A subscription business is said to be in a condition of negative churn when it can gain more income through growth than it is losing from Churned Monthly Recurring Revenue (MRR). It happens when a SaaS or subscription-based business’s income from growth from upselling and cross-selling outpaces the money it loses from churning customers and downgrading.
If SaaS businesses wish to endure over time, they must work to achieve net negative churn. For SaaS companies, churn is inevitable. You will still encounter churn even when your business has the finest client retention rates.
Your SaaS company’s objective shouldn’t be to eliminate churn since it is, to put it mildly, unfeasible. You must work hard to increase your income to the point where it outweighs the amount you lose through turnover. When it happens, negative churn occurs.
Negative churn calculation is done the same way the net Monthly Recurring Revenue (MRR) churn rate is calculated. A company has a negative churn when the net MRR churn rate equals below zero.
The proportion of revenue lost from a business’s commencement period over a certain time period is known as the gross churn rate. A comparable indicator is the net churn rate, but it also takes expansion revenue into account.
Starting with expansion MRR subtracted from churned MRR, one may get the net MRR churn rate for a given month. Value is multiplied by the MRR at the beginning of the month. Since we’re looking for a rate in percentage, the result is multiplied by a hundred.
Here, MRR churn includes all the subscription cancellations and downgrades, and expansion MRR includes all the subscription upgrades, cross-selling, and upselling.
The churned MRR and expansion MRR are the main variables that matter in this situation to achieve a negative churn rate. Only when the expansion MRR is higher in comparison to the churned MRR can a company have a negative MRR churn rate. Additionally, this shows that your company’s net revenue retention is positive.
The lack of revenue from new client additions is one of this metric’s key distinctions. As a result, businesses with net negative churn may increase their MRR from their current customer base to balance off their attrition.
The long-term health of a SaaS firm depends on reducing revenue churn. However, a net negative churn indicates the business can withstand a sudden decline in new customer acquisitions, like during a worldwide economic recession. In other words, the total revenues would increase even if it didn’t bring in any new clients.
The expansion MRR is subtracted from the churned MRR in the calculation for computing the net MRR churn rate, which is then divided by the MRR at the beginning of the month. After that, to get a rate in percentage, multiply by 100.
Let’s understand the calculations with an example.
Let’s say a SaaS company named GHI generated $1000 at the start of the month of July. By the time the month ended, it had lost $200 due to customers canceling the subscription or downgrading their membership. Regardless of the cancellations and downgrades, GHI was still able to earn an extra $600 from the remaining customers as some of them upgraded their membership.
Therefore, the MRR at the end of the month was = MRR at the beginning of the month – churned MRR + Expansion MRR.
Churned MRR is the revenue lost from downgrades and cancellations = $200
Expansion MRR is the revenue earned from upgrade = $600
Hence, the MRR at the month end = $((1000 – 200) + 600) = $1400
Now, to calculate the negative churn rate, we use the formula:
Net Churn Rate (in percentage) = (Churned MRR – Expansion MRR) / MRR at the beginning of the month x 100
=(200 – 600) / 1000 X 100
= -400/1000 x 100
= – 40%
This means that company GHI is able to overcome the churn MRR with the expansion MRR from the same set of customers in the month of July with a negative churn rate of 40%. Reduced revenue churn is only one of several elements that go into reaching negative churn. On the other hand, an effective customer success program might have an impact on expansion revenue by pushing for upgrades, upsells, cross-sells, and add-ons.