The math behind successful as-a-service: understanding and calculating churn

| By:
Gregg Lalle

In the first part of our series ‘The Math Behind Successful As-a-Service,’ we’re breaking down all things churn rate: what it is, why it matters, how to calculate it, and, of course, how to minimize it within your organization. Read on for churn-related insights and tips.

What is churn rate?

Sometimes referred to as attrition or turnover, churn rate is your number of customers at the beginning of a period minus your number of customers at the end. It calculates the overall difference but excludes any new sales over that period. Customer churn can include cancellations, non-renewals, or customers switching to another provider.

While some churn is to be expected in every organization, it’s important to garner insights into its specific causes within your customer base so that you can respond and adjust—and minimize your rates.

Why does churn rate matter?

For subscription-based companies like your MSP organization, understanding and calculating your revenue and/or customer churn rates is critical to gauging customer health and satisfaction. It signals whether you’re meeting, exceeding, or falling short of your customers’ expectations—and it lets you know how loyal they are to your organization.

Looking at the flipside of churn drives home why it’s so important. The opposite of customer churn is customer retention—how many customers stay over time. Maximizing retention is important to keep revenue streams flowing. But there’s also another major factor: it costs your organization significantly more to acquire new customers than it does to keep existing ones. The success rate of selling to an existing customer ranges anywhere from 60% to 70%, but the success rate of selling to new customers falls to only 5% to 20%. Understanding the consequences of this disparity—and ensuring you’re doing everything you can to keep your existing customers renewing their subscriptions—is integral to your ongoing success.

Keep in mind, these statistics aren’t meant to be discouraging. In fact, they outline a real opportunity to increase profits. Increasing customer retention (and thereby reducing churn) by just 5% can increase profits by 25% to 95%. So, capitalizing on this additional source of revenue—and ensuring you’re doing everything you can to hold onto your existing customers—is a key strategy in driving your business forward.

How do you calculate churn rate?

Before you start calculating your churn rate, it’s important to understand the difference between customer churn and revenue churn. Customer churn looks at each customer as an equal part of the equation. You don’t fully see the impact of each customer leaving.

Revenue churn digs deeper by looking at the amount of revenue you see walking away with that customer. Losing three small customers isn’t the same as losing one large one if that one customer brought in more revenue than the other three combined. Now that we see the difference, let’s dive into the math.

To calculate revenue churn, first decide on a specific period of time. Whether it’s one month, one year, or the entirety of a specific program, always be consistent in when you enter the metrics to ensure accuracy.

For the purposes of this discussion, let’s say you want to calculate your monthly churn rate. Subtract your monthly recurring revenue (MRR) at the end of the month from the MRR you had at the beginning of the month. Then, subtract any revenue you accrued from cross-selling or upselling to existing customers. Finally, divide this number by the MRR you had at the beginning of the month.

The formula for the monthly revenue churn rate is:

(MRR at start of month - MRR at end of month) - MRR in upgrades during month)
MRR at start of month

Calculating customer churn rate is somewhat similar. Take the number of customers that you lost last quarter and divide that by the number of customers that you started with last quarter. The resulting percentage is your churn rate.

The formula for the customer churn rate is:

(Customers at beginning of period - customers at end of period)
Customers at beginning of period

What’s an acceptable benchmark?

While average churn rates differ across industries and organizations of different sizes, an acceptable churn rate falls between 5% to 7% annually. And depending on whether you measure by customers or revenue, the monthly number can fall between 0.42% to 0.58%.

To translate these numbers into more human terms, this means companies that fall within the acceptable range only lose about 1 out of every 200 customers (or dollars) per month.

What are the leading causes of churn?

Two of the leading causes of churn—and some suggested solutions—are:

1. Poor onboarding

Comprehensive customer onboarding can drain time and resources that your organization may not have—but it’s important to maximize retention and reduce churn. Retently reports that poor onboarding results in 23% of average customer churn—this shouldn’t come as a surprise. Onboarding is a critical phase: one that brings customers up to speed with the way you work, engages them with your service, and boosts brand loyalty.

An effective onboarding process with supporting documentation can help your customers feel supported and connected to your business—and ultimately require less manpower from you. Our 30-45 Day Playbook can serve as a day-by-day guide, helping you maximize every step of the critical onboarding stage for your customers.

2. Weak relationship building

In the same vein, weak relationship building accounts for 16% of average customer churn. This goes well beyond the onboarding stage. Effective relationship building starts before a customer even subscribes and extends throughout the duration of your partnership. Healthy customer relationships are built on foundations of trust, honesty, and active engagement. Keeping regular and continued contact with your customers through surveys, marketing channels, business reviews, email, and other outreach is important—and can make or break a decision to renew a subscription.

Improving the frequency and the quality of your customer communications can bolster your relationship-building efforts and make your conversations more efficient and productive. But be careful: an avalanche of communications can do more harm than good—making you seem bothersome and turning off your customer. The key is always to find a balance.

Maximize your tech to reduce churn

The key to building strong customer relationships is enhancing your customer interactions. When you consolidate all of your customer information into one centralized hub like ConnectWise PSA™ (formerly Manage), your team will be better prepared customer communications—making each conversation more informed, streamlined, and succinct.

To stay on top of customer needs, trends, and histories, implement automation technology like ConnectWise Automate® that helps keep recurring issues at bay. Proactive monitoring auto-remediates issues with scripting to minimize customers’ problems and increase satisfaction and retention. Boost retention even more with our improved renewal functionality, an add-on that helps you keep track of and notify customers about renewals in a timely manner, reducing churn and keeping your existing customers coming back for more.