Churn Rate

What is the churn rate?

The churn rate (in German, Abwanderungsquote) measures the share of customers or revenue that is lost in a period. It is the counterpart of the retention rate.

Two calculations that must not be confused

Customer churn = customers lost in the month ÷ customers at the start of the month.
Revenue churn = recurring revenue lost ÷ recurring revenue at the start of the month.

The difference is considerable. A provider that loses ten small customers and wins one large one has poor customer churn and good revenue churn. Conversely, the loss of a single large customer can cost a quarter of revenue while the number of customers stays stable.

Worked example

A provider starts the month with 400 customers and EUR 200,000 of monthly recurring revenue. During the month, 12 customers with a combined EUR 4,000 cancel. Existing customers expand their contracts by EUR 7,000.

Customer churn: 12 / 400 = 3%.
Gross revenue churn: 4,000 / 200,000 = 2%.
Net revenue churn: (4,000 − 7,000) / 200,000 = minus 1.5%.

A negative net revenue churn means that the existing base grows even without a single new customer. This is the strongest single metric a subscription business can show, and it has a direct effect on valuation.

What must not be calculated wrongly

A monthly churn of 3% is not 36% a year. The correct calculation is multiplicative: 1 − (1 − 0.03)¹² = about 30.6%. The difference grows with the level of the rate and with the number of periods.

Common mistakes

1. Showing only gross churn. Without the expansion among existing customers, half the story is missing.
2. Not counting customers in payment default. Anyone who counts a customer as lost only after three reminders flatters the rate by a quarter.
3. Averaging across all segments. Small customers almost always leave at a higher rate than large ones. If the two are thrown together, it is not visible which segment carries the business.
4. Changing the period. Mixing monthly and annual figures in the same presentation is the most common reason for follow-up questions in the review.

Frequently asked questions

What is a good churn rate?

That depends strongly on the segment. In business with large companies, single-digit annual figures are usual; in business with micro-enterprises, the monthly figures are clearly higher. More important than comparison with collections of metrics is one's own development over eight quarters.

What are voluntary and involuntary churn?

Voluntary churn is cancellation. Involuntary churn is termination because the credit card has expired or the direct debit fails. The second part is often surprisingly large and can be reduced by simple means, such as timely reminders and automatic retry attempts.

How does churn relate to customer value?

The average customer lifetime is the reciprocal of the churn rate. With 3% monthly churn, a customer stays on average around 33 months. This figure goes directly into the calculation of customer value, which is why every error in the churn calculation is multiplied there.

The Roemer Capital view

In the business plan, we always show churn in three lines: customers, revenue gross, revenue net, each by segment. The reason is not completeness. A negative net revenue churn is the argument with which a higher valuation multiple can actually be justified. Anyone who has it should show it.