SaaS churn, net revenue retention, and CAC payback

Customer churn is the share of customers who cancel in a period. Revenue churn is the share of recurring revenue lost from cancellations and downgrades. They can tell different stories. If small customers cancel and large ones stay, customer churn looks high while revenue churn is modest.

Calculate both. Customer churn is customers lost divided by customers at the start. Revenue churn is lost recurring revenue divided by recurring revenue at the start.

Net revenue retention compares today's recurring revenue from last year's customers with what those same customers paid a year ago. It includes expansion and subtracts contraction and churn. Gross revenue retention excludes expansion, so it cannot exceed 100 percent.

Say a cohort paid $500,000 in recurring revenue a year ago. Over the year, $40,000 cancelled, $25,000 downgraded, and $90,000 of upgrades came in. The cohort now pays $525,000. Net revenue retention is 105 percent. Gross revenue retention is $435,000 divided by $500,000, or 87 percent.

Track them separately from churn. A downgrade is a warning that a customer is getting less value. An upgrade shows a product that grows with its customers. A business with high expansion can retain more revenue than it loses even with some churn.

CAC payback estimates how many months of a customer's gross profit it takes to recover the cost of winning them. Divide acquisition cost by monthly gross profit per customer. A $3,000 acquisition cost with $250 a month of gross profit pays back in 12 months.

Use gross profit, not revenue, and include all sales and marketing cost. Segment the number by channel and by customer size, since an average can hide a profitable channel and a losing one.

Strong retention with a long payback means growth needs funding. Short payback with weak retention means growth leaks. Look at all three before deciding where to put the next dollar.