What is Net Negative Churn and A Guide To Achieve It
SaaS metrics are an essential part of SaaS marketing because they are indicators of your business’s success, showing you your strengths and weaknesses. In general, a negative metric is not good news, but a net negative churn is actually an amazing accomplishment. Before getting into details, I want to clarify two types of churn to give you an idea of what I am talking about:
Customer churn: The rate of customers you are losing in a given period of time due to cancellations and passive churn
Revenue churn: The rate of MRR (monthly recurring revenue) you are losing as a result of downgrades and churned customers
Tracking and analyzing churn rate should be very important for you because it can help you identify why you are losing your customers and revenue. Without these metrics, you cannot assess your weaknesses and propose solutions to improve.
It is also important to understand the difference between two churns because while we can talk about net negative churn with revenue churn, we cannot talk about it with customer churn. Therefore, net negative churn actually an indicator of revenue churn (MRR churn).
A great way to analyze why you are losing customers is using churn surveys. Try our completely free survey tool today!
What is Net Negative Churn?
Net negative churn is achieved when the revenue gained from your existing customers exceeds the revenue you lost because of cancellations and downgrades. In other words, your existing customers purchase service (upgrades, new features, etc.), which exceeds the total amount you lose from churned customers (downgrades, cancellations, etc.).
The important thing about net negative churn is it only includes existing customers, meaning when you are calculating it you are not allowed to add revenue from new customers.
This distinction is the reason why net negative churn is considered one of the greatest accomplishments: your existing customers benefit from your service, they invest in your business, and the amount they are investing is enough to compensate for what you lose to churn. This indicates that even without gaining new customers, your business can survive solely based on existing customers.
Net negative churn also shows you that your business provides something that no other competitor can provide your customers with. Therefore, your existing customers choose to stay and buy service from you, ensuring your growth even without new customer acquisition.
How to Calculate Net Churn?
To find net negative churn, first, we need to calculate net churn, which is called the MRR churn.
MRR churn = Total Revenue Lost Due to Cancellations + Total Revenue Lost Due to Delinquent Accounts by the end of the month
It is easy to understand the total revenue lost due to cancellations; however, the total revenue lost due to delinquent accounts may confuse you. It is actually the MRR lost due to payment errors, which are mostly caused by credit cards on file.
For MRR churn, you may also include downgrades. However, this can cause some calculation errors, resulting in an unclear big picture of your churn.
To get net churn (net MRR churn), we’re going to simply subtract MRR gained from expansion, which includes revenue from upsells and cross-sells.
Net Churn = Churned MRR – Expansion MRR
How to achieve Net Negative Churn?
Net churn depends on two different inputs as the formula above shows: Churned MRR and Expansion MRR.
Therefore, to achieve a net negative churn, you must either increase expansion MRR through upsells, cross-sells, and add-ons or decrease churned MRR. If you can both increase expansion MRR and decrease churned MRR, that would be wonderful because it is almost impossible to achieve net negative churn without increasing MRR from your existing customers even though your churned MRR is low. To do that you must focus on customer expansion, which focuses on three different categories.
Upsells in simple words are upgrades. They are the additional features that you offer for your customers for a higher-end product or service. These are more expensive than your base product; therefore, you need to offer your customers tools and features that they cannot refuse.
By providing a better service, you can encourage more expensive purchases, which contributes to your expansion MRR. In this way, without expending time and money to acquire new customers, you can gain revenue from your existing customers.
For example, a higher plan with a dedicated customer success manager or a higher limit could be great reasons for upselling.
Cross-sells are sometimes confused with upsells because they both offer something extra to the base product. However, cross-sells are not upgrades. They are the completely different services or platforms that you offer from your base product.
For example, if your business provides a web analytics tool (like HockeyStack – base product) and also offers to sell another completely different service than the web analytics tool, such as our survey tool, this is called cross-sells. Cross-sells can create greater value when used with the base product; however, they are not necessarily needed to use the base product. By offering your customers a product that they cannot refuse and which is also beneficial to the base product, you can generate higher MRR and contribute to the net negative churn.
Add-ons are another example of customer expansion. Add-ons are literally the additions you make to your existing price plans with a corresponding price. For example, on some CRM platforms, you need to pay an additional cost if you want to add an additional user to your plan. Even though the original plan price stays the same (no upgrades), you buy additional features (add-ons), which slowly but surely increases your expansion MRR.
Reducing churn is also as important as customer expansion because if you lose less MRR each month, you don’t need to expend additional time, effort, and money to compensate that loss through customer expansion.
To reduce churn, it is important to know the reason why your customers are canceling or downgrading. If you can get to the bottom of the solution, it would be easier for you to propose solutions and fix those problems.
Other Important SaaS Revenue Metrics To Track
Net MRR churn and net churn rate are important SaaS sales metrics that help you understand the relationship between you and your existing customers and to boost your customer expansion. However, they are not enough to give the whole picture about your business. Additionally, you need to track other customer retention metrics and revenue metrics such as ACV and ARR to both increase your expansion MRR and decrease your churned MRR.
Retention rate is the percentage of customers you preserve (retain) over a given period amount of time. In other words, it is the rate at which you keep your existing customers and prevent them to choose your competitors. Because retention rate is a feedback metric, meaning it shows you the places you can improve, it is an important metric to track. By analyzing the retention rate over time, you can understand how and why your customers are choosing to stay with you or to leave your service.
Retention Rate = Number of Active Users that Continue Their Subscription / Total Number of Active Users at Beginning of the Time Period
The average revenue per unit (ARPU) or average revenue per user is the measure of revenue that is generated per account or user. It can give you a general idea about how much many on average your customers are spending on your service. ARPU can enhance the way you are understanding your business’s revenue generation capability and growth per-unit level. ARPU can be calculated monthly or annually depending on your needs and preferences.
ARPU = Total Revenue Generated During the Standard Time Period / Total Number of Users
Customer Life Time Value (LTV) is another important SaaS sales metrics, which shows you the total amount of revenue a user will generate before they churn (cancellations). This can be especially helpful for you to understand which types of users are generating the biggest amount of revenue and why they are they are generating the biggest amount of revenue. By tracking LTV, you can focus on how to both attract these types of users and keep existing users. Tracking LTV can also help you to decrease the churn from channels with the highest LTV, maximizing your revenue to its fullest potential.
LTV = ARPU / Revenue or Customer Churn
A SaaS Analytics Tool To Track Everything: HockeyStack
HockeyStack can help you to track analyze the metrics that I have mentioned and provide insight into your business, saving you time, money, and energy.
HockeyStack is an end-to-end analytics tool for SaaS companies. It unifies marketing, revenue, sales, and product data into one dashboard with no code so that you can understand what really drives revenue at your SaaS. It’s completely no code, and it doesn’t require any setup.
HockeyStack offers these features with no code:
- Step-by-step user journey
- Custom dashboards
- Funnels and goals
- Revenue analytics
HockeyStack has a free forever plan and 3 paid plans. Paid plans have a 14-day trial with a 30-day refund guarantee.
You can check out the pricing page here.
- Salesforce (coming soon)
- Zapier (coming soon)
HockeyStack Pros and Cons
I might be biased, but this is an objective evaluation of HockeyStack’s pros and cons 🙂
The unique benefit of HockeyStack is its ability to unify your marketing, revenue, sales, and product data using no code. This allows you to uncover unique insights that you wouldn’t be able to by using multiple tools as they cause you to have fragmented data.
- You can integrate with Stripe, Paddle, and Hubspot and build every single dashboard that you can think of, using all sales, marketing, revenue, and product metrics.
- You can create funnels, goals, and surveys, which are rare to get with other tools on this list.
- You don’t need any developers, tracking is cookieless, and the script is small, so it doesn’t increase your site loading time.
HockeyStack generally lacks reporting features as it’s not focused on agencies and other reporting-based businesses.
- HockeyStack doesn’t have weekly e-mail reports
- The tool lacks some integrations, such as Salesforce, Mailchimp, and Zapier (which are on the roadmap).
It is crucial for businesses to track and analyze product management metrics to understand how well their platforms and/or services are doing and to take data-driven actions.
Net negative churn is one of these metrics that shows you that the revenue you are generating from your existing customers compensates and even exceeds the revenue you are losing from your leaving customers. This is especially an important metric to track because it can answer the question of “can your business solely survive without acquiring new customers?”
Net negative churn also indicates that even though the additional services you are providing (upsells, cross-sells, and add-ons) additionally costs your customers, they cannot give up on your services, meaning that you are creating a value that they cannot refuse.
Average churn rate changes from 2% to 10% according to the service you are providing and your popularity in the market. You can consider the values closer to the lower end as good churn rates and to the higher end as bad churn rates since they indicate a lot of your users are choosing to cancel their subscriptions.
Net revenue churn is the rate at which you lose revenue. The loss in revenue might be caused by several different factors such as bankruptcies, cancellations, etc.
Churn shows you the number of customers who choose to cancel their subscriptions. Because your customers are key to your growth and success, it is very important to keep an eye on your churn. By tracking metrics that help you to analyze churn, you can find the reasons behind why your customers are leaving, propose data-driven solutions, and strategize stronger marketing plans.