by Kate Harvey
Churn: the archenemy of SaaS. Before you can understand the impact churn has on growth and ways to reduce it, you need to understand the the different types of churn and how they affect your subscription business.
All churn isn’t created equal, so in today’s post we’re breaking down the different types of SaaS churn metrics, including:
- Subscriber churn
- MRR (Monthly Recurring Revenue) churn
- Gross MRR churn
- Net MRR churn
Let’s dive right in…
Subscriber Churn Rate
Subscriber Churn Rate is the rate at which your subscribers are cancelling their subscriptions.
Calculation: Subscriber Churn Count / Start of Period Subscriber Count
Example: If you had 200 subscribers at the start of the period and 10 subscribers churned during that period, the Subscriber Churn Rate would equal 5%.
Close.io CEO Steli Efti explains why Subscriber Churn Rate is particularly valuable to early-stage startups: “Just because customer churn is simple doesn’t mean it’s not useful. It’s probably the only measurement a startup needs to address retention in its infancy.”
For larger, established SaaS companies the Subscriber Churn Rate ties in to customer satisfaction and helps you determine other important metrics. Dividing 1 by the Subscriber Churn Rate can help you calculate the average customer lifetime: 1 / 0.05 = 20
In the calculation above, dividing 1 by our Subscriber Churn Rate of 5% indicates the average customer lifetime for that business is 20 months.
Subscriber Churn Rate is also used for forecasting.
When used in forecasting, SaaS [subscriber] churn can be interpreted as the probability rate at which customers will cancel their subscriptions.
While Subscriber Churn Rate is a good operational metric, MRR Churn Rate is a vital financial metric.
MRR Churn Rate
This is the rate at which MRR is lost from canceled subscriptions of your existing paying customer base (excluding new business).
Calculation: Churn MRR / Start of Period MRR
In comparison with the Subscriber Churn Rate, the MRR Churn Rate is a financial metric which shows the impact of churn on revenue for your SaaS company.
If you charge per user or have different pricing tiers, revenue churn lets you put a dollar amount on what churn is actually costing you, and at what velocity. Revenue churn can be drastically different than customer churn, and will often tell a completely different story.
The MRR Churn Rate also helps you identify which customer cohorts are churning.
Through his work with SaaS companies, Tomasz Tunguz has observed SMB’s churn at a much higher rate than larger and enterprise business customers. He created the table below to illustrate his observations on churn rate by customer segment:
“SMB customers tend to go out of business more frequently than bigger businesses. They switch products more regularly because switching costs are low,” explains Tunguz.
For your own SaaS, you’ll also want to analyze MRR Churn Rate to see if lower MRR customers are churning or if you’re losing high MRR customers, which will have a bigger impact on your revenue.
MRR Churn Rate “can also help you understand if those losses are manageable, especially when you compare it to the MRR associated with new customers you are bringing on each period. As you move forward and your business begins to grow, it can even help you forecast future revenue performance,” writes Sandhya Nakhasi.
It is important to track MRR Churn Rate early on in your SaaS company’s lifecycle. It may be tempting to focus on new MRR growth in the beginning but MRR can be steadily growing at the same time MRR Churn Rate is high (or increasing).
Think of MRR Churn Rate “as a sort of early-warning system for your SaaS business. By tracking your MRR Churn early on, you can identify problems that may not show up right away if you’re just tracking MRR, giving you time to pivot before your company goes bust,” advises Nakhasi.
Gross MRR Churn
Gross MRR Churn is the sum of MRR lost from both canceled subscriptions and downgrades (contraction).
Calculation: Churn MRR + Contraction MRR
Similarly, the Gross MRR Churn Rate is the rate at which MRR is lost from both canceled subscriptions and contraction.
Calculation: (Churn MRR + Contraction MRR) / Start of Period MRR
Some SaaS industry experts consider these metrics a more “honest” look at the health of the business because Gross MRR Churn metrics don’t “sugarcoat” the numbers by including expansion MRR (which is included in Net MRR Churn, below).
Lots of churn definitions out there. It all boils down to a low Gross MRR Churn indicates if a business is healthy. Net MRR can be ‘improved’ by expansion, but if the Gross MRR Churn is above 1-2% there seems to be an issue with the product or the ROI story.
Low Gross MRR Churn helps indicate a healthy business and it is one of the metrics potential investors pay attention to.
“The quickest way to build your SaaS company valuation is to keep current customers paying for 50+ months (means 2% or less gross monthly churn) and drive expansion revenue from current customer base (negative net monthly churn),” advises Nathan Latka, CEO of The Top Inbox.
How do you determine the acceptable Gross MRR Churn for your own SaaS company? While Bruehl advised the metric should remain below 2%, Lincoln Murphy emphasizes your own metric should be as low as possible. He gives the following example: your Gross MRR Churn Rate is too high if you ended the year with a lot of new subscribers but approximately the same amount of revenue.
Net MRR Churn
Net MRR Churn is the sum of MRR lost from canceled subscriptions and contraction plus MRR gained from expansion (upgrades) and reactivation (cancelled accounts that come back).
Calculation: (Churn MRR + Contraction MRR) + (Expansion MRR + Reactivation MRR).
Another important metric is Net MRR Churn Rate, which is the rate at which MRR is lost (or gained) from canceled subscriptions and contraction plus MRR gained from expansion and reactivation.
Calculation: Net MRR Churn / Start of Period MRR
“Not only does net churn more accurately portray your revenue churn, but it’s important to your company’s overall strategy,” says Efti.
Net MRR Churn metrics combine both unhappy (churn/contraction) and happy subscribers (expansion/reactivation). These metrics give you the full picture so you can see how you’re succeeding and failing.
Because Net MRR Churn metrics include “cross-sells, up-sells, organic growth within a customer account, and price increases” they’re important as broader metrics “which tell the story of what would happen to a SaaS business over time if it did not acquire any new customers,” according to Todd Gardner, founder of SaaS Capital.
It is important to note Net MRR Churn Rate is the only churn rate metric that can be negative because it is calculated using Net MRR Churn.
“Negative churn indicates the value of your existing customer base is growing without factoring in any new business,” explains our own Adam Feber, Marketing Director at Chargify.
Tunguz has a great post on negative churn (definitely worth the read), and he gives the following example of a company which has achieved 5% negative churn:
The company may lose “5% of its customer base each month, but the remaining 95% of the customers grow their spend with the startup by 10 percentage points, so the total revenue from the cohort is equal to 105% of the revenue from the previous month. Like a savings account, each month, every cohort becomes more valuable.”
The holy grail in a SaaS business is reaching net negative revenue churn. Negative monthly revenue churn signals a SaaS company that has mastered making customers happy and ultimately selling them on new products and services.
Even if you’ve achieved negative churn or a low net churn, there is always room for improvement “because gross churn can be a more accurate measurement of how your SaaS tool and customer success team is working,” reminds Jesse Pärnänen, Business Development & Partnerships Manager at Leadfeeder.
If left unchecked, churn can truly be a SaaS killer. Understanding your churn metrics is the first step to reducing churn at your own SaaS.
Here are some great resources to help you decrease churn:
- 16 Tips to Reduce SaaS Churn from Industry Leaders
- The 10 Reasons SaaS Customers Churn (and How to Combat Them)
- How To Win Back Cancelled Customers Before They Churn
We’re thrilled to have recently released Subscriber & Churn Analytics, giving all Chargify merchants crystal clear insights into the health of their customer base and all of the churn metrics described in this post. You can schedule a demo to learn more or signup for a free Chargify account to try it out for yourself.