Revenue Ceiling Calculation

If you run a business with recurring revenue, you probably understand the importance of churn. Known as the “silent killer”, churn is a measure of how many of your existing customers leave in a given time period. So if you start February with 50 customers, and 2 of those leave, that’s 4% monthly churn (or 48% annual churn).

We’ve all been advised to keep our churn as low as possible, because it’s very expensive and obviously makes it more difficult to grow. I’ve internalized this, and have been watching churn carefully at our property management company for many years.

What I failed to recognize was that churn, plus 2 other key metrics, literally defines a revenue ceiling for your business. The issue is that since churn scales with the size of your company (in other words, your churn may remain at a constant 4% monthly, but the actual number of customers that represents increases as your company gets larger). It follows naturally that unless you add more and more customers per month, your business will approach a size limit where you’re losing as many customers per month as you’re adding. And customer growth does NOT scale linearly with company size the way churn does, at least not in my experience. You don’t get more customers for free as you get larger unless you have a super-viral startup or something. But you DO lose more customers “for free” as you get larger.

To find your company’s revenue ceiling:

• Take your average customer monthly revenue (eg. $600).

• Divide that number by your monthly churn (eg. 3%).

• This gives your CLV (customer lifetime value) in this example, $20,000.

• Now multiply that by the number of new customers you’re adding per month (eg 10).

• $20,000 x 10 = $200,000. This is your maximum monthly revenue possible.

• Multiply by 12 to get your annual max revenue, 2.4M in this example.

Unless you change your churn, customer monthly revenue, or new customers per month, your business will quickly and then slowly approach this revenue ceiling.

This “ceiling” actually works both ways. If you do a tuck-in and buy a book of business from a competitor to leapfrog over this limit, but your metrics remain the same, your revenue will slowly shrink down to the revenue ceiling!

I was introduced to this idea by Alex Hormozi in this video.