Churn Rate Assumptions for Recurring Offerings
Q: Does your model account for “subscriber churn” with a SaaS model or other recurring revenue business models?
A: Yes, you are able to model churn for each individual offering (a critical and necessary capability as various offerings will often have different customer behaviors). For recurring revenue sales models, enter a Renewal Rate that you expect to renew at the end of the contract life. In the example below, if you sold 100 customers in a particular month, you would retain those 100 customers for 12 months and then lose 20 to churn and retain 80 and the same thing would happen at the 25th month, you would churn 20%, or 16 and retain 66, etc.
Each year you would see the churn diminish your customer base that was sold for a given period, just like in a typical business context. If you entered a contract life of 24 months, then your first amount of churn would hit the 25th month at the end of the initial contract period. These assumptions and the model’s calculations layer on top of each other as your sales ramp for each offering, based upon each offerings churn rate and contract length - thus creating a waterfall effect of growth and churn over time. The Sales report will show Total Subscribers at the Beginning of the Period, the New Subscribers added during the period, churn rates in the form of Lost Subscribers, and the Total Subscribers at the End of the Period for each offering as shown below:
The actual Churn Rate as a percentage of all subscribers on board any given month may look deceptively low, but because the initial contract length assumption was 24 months, the Churn Rate is showing the 20% losses of the Month 1 customers in Month 25 at a point when many other subscribers have been added in Months 2 - 24 at an increasing rate: