What is the difference between gross churn and net churn?

Picture having a Savings Jar, and you're putting money into it regularly. Gross Churn is like counting all the money you took out of your savings jar, whether it was for a planned expense, an emergency, or even if you later put some back. It's all the money that left the jar. Net Churn is the difference between what you took out and what you managed to put back in the jar. If you spent $50 but later added $20, your net churn is $30. It's like saying, "I may have used some, but I also topped it up." In business terms, gross churn includes all the customers who left, whether you win them back or not, while net churn focuses on those customers you couldn't retain. It's like tracking the customers who left and didn't return to your business.

Actually the gross churn formula described is not consensual. Many companies consider the gross churn formula as follows: - Customers that left in a certain period divided by the average customer size base of that period. And the average customer base results from the opening and closing subscriber base of that period. This formula is considered more accurate, because it also considers as relevant the immediate churn that might occur from customers acquired in the same period.

It is essential to review the churn metrics from a Customer Strategy perspective and understand the evolution of the entire customer base - Churn is only one element. Measure both Customer and Revenue Churn, and I recommend monitoring gross and net metrics for both. Here's an example: Gross Churn % = #of customers in a given period / #of customers at the beginning. Net Churn = Total # of customers at the beginning of a given period / Total # of customers at the end. It helps to understand the net evolution of your customer base and how much Churn influences it. Similarly, with one amendment for Revenue: it's a matter of business decision/industry specifics if you consider upsells/cross-sells, past or estimated future Revenue.

Understanding seasonal influences is crucial for a comprehensive grasp of gross churn, as businesses frequently encounter varying churn rates at different times, such as holidays or peak industry seasons. Acknowledging these seasonal patterns enhances forecasting and resource allocation accuracy; for instance, the travel industry might witness increased cancellations during the summer vacation season, while churn decreases during the winter holiday season due to surging travel demand.

Gross Churn % = #of customers in a given period / #of customers at the beginning. Net Churn = Total # of customers at the beginning of a given period / Total # of customers at the end

When considering net churn, it's essential to emphasize the effectiveness of proactive retention strategies, as they play a pivotal role in reducing customer departures and driving upgrades. Personalized outreach to at-risk customers, tailored loyalty rewards, and targeted subscription recommendations can serve as potent instruments for diminishing net churn and nurturing revenue growth.

My industry is a great example: Office Solutions. During Covid, I like to call it the Zoom-Boom, most offices were empty. The “Copier” companies took a beating. Print revenue was down more than 60%! For most companies that exclusively offered copiers and printers, the Net Churn was 100%, aka out of business. Contracts were either revised down or cancelled, and were rarely being replaced. Orders for new equipment were trickling in at best. I work for a Managed Service Provider, providing Copiers + Managed IT, Document Management, etc. At companies like this, print revenue was down 60%, but revenue from other services decreased the total revenue loss to 10%. Net Churn of 10% Net Churn can be calculated on lost customers or revenue.

Rather than only reviewing net churn (i.e. gain above your gross churn), investors are often referring to this as net revenue retention i.e. NRR. The calculation looks at metrics as a gain over the existing base, which tells the story of how fast you can expect to grow from your existing customers. This is important information as it tells the story of how strong your current base is and how well they are adopted to your product offerings.

Net churn can be seriously misleading: acquired 10 new customers, lost 10; net= zero. But you need to consider the lifetime value of the ones you lost and track against the time and effort it took you to win the new ones. If acquisition revenue is less than lost customer revenue, you'll probably want to look at loyalty issues.

Net churn is a more important metric for businesses to track than gross churn because it measures the overall health of the customer base. A high net churn rate indicates that the company is losing more customers than it is gaining, which is not sustainable in the long term.

Gross churn primarily measures the number or percentage of customers who leave your business, providing insights into customer satisfaction, loyalty, and overall market dynamics while net churn specifically evaluates the financial impact of customer departures and upgrades, offering a clearer view of your business's profitability and scalability. While gross churn reveals how many customers you're losing, net churn showcases the net effect on your revenue, making it a more financially oriented metric.

Gross churn is the entire scope of wins and losses; net churn is the sum. Since teh combined Marketing and Sales effort to win a customer is (in B2B) typically 5x to 7x the cost of sale to an existing customer, any loss is a serious issue that degrades new sales wins.

When we talk about churn, it's all about customers or revenue we're losing. Gross Churn is like looking at how many customers walked out of our shop without considering those who walked in. It's just the total percentage we lost over a period. Now, Net Churn is a bit more holistic. It's like standing at the door and counting both those who leave and those who enter. So, we take the losses but also subtract any gains, like new customers or even current ones who decided to buy more. Positive net churn means we had more gains than losses, and negative means the opposite. So, in a nutshell: Gross Churn: Counting the exits. Net Churn: Exits minus entries.

Gross churn measures customers lost, while net churn factors in revenue gained from existing customers. Net churn is a more holistic view of customer base health.

Businesses can use net churn to identify areas where they need to improve in order to keep customers happy and reduce churn. For example, if a company has a high net churn rate among customers who have recently signed up, it could indicate that the company's onboarding process is not effective enough. By tracking and understanding net churn, businesses can make informed decisions about how to improve their customer experience and reduce customer loss.

To effectively reduce churn, understanding its drivers is critical. I recommend to start by listening to churned customers; they often are willing to share valuable insights. Collecting and analyzing data can unveil patterns about the key churn reasons. Surprisingly, churn can be attributed to both external factors like competitive offers and macroeconomic trends, as well as internal issues such as broken processes, mishandled complaints, or overpromising from sales channels. Once you grasp the churn drivers, plan and execute a targeted churn reduction program. However, continuous monitoring of churn is essential. Churn management is dynamic and demands swift action at an early stage to prevent an uncontrollable snowball effect.

Multiple factors required from high level a cross company and from the team handling the churn customers(Retention Team) -From point of sale customer should be fully aware about the product/ service and not misguided. To reduce the percentage of churn -Continues improvement for the product /Service -Consider flexible pricing options, discounts, or loyalty programs to retain customers and Offer long-term contracts or subscriptions to lock in customers -Should analyse the data and consider the proactive retention strategy and approach the customers before they approaching you. -Collect data and analyze the root causes of the churn and fix the pain points. -Stay aware of your competition and adapt your strategy accordingly.

Start by looking at lost accounts: go back and ask painful questions; find out what you need to put right. Quite often, it's not the product but the associated services, or the 'ease of doing business'. If customers think you're ignoring them or not responding fast enough, they'll walk.

Gross churn represents the total percentage of customers or revenue lost over a specific period, without considering any new acquisitions or expansions. It's a straightforward measure of losses. Net churn, on the other hand, factors in both customer losses and expansion revenue from existing customers. A negative net churn suggests that a business is growing its existing customer base even in the face of customer departures. It's a more comprehensive metric that reflects overall revenue dynamics.

For me, it’s all about the data. Analyse it and thoroughly understand it. It’ll mean that you’ll make more informed decisions when creating a customer-centric strategy.

In B2B, I'd prioritise reducing the lost customer rate above the acquisition rate. Acquisition can be affected by factors beyond your control - the economy, exchange rates for exports, logistics for components, etc. - but maintaining an existing business relationship is always worth extra effort.

I recommend working with the finance team on this one to ensure that there a no misses or different interpretations (i.e. is there a churn or downgrade of contract). The most important thing is to review your data and ensure that this has been recorded accurately to the data source that you are going to use to base your calculations on.

Additionally, it is important to have a simple and clear pricing structure because the more complicated it you make, the harder it becomes to track your different revenue buckets (i.e. new business, renewal, expansion) for the metrics discussed. I also claim that the simpler the pricing model, the easier it is to explain it to the customer and ensure that they understand what they are signing up for!