Negative Churn: A Reminder
Net-negative revenue churn happens when the positive impact of account expansions outweigh the negative impact of account cancellations and downgrades. For example, you might start the year with 100 customers all paying $10 per month ($1,000 MRR total). 10 cancel during the course of the year, but of the 90 remaining, 20 upgrade to a higher plan at $20 per month. The change to this cohort of 100 customers is therefore a net increase of 10% in MRR over the year, despite the lost accounts.
However, if you’re trying to understand your churn and reduce it, then focusing too hard on net revenue churn could be a little dangerous. Net churn merges together two somewhat unrelated metrics:
- Lost revenue from (probably unhappy) cancelling customers
- Gained revenue from (probably happy) customers upgrading
Introducing Gross MRR Churn Rate
In most cases (at least internally) it makes much more sense to focus on gross revenue churn (or Gross MRR churn rate). This gives you a more realistic picture of how much revenue you are losing without sugar-coating the numbers. That’s why we recently split out Gross MRR churn rate from Net MRR churn rate in the ChartMogul app.
The Gross MRR churn rate number will always be higher then the Net number, and by definition can’t be a negative value. Another trick, to help paint the ugliest possible picture of churn for your internal KPIs is to recognize churn at the time when customers cancel and not at the end of their paid-up billing periods. This will make your churn cohort analyses much more meaningful, in terms of understanding customer behaviour.
Now to backtrack a bit; if you do have net-negative revenue churn you will want to take this into consideration, particularly when planning what to spend on acquiring a customer and making cash flow projections. E.g. if $1 of MRR today is going to be worth $1.10 in 12 months then this changes what you will be willing to spend to acquire a $1 of new MRR.
Finally, if you are fundraising, having a negative churn rate helps create a great story to potential investors. But for trying to understand and reduce churn I recommend focussing on the gross number and not the net.