Churn, the enemy of any Saas business, the opposite of retention. It is a silent business killer. But is churn always a bad thing? Well, there are cases where negative Net churn, churn’s much friendlier sister metric, is synonymous with business validation. If you want positive growth, you need negative churn.
Net negative churn, or negative churn, is known as the holy grail of SaaS.
What is churn? A quick overview
In order for us to understand net negative churn we need to define what churn is and how we calculate the metric. In this post we already talked about it, Churn Rate in Saas: How to measure and identify it?
Churn is an indicator that shows the quality and health of your existing subscriber base. In short, churn is the rate at which customers or revenue abandon your SaaS business.
We can distinguish churn in two ways:
- Customer churn: measures the rate at which customers abandon your SaaS business.
- Revenue churn: measures the rate at which revenue leaves your SaaS business.
- Customer churn rate = (churned customers) / (customers at the start of the period).
- Gross Monthly Recurring Revenue (MRR) Churn Rate = (churn + MRR shrinkage) / (MRR at start of period)
- Net MRR Churn Rate = (churn + MRR contraction) – (MRR expansion + MRR reactivation) / (MRR at the beginning of the period)
Understanding churn is fundamental to discussing negative net churn. If you wish, you can learn more about the basics and benchmarks of churn in our blog.
What is negative Net Churn?
In short, negative churn is the only type of churn you want.
Negative net Monthly Recurring Revenue (MRR) churn exists when the MRRs gained from existing customers through expansion and reactivation exceed the MRRs lost through churn and contraction. Simply put: the customers you keep bring in more money than those who leave bring out.
Net Churn MRR = (Churn + Shrinkage MRR) – (Expansion and Reactivation MRR) / (MRR at the beginning of the period)
A quick example: let’s say a subscription SaaS company charges $10 per month per user seat. With 200 customers, your MRR is $2,000. If 50 customers unsubscribe, you lose $500. But 20 customers add 3 seats, which is $600 more revenue. Following the formula above:
($500 – $600) / $2,000 = -0.05% net monthly recurring revenue Churn.
In this example, despite having a loss of 50 customers, there is a gain of $100 in revenue from expansion of existing customers.
Compare your Churn metrics with other Saas
You may be wondering where you stand, in terms of Churn, among your SaaS competitors?
In our recent SaaS benchmark report we analysed data from over 2,100 SaaS companies to gain insight into key metrics, including churn rate. Here are two based on ARR and ARPA of SaaS companies.
How negative Churn is synonymous with retention and therefore growth
There is no one-size-fits-all solution: Churn is inevitable. Negative Churn is about delivering an amazing experience to the customers the product is made for.
When Churn is negative, existing customers generate more money each month. If you look at a cohort report, you should see that the value of cohorts increases over time, regardless of the Churn within that cohort.
La ampliación de los ingresos cuesta menos que la adquisición de nuevos logotipos. Esta es una buena noticia para tu ratio LTV:CAC, el periodo de amortización del CAC y, por supuesto, el LTV. He aquí algunas ventajas más:
Your company is growing its revenue base, even with some customer churn.
Our analysis showed that 40% of companies with an ARR between $15m and $30m had negative churn.
Your company is achieving retention and revenue growth with existing customers, which translates into longer customer lifecycles, lower churn and greater revenue stability.
Increasing customer lifetime value (LTV)
Satisfied and loyal customers who continue to use and expand the use of your SaaS product, thus bringing in more revenue over its lifetime.
Reducing churn and expanding the existing customer base can be more cost-effective, as it minimises the need for large-scale campaigns and customer acquisition.
Positive market perception
Your company’s reputation in the marketplace is enhanced, which attracts potential investors, retains existing customers, reduces revenue churn and serves as a competitive advantage.
How to achieve a negative Net Income Churn
Reducing customer churn
It may be obvious, but that does not mean that reducing churn is a simple task. The reasons for churn can be hard to find and complex. This includes UX/UI, product adoption tactics, pricing and even things as fundamental as the core product and features. If you want to achieve a negative net churn, there is no debate: reducing churn is crucial.
Facilitating revenue expansion in your pricing model
How can your company achieve negative Churn? The only sustainable way to achieve a negative Churn rate is to create a pricing model that contains an expansion loop.
Pricing structures that expand with the customer are one way to move towards a negative churn rate. There are many ways to do this, some examples are the use of pricing tiers by revenue/sales, bandwidth/data usage, number of servers or number of employees.
Upgrate and Crossell
You need to make sure that your existing customers get the most out of your product. This means upgrades (that make sense to them) and seat expansion. All of this will tie into your pricing strategy, what additional features will come with which pricing tiers, how many seats in a package, etc. Driving the expansion of monthly recurring revenue from existing customers increases your chances of reaching a negative net churn rate.
If you haven’t already done so, take proactive customer success seriously. Having a team dedicated to serving your customers is crucial. The customer service team is in charge of maintaining relationships and making sure customers achieve their goals with the product. By being attentive to product usage, they will be able to tailor up-sells that really make sense for customers.