What is Churn? How Can It Be Negative? And What’s a Good Monthly Churn Rate?
Churn gets a lot of bad press. Yes, it is complex. Yes, it is confusing. But as a metric, it is helpful.
In the early stages of building a company, churn gives you quick feedback which other metrics seldom do. You can run tests on your platform, and then see feedback within the next few days or months. Boom!
In this post, we go deep into churn. First, we answer a few key questions such as what is churn? What are its different types? And how can it be negative?
Then, we dive into churn benchmarks. We analyze anonymized and aggregated data from ChartMogul to answer the question: What is a good churn rate?
So without any further ado, let’s dive in.
What Is Churn?
Churn is a health indicator of your existing subscriber base. In simple terms, churn is the rate at which customers or revenue is leaving your SaaS business.
At a high level, you can look at churn in two ways:
- Customer churn — measures the rate at which customers are leaving your SaaS business
- Revenue churn — measures the rate at which revenue is leaving your SaaS business
Why Look at Customer and Revenue Churn Separately?
Depending on the revenue concentration, customer churn can be different from revenue churn. Hence, it’s good to look at both numbers.
For example, imagine you’re running a SaaS business with three customers: A, B, & C. Their monthly recurring revenue (MRR) is $20, $30 & $50 respectively (for a total MRR of $100).
Now, one day, C decides to cancel their subscription and churn. In this example, if you calculate your customer churn rate for the month, it comes out to be 33% (as 1 of 3 customers churned). But, if you calculate your revenue churn rate, it comes out to be 50%. This is because C made up 50% of your MRR.
Revenue Churn and Its Two Types
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 called Gross MRR churn because it only takes into account the MRR lost (and not MRR gained) from your existing customers. As a reminder, you lose MRR from your existing customers via both churn and downgrades.
- Net basis — called Net MRR churn because you net the MRR lost and gained from your existing subscriber base. So you lose MRR via churn and downgrades but also gain MRR via expansion and reactivation. Net MRR churn gives you a more holistic picture of the state of your existing subscriber base.
Here’s how you calculate your gross & net MRR churn rate:
- Gross MRR Churn Rate = (SUM of Churn & Contraction MRR) / (MRR at start of period)
- Net MRR Churn Rate = (SUM of Churn & Contraction MRR – SUM of Expansion & Reactivation MRR) / (MRR at start of period)
How Can Churn Be Negative?
So, if you spend a little more time thinking about the churn formulas, you can infer two things:
- By definition, Gross MRR churn would always be higher than Net MRR Churn. This is because Gross MRR churn only takes into account the MRR lost, while Net MRR churn also takes into account MRR gained.
- Net MRR churn can be negative. If the MRR gained from existing customers (Expansion + Reactivation) exceeds the MRR lost (Churn + Contraction), your net MRR churn rate will be negative.
changes. At higher ARPA you start to sell to businesses rather than to consumers. Also, generally, customers make a more informed decision when buying a higher priced product and hence churn less.
In addition to the median, the chart below also shows the 25th and 75th percentiles of the gross MRR churn rate. You can use this data to benchmark your churn rate in comparison to your peers.
SaaS startups with ARPA <$100 should target a monthly gross MRR churn rate of <3.5% while those with ARPA >$100 should target a monthly gross MRR churn rate of <2.5%.
As a reminder, ARPA is the average revenue per account, i.e. average MRR across all your customers. It’s also known as ARPU or APRC. You can find your ARPA in ChartMogul.
The chart below shows the median monthly gross MRR churn rate by ARPA bands. As you’ll notice, the higher the ARPA, the lower the gross MRR churn rate.
For example, companies with ARPA per month in the range of $0-10, have a monthly gross MRR churn rate of 8.9%. As ARPA increases, the gross MRR churn rate decreases. It goes down to 2.5% for companies with an ARPA per month of >$500.
Why does the gross MRR churn rate decrease as ARPA increases? Because the customer profile changes. At higher ARPA you start to sell to businesses rather than to consumers. Also, generally, customers make a more informed decision when buying a higher priced product and hence churn less.
- Understanding and Benchmarking Your MRR Movements
- What Is a Good Customer Churn Rate?
- What Is a Good Monthly Growth Rate for SaaS Startups?
This article first appeared on TechCrunch.