“Net Churn” is a bullshit metric

TLDR: Certain subscription-based vendors have conceived of a metric called “Net Churn”. The concept seems to have originated in publicly-traded SaaS companies. It’s probably in response to Wall Street analysts’ enduring attempts to decode the underlying measures of financial health in their renewal revenue streams.

Here’s how Net Churn is calculated:

  • You take the renewal revenue pool for a given month; let’s say it’s $1,000,000 of potential revenue
  • You take the actual renewals PLUS actual up-sells/cross-sells that you get from those customers at the same time, PLUS actual cancellations value PLUS down-sells; let’s say these sum to $950,000
  • Divide actual over potential and voila! Net churn rate

By using this math, “Net Churn” can be a number as high as 95% even over 100%.

This is financial chicanery.

An organization should measure each metric separately. Each is a unique and important financial lever. Combining measures into Net Churn blurs how well (or not) you’re doing at each.

For example, in a B2B business with annual subscriptions, consider these metrics:

  • Logo churn – this is the count or rate of customers in the renewal pool who actually renew. The calculated rate is always 100% or less
  • Revenue churn – this is the count or rate of renewal revenue in the pool that was actually renewed. The calculated rate is always 100% or less
  • Cancellations – this is the count or rate of cancellations in the period between renewals
  • Base renewals – this is the count or rate of revenue from customers who renew at the same financial commitment as the prior period
  • Up-sell/cross sell – this is the additional revenue captured beyond the renewal potential
  • Downsell – this is the renewal revenue from customers who lower their financial commitment for the same product for the renewal period versus their prior level (downsell is also referred to as partial churn in some organizations)

Ideally, you measure and optimize on all levers:

  • Logo churn – useful to see churn patterns across your whole customer base
  • Revenue churn – useful to see churn especially from high-value customers
  • Cancellations – a particularly concerning outcome worth understanding in depth
  • Base renewals – useful to see the customers who are steady-state. These customers may end up as future at-risk customers because they aren’t growing
  • Up-sell – useful to see the performance of premium versions of your product offerings (if you have them). Your marketers spend a lot of time tuning your offer hierarchy and this is a great way to validate their efforts
  • Cross-sell – useful to see the performance of complementary products in your portfolio (if you have them). Many vendors diversify their product portfolio, at great expense. The payback is often measured by how well your customer base consumes the new offerings
  • Downsell – useful to see customers who lessen their commitment, which may present clues to overselling license capacity in a prior period

Leaving aside the games that are played with Wall Street analysts, focusing on these metrics individually will quickly highlight several drivers of financial performance. Each metric reflects a unique opportunity to drive revenue growth.

4 thoughts on ““Net Churn” is a bullshit metric

  1. The prime issue with net churn is that it combines two objectives that need to be optimized separately, up-sales/cross-sales and retention. Mushing these metrics together hides potentially serious problems. All SaaS companies really need to understand their churn and figure out how to minimize it. The strategies for increasing the per customer revenue are different (though they all related to customer engagement of the SaaS product).

    The Net Churn metric was first proposed (to my knowledge) by David Skok where he defines “The Power of Negative Churn (aka a postive “Net Churn.” http://www.forentrepreneurs.com/saas-metrics-2/. He’s a much smarter guy than I am, but I think this was a rare misstep.

    Joel York wrote a good post on the subject in July of 2013 http://chaotic-flow.com/negative-churn-its-not-that-i-dont-dislike-it-i-do/.

Comments are closed.