Source: https://www.forentrepreneurs.com/demystifying-churn/

Additional Reading: https://www.forentrepreneurs.com/why-churn-is-critical-in-saas/

Churn is one of the single most important metrics in determining health of any business. We track growth/decline in DAUs, MAUs, Footfalls, #Customers, #Unique Customers, #Orders, etc. to get a sense of how the business is performing.

Three churn rates tracked for a business are; customer churn, gross dollar churn, and net dollar churn.

Customer Churn: Is the number of customers lost over a period.

CC = #Customers Lost in This Period / #Customers in Previous Period

Customer churn can be involuntary/voluntary and this is where businesses need to understand drivers of churn.

Gross Dollar Churn: Is total revenue lost from both churning customers and down selling.

GDC = (Revenue Lost Churn + Revenue Lost Down sell) / Revenue in Previous Period

The importance of tracking the GDC is it highlights to the business what the value of churned customers is along with the value of retained customers.

Net Dollar Churn: Is gross dollar churn less revenue from upsell. It is effectively the change in the business’s monthly recurring revenue excluding new customers.

NDC = (Revenue Lost Churn + Revenue Lost Down sell – Revenue from Up Sell) / Revenue in Previous Period

The best businesses have a negative net dollar churn. A negative churn requires that a business can do one or more of the following three things:

- Expanding revenue from current product by either increasing prices or having a pricing model that increases with either usage/time

- Up-selling customers to a value added or highly featured product

- Cross-selling customers additional products or services

Apart from generating net dollar churn, a business can also focus on reducing churn by following these tactics:

- Calling customers to get feedback and understand pain points

- Measuring customer engagement/ net promoter score

- Figuring out which features make your product sticky and targeting customers that do not use those features

- Considering long term contracts with customers

- Assigning your best sales reps to customers asking to cancel

Understanding churn and its implications for a business are important for not only the businesses but also investors.