Churn is the enemy of any subscription company.
In a general definition, churn is the number or percentage of subscribers to a service that discontinue their subscription to that service in a given time period. In order for a company to expand its clients base, its growth rate must exceed its churn rate.
So let’s say you have 100 subscribers to a software-as-a-service product: if 10 customers cancel their subscriptions on a given month, you got a 10% churn rate. Simple as that.
Customer Churn vs Revenue Churn
But it’s important to notice that we should measure churn not only counting customers, but also counting revenue. Customer Churn refers to the number of customers that have discontinued their subscription on a given period. Revenue Churn is how much those lost customers represent in revenue.
In the end of the day you want to make a profit, right? So if you have one single customer giving you a $1M revenue with 40% gross margin, you’re definitely making money.
Despite this extreme example, the point is: you don’t want to put all your eggs in a single basket. That’s why you have to take care both of the numbers of customers and revenue.
Let’s say your product has a $10/mo and a $100/mo pricing plan. Loosing 5 customers paying $10/mo still good if compared to loosing one single customer paying $100/mo.
Expansion vs Contraction
If you acquire new customers you’re obviously growing your business, and if you loose customers you’re obviously reducing it, right? But see that you can grow or reduce without acquiring or loosing a single customer.
On a subscription business, you can have a huge revenue churn without loosing one single customer due to down-sells, discounts, refunds, credits, or a reduction in use by your customers.
On the other hand you can also grow your revenue without acquiring new customers due to up-sell (customers moving to a more highly featured version of your product), cross-sell (customers to purchase additional products or services) or growth in use.
A good way to do this is to price your product according to a usage variable. Here are some examples of product prices that scale according to usage:
- Salesforce: number of users;
- Dropbox: disk space;
- AWS: hours of cloud computing;
- Mailchimp: number of users on lists.
Keep in mind that you might want to measure these numbers separately.
Firstly, because it’s important to know how much money are you making from new customers and how much from existing customers. That’s why a good practice is to measure ARPA (Average Revenue pr Account) for new customers and for existing customers.
If you only measure revenue growth you’ll never know if this new revenue is coming from new acquired customers or existing customers.
Another good practice is to measure growth on a cohort basis, which means you’re measuring numbers for a specific time period, let’s say a month. Cohort enables you to identify behavior patterns for a specific group of customers – that could be acquired from a specific channel or after you released a specific feature.
So let’s say you identify customers that signed-up in august were much likely to stay as subscribers for a longer period than those that signed-up in july, you can go ahead and see how customers from august are different from customers from july and try to adapt your product/sales – or event focus on customers with the same characteristics of customers from august.