MRR churn
What is MRR Churn? Formula, Benchmarks, and Importance in SaaS
What you'll learn in this article
What is MRR churn?
Monthly recurring revenue (MRR) churn is a measure of a company's total MRR losses over a set period of time. MRR churn is calculated by adding up all recurring revenue losses due to customer churn and subtracting any revenue gains due to upgrades, cross-sells, and new customer acquisition. Though "monthly" is right there in the metric's name, companies can use the same formula to calculate annual recurring revenue (ARR) churn as well. Whichever time period you choose, MRR churn is an important metric to track, providing insights into customer retention and serving as a benchmark that you can compare to the average revenue KPIs of other companies in your industry.
As with all SaaS metrics, there is neither a firm nor well-established method for the calculation of MRR Churn. It can be an absolute number, such as $3,500 of MRR churned, or a relative churn rate, like 4%.
MRR churn isn’t typically calculated using true GAAP reportable revenue, but rather a number representative of the recurring revenue attributed to a subscription, MRR. There are many ways to calculate MRR, and those in of themselves will not usually lead to significant variance in the core MRR numbers. However, there can be significant variance in the MRR churn number due to the inclusion or exclusion of upgrades/up-sells and downgrades/down-sizing (what we respectively call “expansion” and “contraction”). This is especially true for businesses using the “land and expand” model, where up-selling is a critical component of the overall business growth strategy.
Importance of MRR churn in SaaS
Many would argue that contraction should be included in an MRR churn calculation. Some would also argue that if you are going to include contraction, then it is only fair to also include expansion. Still, others would argue neither expansion nor contraction should be included.
There are no rules, so you need to define and communicate how you measure MRR churn, and stick with it.
Consistent reporting ensures your C-level and board constituents understand the formulae and rules well enough to have a well-informed opinion. Additionally, the process of defining the rules helps you define the underlying strategic uses for MRR churn, such as determining the ideal pricing for your subscriptions or how much you should invest in new customer acquisition vs customer retention/reactivation. Finally defining and documenting all the SaaS metrics you use to manage and measure company performance, you avoid confusion that often comes from personal biases and interpretations stemming from a lack of industry standards.
MRR churn rate formula
MRR churn rate is defined as the rate at which monthly recurring revenue is lost due to customer churn during a given period (typically from the start of the month to the end of the month). Unlike MRR churn (which is expressed as a dollar value), MRR churn rate is expressed as a percentage.
MRR Churn Rate: Churn MRR / Start of Period MRR
Using this formula to calculate MRR churn rate allows for standardized comparisons across different time periods or businesses regardless of MRR scale. MRR churn rate is also useful for forecasting and planning, making it easier for companies to analyze trends and better predict projections such as customer acquisition targets or the number of customers who are likely to cancel their subscription over a given time period.
Gross MRR churn formula
Gross MRR churn is the sum of MRR lost from both canceled subscriptions and downgrades (contraction). This metric tells you the amount of revenue lost since the beginning of the month (or another time period) due to lost customers without taking into account any recurring revenue you might have gained over the same period.
Similarly, the Gross MRR churn rate is the rate at which MRR is lost from both canceled subscriptions and contraction.
Some SaaS industry experts consider these metrics a more “honest” look at the health of the business because gross MRR churn doesn’t “sugarcoat” the numbers by including expansion MRR, likenet MRR churn rate calculations do.
“Lots of churn definitions out there. It all boils down to a low gross MRR churn indicating if a business is healthy. Net MRR can be ‘improved’ by expansion, but if the gross MRR churn is above 1-2%, there seems to be an issue with the product or the ROI story.” - Alexander Bruehl, Founder of SaaS Garage
Low gross MRR churn helps indicate a healthy business and is one of the metrics potential investors pay the most attention to.
“The quickest way to build your SaaS company valuation is to keep current customers paying for 50+ months (2% or less gross monthly churn) and drive expansion revenue from the current customer base (negative net monthly churn),” advises Nathan Latka, CEO of Founderpath.
Determining an acceptable MRR churn rate
So how do you avoid a high churn rate in your own SaaS company, and what should your goal be for a healthy churn rate?
Retention best practices state that gross MRR churn should remain below 2%. However, your own metric should be as low as possible. For example, your customer churn rate is too high if you ended the year with a lot of new customers but approximately the same amount of revenue. Ideally, your MRR churn will be low enough that your company has a negative churn, meaning that you've generated more recurring revenue than you've lost over a given period.
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