Performances Churn and NRR vs Accounting Churn

Lyne

Hello GGR community,

Seeking some guidance here as a new CS ops manager.

I joined my current company a few months ago but soon got to understand there is a misalignment between how our finance team views and calculate churn and NRR vs how local operational teams do.

Basically, our customers are subscribing to annual contracts with different payment terms ( annual, semi-annual, quarterly and few cases of monthly payments), and any upsell/ cross-sell comes in the form of individual opportunities with their own start and end date.

Which means that a customer could have his main contract with and effective start date in January and an upsell opportunity/invoice with an effective start date in March.

We do not have consolidated start dates at the moment.

Now, the way I used to track churn performances was: Churn from contract w/ effective start date current month / Renewal Base with effective start date current month 

However, in this current scenario, I have been advised to take two stances: 

1. Keep the same logic as above to calculate churn

2. Calculate local teams and individual contributor NRR by dividing any churn happening in month X / Month X renewal base.

Meaning not taking into account the effective start date of the churned contracts here. 

I am not sure if any of the above makes sense to be honest, or if I should l calculate it differently since mapping each account with all of his invoices monthly or quarterly would represent colossal work. 

On the other end, our Finance team calculates churn by looking at all invoices issued in Month X and how many haven’t been paid, which I don’t think is of any use for our operational teams.

But I may be wrong.

I would appreciate learning from your experience and/or getting your feedback on this.

Thanks !

Ed Powers

@Lyne, the conventional way to measure churn is full of errors. For example, numerators are blended, denominators vary in each period, and samples sizes are too small, so errors are at least 10x greater than any difference you measure. The income statement approach may be fine for tracking long-term trends, but it should never be used to make operational decisions in the short-term.

Instead, use a statistical control chart. It measures churn at a specific point in time (churn rate usually isn't constant) and it fixes sample sizes, which reduces errors substantially. You then apply statistical tests to the plot, allowing you to accurately detect even small shifts in performance over time.

Control charts have been widely used in manufacturing for almost 100 years. The math is the same, however, whether we're talking about defective products or defecting customers. You typically use a p-chart for logo or product churn and an XmR (Individuals) or X-bar, R (Average and Range) chart for revenue.

If you're interested in learning more about control charts, we cover them in I teach a course called Data Driven Decision-Making for Customer Success with SuccessCOACHING and I have a self-paced on Udemy. I'm happy to talk you through it 1:1, too. Just contact me.

Ed