Net MRR Churn Rate
What is Net MRR Churn Rate?
Another common SaaS metric, Net Monthly Recurring Revenue (MRR) Churn Rate is the measure of lost revenue month over month (due to cancellations and account downgrades) after factoring in any revenue from existing customers (i.e. upgrades / expansion). It shows revenue churn minus expansion. This is in contrast to Gross MRR Churn Rate that estimates the total loss to the company not including expansion.
Advice from VCs: Why Net MRR Churn Rate is critical
“MRR churn sucks the blood out of your business. That’s why I think that SaaS companies should work very hard to get MRR churn down, as close to zero as possible, or even better achieve negative MRR churn.” - Christoph Janz, co-founder and managing partner at Point Nine Angel VC
How to calculate Net MRR Churn Rate:
[ ($) MRR Churn
($) Expansion MRR ]
($) Total MRR at the start of the Month
(%) Net MRR Churn Rate
Net MRR Churn Rate is calculated by first subtracting expansion MRR from churn MRR. (Remember that churn includes both cancellations and account downgrades or ‘contractions.’) Then divide the result by the total MRR at the start of the month and multiply by 100 to convert to a percentage. For example, if a company’s total MRR for the month is $50,000 with churn of $2000 and account expansion of $800, the net MRR churn rate would be 2.4% for that month.
($2000 - $800) / $50,000 X 100 = 2.4%
It’s possible to end up with a Net Negative MRR Churn Rate. This happens when the expansion MRR for the month exceeds the churn MRR (including cancellations and downgrades). Continuing with our example above, if the total MRR is $50,000 but churn is $1500 and expansion is $2000, then the net (negative) MRR churn rate would be -1%.
Net MRR Churn Rate can also be calculated on a cohort basis instead of monthly. The formula is quite similar to monthly version - simply change the figures to reflect the duration of the cohort, not a single month. See the adapted calculation below.
[ ($) Churn MRR from cohort
($) Expansion MRR from cohort ]
($) Total Cohort MRR
(%) Net MRR Churn Rate for Cohort
Tracking the Net MRR Churn Rate is essential for understanding the health of a SaaS business since it’s one of the most significant hindrances to growth. By factoring in expansion MRR, net churn focuses on sustainability - can the business keep growing with this churn rate? Ideally, companies should aim for zero or even a negative churn rate to optimize the impact of new MRR.
Companies that achieve net negative churn rate can actually grow even if they don’t add any new MRR (this isn’t recommended, but shows the power of negative churn).
In general, churn is a reflection of targeting the right customers and making the product more and more valuable. Net MRR Churn Rate can hide useful information if tracked exclusively since it combines unhappy customers (those who cancel) and happy customers (those who upgrade or expand their account). This information can be parsed out by tracking Expansion MRR and Gross MRR Churn Rate.
Relevant SaaS Metrics and KPIs:
If you’re adding Net MRR Churn Rate to your SaaS dashboard, you might want to also consider tracking these related SaaS metrics for context.
Benchmarks for churn rate vary significantly depending on company stage (SMB, Mid-Market, or Enterprise). There’s also quite a bit of ambiguity around benchmarks for gross vs net churn and customer vs revenue churn. Many of the available benchmarks focus on customer churn instead of revenue churn, but the range for each company segment can still be helpful.
“The maximum viable churn for a company depends on the company’s runway and the rate at which the startup can grow accounts through up-sell and cross-sell. It goes without saying that less churn is always better, but estimating an upper-bound for churn can be helpful for financial modeling and internal prioritization of customer success efforts.” - Tom Tunguz, Partner at Redpoint Ventures
Learn more about Negative Churn here or here. For a more thorough look at churn rate benchmarks, read this post. Or to learn more about cohort analysis, check out this free template.