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Written by Sam Kawtharani
on October 17, 2017

As a SaaS startup, assessing the health of your business involves tracking and calculating overwhelming numbers, statistics and metrics. In this series on key SaaS metrics, our team walks you through the most common and helpful metrics to successfully grow your SaaS startup.

 

When running a SaaS startup, analyzing the health of your business involves more than looking at your revenue and gross margins. Understanding where your revenue is growing and shrinking is crucial for scaling your startup. This is accomplished through a common SaaS metric, Monthly Recurring Revenue (MRR) Churn Rate. In this post, we will cover everything you need to know in order to understand and calculate gross and net MRR churn.

 

What is Net and Gross MRR Churn Rate?

The Net MRR Churn Rate measures the lost revenue month over month due to cancelled contracts and account downgrades after factoring in any additional revenue from upgrades or service expansions from your existing customers. It shows the revenue churn minus expansion, allowing you to get a clear picture of what revenue changes you can expect from your current customer base.

In contrast, the Gross MRR Churn Rate measures the total monthly revenue lost from contracts and downgrades. The Gross MRR Churn Rate allows you to estimate the total loss to the company excluding expansion.

 

How to Calculate Gross MRR Churn Rate?

Gross MRR Churn Rate is calculated by summing the amount of all cancelled contracts; the MRR churn, and dividing it by your MRR at the beginning of the month. Then multiply by 100 to convert to a percentage. For example, if a company’s total MRR is $50,000 and customers cancel $4,000 worth of contracts (the churn), the gross MRR churn would be 8% for that month:

($4,000 / $50,000) X 100 = 8%

 

How to Calculate Net MRR Churn Rate?

Net MRR Churn rate is calculated by first subtracting expansion MRR (i.e. revenue gained from upgrades or service expansions) from churn MRR. Take that number and divide it by your MRR at the beginning of the month. Then multiply it by 100 to convert to a percentage.

Let’s consider the same example from above with an opening MRR of $50,000 and $4,000 worth of contract cancellations and downgrades. However, the company had two customers upgrade to a premium plan, resulting in an additional $2,000 in MRR. The company’s net MRR churn rate would be 4% for that month:

($4,000 - $2,000) / $50,000 X 100 =  4%

 

So what happens if your expansion MRR exceeds the churn MRR? This will result in what we call a Net Negative MRR Churn Rate. Continuing with the example above, if everything else stayed the same but churn drops to $1,000, then the net (negative) MRR churn rate would be -2%.

 

Why Track Gross and Net MRR Churn Rate?

The gross MRR churn rate gives you an overview of lost revenue from your existing customers. On the other hand, the net MRR churn rate is essential for understanding the health of your SaaS startup as it’s one of the most significant obstacles to growth. By factoring in expansion MRR, net churn gives you a snapshot view of growth – can your business sustain itself and keep growing with this churn rate? Ideally, SaaS companies aim for a zero or even a negative churn rate to take advantage of new MRR.

 

At the end of the day, churn is a reflection of your product market fit and targeting the right customers. While Net MRR Churn Rate is a good number to measure, it can hide useful information if tracked exclusively as it combines unhappy and happy customers.

 

Both net and gross MRR churn rates are important, and both tell different stories. This why it’s essential to track expansion MRR and gross MRR churn rate along with your net churn.

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