Customer churn is the silent killer of businesses. It’s the phenomenon where customers leave, and revenues dwindle. Understanding churn is crucial, but here’s the catch: there are two types, membership churn and revenue churn. Which one should you focus on? Let’s dissect both to find the answer.
This blog post is part of our Cracking the Churn Code series, part of our Demystifying Analytics program. See our full series here, and keep an eye out as we explore this topic in great detail – but this time, in plain English.
The Churn Dilemma: Membership vs Revenue
In the intricate world of customer analytics, your business may find itself standing at a crossroads, torn between tracking membership churn and revenue churn.
Or worse, not even considering that there’s a choice here.
The choice between these metrics is akin to deciding which lens to view your customer exodus, and each offers a unique perspective. We think one is a clear winner.
See if you can tell which as we go.
Membership churn, the more commonly observed metric, focuses on the sheer number of customers departing from a service or product within a specific timeframe. It appears straightforward, addressing the fundamental question: how many customers are you losing? However, this simplicity is deceptive, as membership churn tends to overlook a critical factor—changes in customer value.
In contrast, revenue churn provides a financially astute viewpoint. By monitoring revenue churn, your business gains insight not only into the quantity but also the quality of lost customers. This metric accounts for the fluctuations in your subscription plans (upgrades, downgrades, payment failures in some cases) encapsulating the shifts in customer spending habits, and ultimately providing a more precise understanding of the financial impact of churn.
The dilemma lies in deciphering which metric aligns best with your business’s approach to managing churn.
Revenue Churn: The True Bottom Line
What sets revenue churn apart and makes it arguably superior to membership churn is its ability to capture the true impact on your business’ bottom line.
By understanding the revenue lost due to customer churn, your business can better make data-driven decisions about addressing churn. This metric illuminates subtle yet crucial details, such as the rate at which higher-value customers are leaving or how pricing adjustments affect customer retention – particularly at those oh-so-valuable higher membership tiers.
Even better, where KPIs and team performance are monitored based on churn, revenue churn will automatically focus their efforts on things that actually affect your bottom line, like increasing efforts towards upgrading members, while also focusing efforts on retention of your higher-value customers.
This depth of insight equips your business not only to stem financial losses but also to craft targeted strategies — and financially sustainable ones at that because you’ll have a direct connection to revenue. This is paramount in ensuring sustainable growth and fostering long-term customer relationships.
In essence, revenue churn guides your business toward the path of financial stability and customer-centric success – rather than just a vanity metric of “we have 100,000 members on our book”.
“Oh yeah, we forgot to mention they’re all $1/mo members”.
And that’s why we think…
Membership Churn Can Be A Deceptive Metric
Membership churn, while seemingly straightforward, often conceals a significant caveat: it doesn’t discriminate between high and low-value customers.
Imagine a scenario where this business boasts proudly of having 100,000 members, only to realise later that they’ve all downgraded to the lowest $1/mo membership.
In the realm of business sustainability, this revelation renders membership churn a deceptive metric. While it might indicate a high volume of users leaving, it fails to reflect the true financial impact, as these departing users weren’t contributing revenue in the first place.
Businesses only operate when they make money — when they have revenue. Not when they have users on the books.
Unless you’re Uber.
That’s why we think membership churn isn’t really the greatest measure when you’re managing churn.
But that’s if you’re considering membership churn on its own. We actually think both should form part of your analytics strategy. Here’s why.
Why Track Both? The Power of Comparison
Comparing these metrics serves as a simple wayfinder to focus your efforts.
For instance, if your business experiences a spike in revenue churn outpacing membership churn, it signifies high-value customers departing. This insight prompts tailored retention efforts, ensuring the business doesn’t lose its financial backbone.
Conversely, if membership churn surpasses revenue churn, it suggests a loss of lower-tier users, which might be less concerning from a revenue perspective — provided this is aligned with your business strategy.
This comparative analysis sharpens decision-making, fostering a balanced approach where customer quantity aligns seamlessly with revenue quality.
In Closing: A Balanced Approach to Churn Management
We’ve explored some of the nuances between revenue churn and membership churn. While membership churn offers a quick pulse on customer departures, revenue churn unveils the financial intricacies, providing invaluable insights into the true health of a business. By embracing both metrics, businesses like yours can craft a balanced approach, addressing both quantity and quality in customer attrition.
The power of comparison cannot be overstated. Recognising that there will be disparities between membership and revenue churn rates serves as an early warning system, alerting your business to potential issues. Whether it’s the departure of high-value customers or a natural shedding of low-revenue generating users, these insights guide us in tailoring their retention strategies effectively.
In essence, successful churn management is much more than mere numerical metrics.
It embodies a holistic understanding, where every lost customer is not just a subtraction from a tally but an opportunity for strategic adaptation. Churn ceases to be a threat; it becomes a catalyst for growth, driving your business towards enduring success and customer-centric excellence.