Net Negative Churn

Net Negative Churn in SaaS Industry

The gross churn rate is the percentage of a company’s beginning of period (BoP) revenue lost across a specified period.

The net churn rate is a similar metric, with the distinction of also including expansion revenue.

• Churned Revenue → Cancellations, Downgrades
• Expansion Revenue → Upselling, Cross-Selling, Upgrades

In certain scenarios, the net churn rate can become negative, in what is referred to as “net negative churn”.

• Positive Net Churn Rate → If the churned MRR exceeds the expansion MRR (i.e. upselling, cross-selling), the churn rate is positive.
• Negative Net Churn Rate → On the other hand, if the expansion MRR exceeds the churned revenue, the net churn rate turns negative, i.e. the expansion MRR offsets the lost churned MRR.

One important distinction of this metric is the absence of revenue from new customer acquisitions.

Therefore, companies with net negative churn are able to grow their recurring revenue (and offset their churn) from their existing customer base.

The reduction of revenue churn is critical for the long-term viability of a SaaS company, but a net negative churn implies the company is capable of weathering a sharp drop-off in new customer acquisitions, such as during a global economic slowdown.

In order words, even if the company were to acquire zero new customers, its revenue would continue growing.

Net Negative Churn Formula

The formula for calculating the net churn rate subtracts churned revenue from expansion revenue and then divides it by the BoP revenue.

Most often, the monthly recurring revenue (MRR) is used for SaaS companies rather than the GAAP revenue.

Net Churn Rate Formula

• Net Churn Rate = (Churned MRR – Expansion MRR) / MRR BoP

For instance, let’s say a company generated $1,000 in MRR at the beginning of the month.

By the end of the month, the company lost $200 in MRR from customer cancellations and downgrades.

However, if the company obtained $600 MRR from existing customers upgrading their accounts, the MRR at the end of the month is $1,400.

• MRR, EoP = $1,000 MRR, BoP – $200 Churned MRR + $600 Expansion MRR

Net Negative Churn Calculator – Excel Template

We’ll now move to a modeling exercise, which you can access by filling out the form below.

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Net Negative Churn Example Calculation

Suppose a SaaS company had $1 million in MRR at the beginning of the 1st period.

In Period 1, the churned MRR was $50,000 and the expansion MRR was $100,000.

• Churned MRR (Period 1) = $50,000
• Expansion MRR (Period 1) = $100,000

The roll-forward for MRR is as follows.

Monthly Recurring Revenue (MRR) Formula

• MRR, EoP = MRR, BoP – Churned MRR + Expansion MRR

For the churned and expansion MRR, we’ll use the following step function to increase (or decrease) the amounts for each period.

• Churned MRR Step = –$4,000
• Expansion MRR Step = +$10,000

From Period 1 to Period 2, the MRR, EoP values are shown below.

• Period 1 = $1.05 million
• Period 2 = $1.11 million
• Period 3 = $1.17 million
• Period 4 = $1.24 million

To calculate the net churn rate – which we can assume will be negative considering how expansion MRR clearly outweighs the churned MRR in all periods – we’ll subtract the churned MRR from expansion MRR and then divide by the MRR, BoP.

The net negative churn for our model is listed below.

• Period 1 = –5.0%
• Period 2 = –5.3%
• Period 3 = –5.6%
• Period 4 = –5.8%

Our hypothetical company’s MRR grew from $1.05 million in Period 1 to $1.24 million in Period 4, which is attributable to how its expansion MRR offset and surpassed its churned MRR.