Churn Rate (Less Simple)

Note: Start with Churn Rate (Simple) to learn the basics of calculating churn rates.

In this section, we’ll focus on churn rates by recurring revenue.

In the Churn Rate (Simple) section, we calculated the churn rate based on the lost revenue of customers who did not renew. But businesses are more complex than that. A growing business may have the following types of renewals:

  • Non-renewal (customers leave and contribute nothing)
  • Downgrade (customers buy a different product that contributes less revenue than their previous purchase)
  • Discounts or price cuts (customers use the same product but pay less)
  • Straight renewal (customers renew the same product at the same price)
  • Lower discount or price increase (customers renew the same product but pay more)
  • Upsell (customers buy a more expensive product tier that contributes more revenue than their previous purchase)
  • Win-backs (former customers who returned, generally restricted to a dormancy time period)

Using these renewal types, we typically categorize churn in the following ways:

  • Churned recurring revenue
    • Non-renewals
  • Contracting recurring revenue
    • Downgrade
    • Discount or price cut
  • Renewed recurring revenue
    • Straight renewals
  • Expansion recurring revenue
    • Lower discount or price increase
    • Upsell
    • Win-Backs

EXAMPLE:

You want to calculate your monthly churn rate in January.

  • Your business entered January with 900 customers and an Average Revenue Per User/Unit (ARPU) of $30. That means you entered the month with a Monthly Recurring Revenue (MRR) of $27,000.
  • Exiting January, you lost 30 of the 900 existing customers. Let’s say those were higher-paying clients with an ARPU of $40. That means you lost $1,200 of MRR.
  • Your business also had contracting revenue:
    • 75 customers downgraded your product to a lower level, losing $10 ARPU
    • 20 customers were given discounts, losing $5 ARPU
  • The good news though, is that there was also expansion revenue:
    • 100 customers upgraded your product to a higher level, gaining $10 ARPU
    • 10 customers phased out of discounts, gaining $5 ARPU
    • 10 customers were won back, gaining $30 ARPU
Customer CountARPUMRR
Start of January900$30.00$27,000
Customers Churned-30$40.00-$1,200
Contracting Revenue
Downgraded75-$10.00-$750
Discounted20-$5.00-$100
Expansion Revenue
Upgraded100$10.00$1,000
Stopped discounting10$5.00$50
Win-Backs10$30.00$300
End of January880$29.89$26,300
Customer Count Churn2.22%
MRR Churn Rate2.59%

While your monthly churn rate based on customer count for January is 2.22% (880 ÷ 900), your MRR churn rate is 2.59% ($1,350 ÷ $2,050).