Running a SaaS company and offering a free trial or demo of your software to your potential customers? You’re probably tracking how many customers who sign up for these trials become your company’s paid subscribers. But I bet you’re wondering if you’re losing a good amount of money every month when your regular subscribers unsubscribe or downgrade without you being completely aware of it?
When you’re operating in the SaaS business landscape, all of these wonderings and realities are all too common. What sets you up for success though is how often you let these cancellations and downgrades impact your business’s bottom line. That’s where tracking your Monthly Recurring Revenue (MRR) churn, one of the most important SaaS metrics, comes into the picture.
So, what exactly is MRR churn, and why should you care about it as a SaaS business? Read along to find your answers as well as ways to calculate and reduce it.
First up, what is MRR churn?
Starting with the basics, MRR churn, or Monthly Recurring Revenue churn, simply measures the monthly decline in your business’s revenue due to customers canceling or downgrading their subscriptions. It’s a crucial metric for any subscription-based business, as it helps you understand how much revenue you’re losing each month and how hard you should work on customer retention measures. This is especially important when research shows that just increasing your customer retention by 5% can boost your profits by 25% to 95%.
For instance, if your total MRR is $50,000 and you lose $2,000 due to cancellations, your MRR churn is $2,000. That’s a lot of profits lost there!
Having understood the core, let’s now proceed to why it’s so important for you to track your MRR churn.
Importance of MRR churn for SaaS businesses
Understanding MRR churn is vital for making strategic decisions in your SaaS company. Here are three key reasons why it’s one of the most important SaaS metrics:
1. MRR churn determines the ideal pricing for your subscriptions
MRR churn helps you assess whether your pricing strategy is effective. If you’re experiencing high churn, it might indicate that your prices are too high or too low for your customer base. For example, if you notice that customers consistently cancel their subscription after a free trial, it could be a sign that your pricing isn’t competitive enough.
2. MRR churn helps you balance customer acquisition vs. retention
MRR churn informs how much you should invest in acquiring new customers versus retaining existing customers. If your churn rate is high, you might need to focus more on customer retention strategies to prevent losing revenue. For instance, if your churn rate is 5%, you might allocate more resources to customer support and engagement to reduce this number.
3. MRR churn impacts revenue and growth potential
MRR churn directly affects your company’s revenue and growth potential. A high churn rate can significantly limit your ability to grow, as you’re constantly losing revenue from existing customers. On the other hand, a low churn rate means you can focus on expanding your customer base and increasing revenue through upselling and cross-selling. For instance, if you achieve a negative churn rate, where expansion revenue exceeds lost revenue, you can grow your business even without acquiring new customers.
As you grasp the importance of MRR churn, the next step is to understand how to calculate it effectively..
Learn how to create the perfect SaaS customer journey.
How to calculate MRR churn rate for your SaaS business?
Calculating MRR churn involves two main formulas: Net MRR Churn Rate and Gross MRR Churn Rate.
Net MRR churn rate formula
To measure the total percentage of monthly recurring revenue (MRR) lost due to customers canceling subscriptions or downgrading, you need to calculate the Net MRR churn rate. This metric also accounts for any revenue gained from existing customers through upgrades or expansion. In essence, the Net MRR Churn Rate considers both the MRR lost and any expansion revenue from existing customers. The formula is:
Net MRR Churn Rate = (Churned MRR − Expansion MRR) / Total MRR at month’s start × 100
Here’s what each of these components means:
- Churned MRR is the revenue your business lost due to customer cancellations or downgrades;
- Expansion MRR is the additional revenue your business got from existing customers through upgrades or expansions;
- Total MRR at the month’s start is the total recurring revenue of your company at the beginning of the month.
Example: Imagine you’re running a SaaS company and start the month with a total MRR of 60,000 US dollars. During the month, if you bear losses worth 2,500 USD in MRR due to cancellations but gain 950 USD in expansion revenue from existing customers, your net MRR churn rate would be:
Net MRR Churn Rate = ($2,500−$950) / $60,000 x 100 = 2.583% ≅ 2.6%
In simple words, this formula can help you understand how effectively your SaaS business is retaining revenue from your customer base, taking into account both losses and gains.
Gross MRR churn rate formula
The Gross MRR Churn Rate only considers the revenue lost due to cancellations and downgrades, without accounting for expansion revenue. The formula is:
Gross MRR Churn Rate = Churned MRR / Total MRR at the start of the month × 100
Example: With the same numbers as above, your gross MRR churn rate would be:
Gross MRR churn rate = ($2,500 / $60,000) x 100 = 4.16%
Now that you know how to calculate MRR churn, the next question is: what’s an acceptable rate, and how can you reduce it?
What’s an acceptable MRR churn rate and how to reduce yours?
An acceptable MRR churn rate varies, but generally, a rate below 1% is considered good. For many SaaS companies, a churn rate between 5% and 7% annually is normal. To reduce your MRR churn rate, consider these strategies:
Work on expanding your active user base
Focus on engaging your existing customers to increase retention. Offer value-added services or features that encourage users to stay and expand their subscriptions. For example, if you have a customer support tool, offering premium features like advanced analytics or priority support can encourage users to upgrade their plans.
Have a clear credit card dunning system
Implement robust credit cards dunning systems to handle failed payments efficiently, reducing involuntary churn. This involves sending timely reminders and notifications to customers about payment failures, ensuring they can update their payment details promptly.
Fix your pricing
Regularly review your pricing strategy to ensure it aligns with customer expectations and perceived value. High churn rates might indicate that your pricing is too high or too low, affecting customer retention. Conduct surveys or gather feedback to understand what your customers are willing to pay for your services.
Track and monitor MRR churn regularly
Use analytics tools to track MRR churn regularly, allowing you to identify trends and make timely adjustments. This helps you stay on top of any changes in customer behavior and adjust your strategies accordingly.
By implementing these strategies, you can effectively manage your MRR churn and improve your overall business performance.
Find out how to automate revenue recognition for subscription-based businesses.
Closing thoughts
In short, MRR churn is a critical metric for SaaS businesses, impacting revenue and growth potential. By understanding and managing MRR churn effectively, you can optimize your customer retention strategies and improve your bottom line.
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