MRR Churn is the amount of monthly recurring revenue lost due to customer cancellations, delinquent charges, and downgrades. This is a fundamental metric in SaaS business as it gives users an accurate indication of how much increase or decrease in revenue can be expected from existing customers.
MRR Churn is calculated against MRR to obtain a percentage known as the MRR Churn rate. Mathematically, MRR churn rate is an extension of the SaaS customer churn rate calculated by substituting MRR in place of the number of customers. If you have 50 customers with an MRR base of $2M, and 10 customers cancel a total of $200, 000 during the year, then your MRR churn rate for that year is 10%. It’s important for SaaS businesses to track MRR churn in real-time to allow for creating better products, improve marketing strategy, and grow their business. To stay competitive in the SaaS industry, you must understand and known how to track MRR churn for purposes of reducing churn and increasing revenue.
GROSS MRR CHURN RATE VS NET MRR CHURN RATE
Gross MRR churn rate is the percentage of recurring revenue lost due to customer cancellations, delinquent charges, and downgrades. It can be expressed as a monthly rate or an annual rate.
HOW TO CALCULATE GROSS MRR CHURN RATE
Sum (canceled MRR +delinquents charges + downgraded MRR) / (Total MRR at the beginning of the month).
For example, if the total MRR churned in a particular month was $200,000, and the total MRR is $1M, then the gross MRR churn rate is 20%. Net MRR churn rate is the percentage change in MRR due to customer cancellations, delinquent charges, and downgrades.
A negative net MRR churn rate occurs when the amount gained from expansions exceeds the recurring revenue lost. A negative net MRR churn rate indicates positive growth, while a positive net MRR churn rate means your revenue is shrinking faster than expanding.
HOW TO CALCULATE NET MRR CHURN RATE
Net MRR churn rate = [(Contraction MRR –Expansion MRR during a period) / (MRR at the beginning of the period)]*100. For example, if your business has a MRR of $100,000 and $10,000 worth of cancellations and downgrades and expansions worth $ $5,000. The business’s net MRR churn rate would be 5%.
($10,000 -$5000)/ $100,000 X 100 =5%.
HOW CAN YOU IMPROVE CHURN?
Every business that wants to thrive in the competitive SaaS environment must devise ways to reduce MRR churn. Some of the best ways to reduce MRR churn include:
ADJUST YOUR PRICING
Customers churn out simply because a business’s pricing doesn’t align with the value offered. SaaS businesses can reduce churn by aligning their products to the value a product/service provides for customers.
INCREASE ACTIVE USERS
A lot of cancellations come from inactive users. When you send an invoice to an inactive user, they are more likely to cancel.
RESCUE THE SAVEABLE ONES
You can also reduce MRR churn by implementing a delinquent credit card dunning system and running churn loss surveys.
Overall, MRR churn rate is a reflection of the health of your SaaS startup. This is why it’s essential to automate your MRR churn tracking system for better efficiency.
Be sure to check out our ultimate churn guide!