Definition
Churn is the rate at which a business loses customers or recurring revenue over a period, usually a month or a year. Customer churn counts the customers who leave, while revenue churn measures the recurring revenue lost to cancellations and, in some definitions, downgrades. The two can tell different stories when customers pay very different amounts.
Recurring revenue comes back without being won again each time, through subscriptions, retainers or service contracts. Contracted revenue is the part committed for a fixed term.
Worked example
Tidewell is a fictional Australian subscription software business with 1,000 customers and MRR of A$100,000 at the start of a month.
During the month, 30 small customers cancel, taking A$1,500 of MRR with them. One large customer paying A$3,000 a month also leaves.
- Customer churn: 31 customers out of 1,000 = 3.1% for the month.
- Revenue churn: A$4,500 out of A$100,000 = 4.5% for the month.
The single large customer does more damage to revenue than the 30 small ones combined.
Monthly recurring revenue (MRR)
Monthly recurring revenue is the subscription revenue a business expects to bill in a normal month. Its monthly movements show where growth comes from and where it leaks away.
Why buyers care
A business with high churn must keep winning new customers just to stand still, and small monthly rates compound into a large share of revenue over a year. That makes growth expensive and fragile under a new owner.
Ask for churn by month for at least two years, split by plan and by customer cohort, and check it against cancellations in the billing system. Be wary of churn figures that leave out customers who cancel in their first month or two, or of a recent improvement that coincides with the sale. In Loupe's valuation tool, low monthly revenue churn raises the multiple for SaaS businesses and high churn lowers it.