When it comes to building sustainable growth, understanding customer churn is essential. But churn is not just one metric; there are different types that tell different stories.
Two figures that often pop up in discussions around churn are net churn and gross churn.
They both reveal important information about customer retention and revenue flow, but they aren't interchangeable. Knowing which one to prioritize can help shape your growth strategy more effectively, keeping you focused on what matters most for scaling.
For many businesses, net churn and gross churn are the secret ingredients to understanding retention trends, identifying friction points, and deciding which customer segments require attention. However, each metric has distinct advantages and limitations. Let's explore what makes net churn and gross churn unique, how they align with growth objectives, and what they reveal about customer behavior.
Gross churn represents the total revenue lost from customers who cancel their subscriptions or services within a given period. It’s a blunt measure — all it tells you is how much revenue you’re losing from defections. Gross churn doesn’t factor in any revenue earned from expansion within the same customer base, so it gives a somewhat pessimistic view of retention. This metric is straightforward, which makes it easy to calculate and understand, but it lacks context.
Net churn, on the other hand, balances the revenue lost from cancellations against the revenue earned from customers who stay and spend more. Imagine a situation where a group of customers churns, but another set of existing customers upgrades or expands their usage. Net churn incorporates these offsets, showing a fuller picture of revenue trends by reflecting any upsell or cross-sell activity that may mitigate the loss.
Gross churn is a powerful, reality-check metric — it tells you directly how much revenue you lose purely due to customer exits. Here’s when focusing on gross churn becomes essential:
If you’re a young company, or if you’ve recently expanded into a new market, gross churn gives an honest view of retention issues. A high gross churn rate is a clear signal that customers aren’t sticking around, which means you may need to rethink your onboarding, product-market fit, or customer support.
If you operate a low-commitment subscription model (think monthly subscriptions that are easy to cancel), gross churn will help you measure immediate customer satisfaction. A rising gross churn rate might indicate that customers aren’t seeing value quickly enough, giving you an opportunity to optimize your service offerings or enhance the onboarding process.
For businesses where upselling or cross-selling isn’t feasible — such as certain fixed-capacity services or basic subscription models — gross churn becomes the metric to watch. In these scenarios, focusing on reducing gross churn (through better customer engagement, competitive pricing, or enhanced service quality) could have a direct impact on revenue stability.
Focusing on gross churn helps you gauge how many customers you’re able to retain in their original plans. This is valuable when revenue predictability and stability are priorities, and when upselling isn’t viable or common within your model. Gross churn forces you to address fundamental retention issues, which is vital for building a solid customer base.
In more established companies or those with flexible pricing structures, net churn often becomes more significant. Net churn acknowledges that customer relationships are fluid; they can deepen as customers find more value or adopt more products from your portfolio. Here’s when focusing on net churn can be more useful:
Mature Companies or High-Value Segments: For businesses with well-established customer bases, net churn helps capture the value derived from loyal customers who continue to invest more deeply in the service. For instance, an enterprise software company might see net churn improve as clients expand their usage or opt into additional features, even as some smaller clients churn.
Businesses With Strong Upsell and Cross-Sell Potential: For companies where customers tend to upgrade, net churn captures a more complete revenue picture. This applies to SaaS models that offer scalable plans or e-commerce platforms that thrive on cross-selling. If net churn is healthy, it implies that lost revenue is offset by engaged customers who are deepening their commitment.
Market Expansion and Enterprise Clients: In sectors with significant enterprise clients, net churn is often prioritized, as it demonstrates ongoing client investment and expansion. For instance, if a company lands a large enterprise client that later expands across departments or regions, net churn captures the positive impact of this growth.
Prioritizing net churn gives you a refined picture of revenue stability. It also helps identify where your greatest growth opportunities lie within your current customer base, letting you concentrate on customer success initiatives and tailored value-adds. High net retention also gives confidence to investors, who often value stable, predictable revenue over high customer turnover.
So how do you apply gross and net churn metrics to your growth strategy? Let’s break down the different ways each can shape decision-making.
Setting Customer Retention Goals: Gross churn is a raw measure of how well you retain your customer base. If your primary concern is keeping the largest number of customers in your ecosystem, gross churn should be your guide. It’s a straightforward metric that lets you track initiatives like onboarding improvements, customer support upgrades, and product refinements aimed at retaining customers.
Building Revenue Expansion Strategies: Net churn gives you insight into how well your upsell and cross-sell efforts are working. If you notice that gross churn is high but net churn is low, you might conclude that existing customers are investing more heavily, potentially offsetting losses from departing customers. This could inform a strategy to amplify account management, customer success programs, and expanded feature sets.
Tailoring Product Offerings: When gross churn is high, it may be time to examine the core product or service, as it might lack stickiness or consistent value for customers. But if net churn is high, the issue might be a lack of upgrade or expansion opportunities. In these cases, working with a tool like Rediem to gain feedback and insights directly from customers can highlight which features or services they value most, giving direction for product roadmaps.
Investor Relations and Valuation: Investors closely watch both gross and net churn as signals of a company’s long-term viability. High gross churn rates may suggest volatility and retention challenges, whereas strong net churn (especially if net churn is negative) signals that revenue is growing, even if some customers churn. A healthy net churn rate generally inspires investor confidence, as it suggests robust revenue generation from existing customers.
Ultimately, both gross churn and net churn are essential to understanding customer retention and revenue flow. But prioritizing one over the other can clarify and direct your growth strategy in meaningful ways.
If your business is still gaining traction or relies heavily on a steady influx of new customers, gross churn is likely the more pressing concern. It allows you to focus on retention fundamentals, ensuring your base is as solid as possible. In contrast, if your business model revolves around ongoing engagement with high-value clients or if your customers tend to deepen their relationship over time, net churn becomes the key metric, highlighting the revenue potential within your existing customer pool.
It's worth noting that some companies see success tracking both but with different departments responsible for each. For example, customer success teams might focus on reducing gross churn, while account management or sales teams concentrate on driving up net churn through renewals, upsells, and expansions.
As businesses scale, many adopt a hybrid approach that acknowledges the value of both metrics. Gross churn sheds light on immediate retention challenges, while net churn captures the financial benefits of customer loyalty and expansion. A balanced churn strategy involves keeping an eye on both metrics and adjusting tactics based on shifts in each one.
With Rediem, you can track both gross and net churn effectively, gaining the data insights necessary to drive customer loyalty and maximize revenue. By understanding which metric matters most for your specific growth stage and business model, you can craft strategies that keep customers engaged, reduce attrition, and open up paths for expansion.
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