve booked for the venue is popular, and all the seats are booked out. You’re maximizing revenue. Congratulations.
But, the day before the show, the artist posts on Instagram & Twitter. They tell their fans that they’ve come down with a cold and, as such, their vocal performance probably won’t be great. They still plan to play, but they feel bad about it — so they’re holding another show at a smaller, higher-end venue a couple of days later. As a result, customers begin canceling their tickets and requesting refunds.
You take a look at your books. The numbers look like this:
- Customer churn is 20%. You’ve lost 20% of the customers who’d booked tickets.
- Revenue churn is 37%. You’ve lost 37% of the show’s revenue.
Why the discrepancy? Because, in this hypothetical, a disproportionate number of the people who booked tickets were the fans who booked the premium, expensive seats.
This is the difference between customer churn and revenue churn. While your customer churn shows you what percentage of your customers have dropped off, your revenue churn tells you what portion of your revenue you’ve lost as a result. There are some insights to be gleaned from this.
Read on for information on how to calculate customer & revenue churn — and advice on interpreting the discrepancy between the two.
What is customer churn, and how do I calculate it?
Customer churn is the percentage of customers you’ve lost over a given period. You can calculate it with a simple formula:
Customer Churn = (Customers lost in a period / Customers at the start of the period) x 100
This tells you what percentage of your customers have churned. It’s a valuable metric, and the implications are fairly straightforward: The higher the churn, the more problems you have. Customers aren’t enjoying your product. The lower the churn, the more likely it is that people find value in your product.
At Octane, we work with startups that implement usage-based pricing. Fortunately, in this case, calculating your customer churn is simple: you don’t have to make any differences from how a non-usage-based startup would calculate customer churn. Revenue churn, however, is a different story…
What is revenue churn, and how do I calculate it?
Revenue churn is the percentage of revenue you’ve lost over a given period. Like customer churn, the formula is simple:
Revenue Churn = (Revenue lost in a given period / Revenue at the start of the period) x 100
This is an easy calculation to make if you use flat-rate billing. If you’re charging customers $500 per month or per quarter, things are easy. But if you’re charging customers on usage — say, a certain price per API call — then calculating revenue churn get significantly more complicated. Because, in order to calculate revenue churn, you need to know:
- What your recurring revenue is
- How much revenue you lose when a customer drops off
But if the amount you bill customers changes each period, it’s a lot harder to estimate these things. We’ve written a detailed piece about revenue recognition here, and a piece on calculating MRR for usage-based startups here. The math is complicated, but those two essays will get you up to speed on potential tactics you can use. Most of the tactics here involve using complex math and historical usage data to estimate and predict how much you’ll make from each customer.
What if there’s a difference between my revenue churn and customer churn?
Think back to the example at the start of the piece. What if your customer churn is significantly different from your revenue churn? Let’s walk through a couple of hypotheticals:
- If revenue churn is lower than customer churn: This means that, in the period you’re measuring, the customers that dropped off were less-valuable to your business — they were paying you less money. It’s likely worth digging in here to find out why your higher-paying customers love your product so much, and why lower-paying customers tend to drop off. What you find could change how you price your product (and how you think about acquisition).
- If revenue churn is higher than customer churn: This means that, on average, it’s your higher-paying customers that are dropping off. The implication here depends on your business model, but this probably isn’t a good thing. Assuming you’re optimizing for maximum revenue — and it’s almost certain you are — then you’ll want to figure out what’s preventing your higher-paying customers from sticking around. Is your product providing enough value?
The real implications of your revenue churn and customer churn calculations are intensely-specific to your actual business model, acquisition strategy, and pricing strategy. But the hypotheticals above may help you interpret the metrics you’re looking at.
Octane can help with your usage-based pricing calculations
If you want help implementing usage-based pricing — and dealing with tricky revenue recognition calculations — I think you’d find Octane valuable. We make it easy for startups to implement usage-based billing by eliminating the months-long engineering slog it usually takes to get it going.
Truth is, your engineering team should probably (and would rather) work on the core competency of your product. Chat with us to implement usage-based pricing in just a few clicks. No engineering resources required.