The gross MRR Churn rate is the percentage decrease in monthly recurring revenue from existing subscriptions due to causes such as subscriptions being switched from paid plans to lower or free plans, cancellations, add-ons, and other services being removed from subscriptions. Gross MRR churn is always more significant than net MRR churn by definition. This is because Gross MRR churn only considers MRR lost, whereas Net MRR churn also considers MRR gained.
The churn rate is crucial for businesses whose customers make recurring payments, such as SaaS or other subscription-based companies. No matter how much money you make each month, you’re in trouble if your average customer stays with you long enough for you to recover your average customer acquisition cost (CAC).
Gross churn allows you to quickly analyse the number of subscriptions lost each month to identify why you’re losing income or consumers. Correlations between gross churn and corporate operations can be examined to see what causes changes in the churn rate. You can find customer demographics with the highest average customer lifetime value by measuring gross turnover for distinct customer cohorts, such as subscription type or geographical area (LTV).
A decent SaaS churn rate is generally between 5-7% annual churn, depending on whether it is measured by customer or revenue. The churn rate is commonly expressed as a rate (%) rather than a fixed amount so that it can be understood and applied to any business, regardless of additional circumstances.
For SaaS churn rates, there is no widely accepted industry average or standard. It varies by business, end user (e.g., consumer vs. B2B/enterprise vs. small enterprises), pricing strategies (including potential for upsells or expansion income), contract term, and so on (e.g., monthly vs. annual contracts).
The inverse of this metric is Gross MRR Retention Rate which focuses on the revenue retained from month to month.
Let’s dig a little deeper into revenue churn and its types. You can calculate revenue churn in two different ways:
Gross basis: This is known as Gross MRR churn since it only considers MRR lost (rather than MRR gained) from existing customers. Remember that you lose MRR from existing customers through both churn and downgrades.
Net basis: Net MRR churn, since you net the MRR gained and lost from your existing subscriber base. Net MRR churn provides a complete picture of the health of your existing customer base. So you lose MRR through attrition and downgrades but earn MRR through expansion and reactivation.
The Gross MRR Churn Rate is computed by adding up all cancelled contracts for the month (MRR churn) and dividing it by the total MRR at the start of the month. Then, to convert it to a percentage, multiply this figure by 100.
MRR decline can be attributed to downgrades or cancellations. If this number is excessive, a business should examine the cause of the cancellations. It could be voluntary churn, in which unsatisfied consumers terminate their subscription owing to a lack of perceived value, or involuntary churn, in which the customer’s credit card expires, resulting in the cancellation of the contract.
To deal with involuntary churn, keep track of credit card expiry dates and alert clients ahead of time. Sound billing management systems include this capability by default. Setting up a successful dunning process – gentle, timely reminders for payment – is another strategy to combat involuntary churn.
Unlike Net MRR Churn Rate, which considers expansion, downgrades, and cancellations, Gross MRR Churn solely considers downgrades and cancellations.
Gross MRR Churn Rate is an important KPI for subscription-based businesses because a high churn rate will eventually outnumber growth as customers grow. High churn rates indicate fundamental product-market fit issues, buyer remorse, or a more competitive environment.
Divide the total MRR churn (for the month) by the total MRR to calculate the Gross MRR Churn Rate (at the beginning of the month).
If a company’s total MRR is $50,000 and customers cancel $4,000 worth of contracts, Gross MRR Churn would be 8% for that month: ($4,000 / $50,000) X 100 = 8%