How to Calculate Gross and Net Revenue Churn

Revenue churn is a financial metric that measures the amount of recurring revenue a business loses over a specific period. This metric is particularly relevant for companies operating with subscription or recurring revenue models, as it directly reflects the stability of their revenue streams. Understanding revenue churn provides insight into how well a company retains the financial value of its existing customer base. It serves as an indicator of financial health and helps businesses assess their growth trajectory.

Understanding Revenue Churn

This metric extends beyond merely counting lost customers; it quantifies the actual monetary value that ceases to be recurring. Two primary factors contribute to revenue churn: customer cancellations and customer downgrades. Cancellations occur when customers entirely discontinue their service or subscription, resulting in a complete loss of their associated recurring revenue.

Downgrades, on the other hand, involve customers reducing their service level or subscription plan, leading to a decrease in the recurring revenue generated from them. This means a customer might remain with the business but contribute less financially than before. For businesses that rely on consistent, predictable income, monitoring revenue churn is important for evaluating financial performance. It highlights the extent to which a company’s established revenue base is eroding, which can impact future financial planning and growth initiatives.

Information Required for Calculation

Calculating revenue churn requires specific financial data points, all measured over a consistent time period, such as a month, quarter, or year. The starting Monthly Recurring Revenue (MRR) or Annual Recurring Revenue (ARR) establishes the baseline, representing the total predictable revenue from active subscriptions at the beginning of the chosen period. MRR, for example, normalizes all recurring revenue into a monthly figure, even for customers with annual or quarterly payment plans.

Lost Revenue encompasses the total recurring revenue lost from customers who either cancelled their subscriptions or downgraded to a lower-cost plan during the period. Expansion Revenue is additional recurring revenue generated from existing customers through upsells, cross-sells, or increased usage of services. This includes revenue from customers upgrading their plans or purchasing additional features.

Calculating Gross Revenue Churn

Gross revenue churn measures the total revenue lost from existing customers without accounting for any new revenue gained from upsells or cross-sells. This calculation provides a straightforward view of revenue leakage due to cancellations and downgrades. The formula for gross revenue churn is: (Lost Revenue / Starting MRR) x 100.

Lost Revenue is revenue lost from cancellations and downgrades. Starting MRR is the total monthly recurring revenue at the beginning of the period. For instance, if a company began a month with $100,000 in MRR and lost $5,000 due to customer cancellations and downgrades, the gross revenue churn calculation would be ($5,000 / $100,000) x 100, resulting in a 5% gross revenue churn rate. This metric highlights the raw amount of recurring revenue that a business is losing from its existing customer base.

Calculating Net Revenue Churn

Net revenue churn provides a more comprehensive view of revenue dynamics by factoring in both lost revenue and expansion revenue from existing customers. This metric shows whether the revenue gained from existing customers through upgrades and cross-sells is sufficient to offset the revenue lost from churn and downgrades. The formula for net revenue churn is: ((Lost Revenue – Expansion Revenue) / Starting MRR) x 100.

Lost Revenue is revenue lost from cancellations and downgrades. Expansion Revenue is additional revenue from existing customers. Starting MRR is the total monthly recurring revenue at the beginning of the period. For example, if a company started the month with $100,000 in MRR, lost $5,000 in revenue from cancellations and downgrades, but gained $3,000 in expansion revenue from existing customers, the net revenue churn would be (($5,000 – $3,000) / $100,000) x 100, resulting in a 2% net revenue churn rate. A negative net revenue churn rate signifies that the expansion revenue from existing customers exceeds the lost revenue, indicating growth from the existing customer base even with some churn.