MRR Churn

What is MRR Churn?

MRR churn measures the amount of monthly recurring revenue (MRR) a subscription business loses in a given month due to customer cancellations or downgrades. Along with the customer churn rate (which measures logo retention), it gives companies a glimpse into the current health of their customer base.

The two types of MRR churn are gross MRR churn and net MRR churn.

  • Gross MRR churn measures the total amount of revenue lost in a given month due to customer cancellations or downgrades. It’s always a positive number or percentage from 0% to 100%.
  • Net MRR churn takes into account new revenue generated from upgrades and additional subscriptions. Since expansion MRR can offset churned MRR, net MRR churn can potentially be a negative number or percentage lower than 0%

The MRR churn rate is a particularly useful SaaS metric because it provides a clearer view of churn in relation to the company’s overall revenue. It’s entirely possible for a business to have relatively low customer churn, but high MRR churn due to their highest-value customers downgrading or canceling their subscription plans.

This context makes it more actionable for strategic decisions than customer churn alone.

Synonyms

Impact of MRR Churn on SaaS Companies

A SaaS company’s MRR churn reflects the erosion (or growth) of its recurring revenue base, which significantly impacts its growth and sustainability. High churn rates indicate underlying issues with product-market fit, customer satisfaction, or retention strategies. On the other hand, low or net negative churn rates indicate a stable and growing subscriber base.

Knowing the revenue churn rate helps finance teams with financial forecasting, budgeting, and strategic planning. They can also compare churned customers to their customer lifetime value (CLV) and acquisition costs to determine whether their customer base is profitable for the business.

Sales teams use MRR churn to understand customer behavior and the potential profitability of customers in their pipeline. It also tells them how many new deals they have to close (and at what average deal size) to achieve a particular level of revenue growth.

The metric also provides valuable insights into customer satisfaction and usage patterns for product teams. It helps them identify where customers struggle and where they find value in the product, leading to possible improvements or feature changes.

It’s also worth mentioning that in SaaS, specifically, measuring your net revenue churn rate is crucial because investors always look for a negative churn rate. It means the business can continue growing without new customer acquisition. Net negative churn is the one thing successful SaaS IPOs — including Datadog, Slack, Snowflake, Twilio, and Zoom — all have in common.

MRR Churn Calculation

MRR churn can be calculated either as an absolute dollar amount or as a percentage rate. How exactly you calculate it, however, will depend on whether you want to know your gross or net MRR churn.

MRR Churn as an Absolute Dollar Amount

To express churned MRR as a dollar amount, all you have to do is add up all the revenue you’ve lost from downgrades and cancellations in a given month.

Gross MRR Churn = MRR from Cancellations + MRR from Downgrades

  1. Start by finding all customers who have either canceled their subscriptions or downgraded to a lower-priced plan during the month.
  2. For each cancellation or downgrade, calculate the monthly recurring revenue the business will no longer receive from these customers.
  3. Add them all up to get the total MRR churn in dollar terms.

Suppose you have three customers who either canceled or downgraded:

  • Customer A cancels a $100/month subscription.
  • Customer B downgrades from a $200/month to a $150/month subscription.
  • Customer C cancels a $50/month subscription.

The total MRR churn would be:

$100 (from A) + $50 (200 – 150 from B) + $50 (from C) = $200 MRR churned

Calculating Gross MRR Churn Rate

Your gross MRR churn rate is the percentage of monthly recurring revenue lost due to customer cancellations and downgrades, without offsetting these losses with any gains from new or upgrading customers.

To calculate gross MRR churn as a percentage, you’ll need to know your starting MRR for the month under consideration. This figure will include all active customers’ subscriptions before any changes in subscription status. From there, use the steps above to calculate your gross MRR churn in dollar terms.

Then, use the following formula:

Gross MRR Churn Rate = (Gross MRR Churn / Start of Period MRR) × 100

Let’s say your starting MRR for the month is $10,000, and you calculate a gross MRR churn of $200:

Gross MRR Churn Rate = ($200 / $10,000) × 100 = 2%

In this scenario, 2% of your starting MRR was lost due to customer cancellations and downgrades during the month.

Calculating Net MRR Churn Rate

Net MRR churn takes into account new revenue generated from customer upgrades and expansion, such as adding additional users to their plan or subscribing to a higher-priced plan. As a result, it can potentially be negative or greater than 100% if expansion revenue offsets contraction MRR (from downgrades) and churned MRR (from cancellations).

To calculate your net MRR churn rate, first use the following formula to calculate your net MRR churn:

Net MRR Churn = (MRR Churn from Cancellations + MRR from Downgrades) – (MRR from Upgrades + MRR from Expansion)

Then, use this formula to calculate the net MRR churn rate as a percentage:

Net MRR Churn Rate = (Net MRR Churn / Start of Period MRR) × 100

Suppose your starting MRR for the month is $100,000, and you have:

  • $10,000 churned from cancellations
  • $5,000 downgraded
  • $20,000 upgraded to a higher-priced plan
  • $15,000 in additional revenue from expansion (e.g., adding more users to plans)

Your net MRR churn would be:

Net MRR Churn = (10,000 + 5,000) – (20,000 + 15,000) = $-20,000

And your net MRR churn rate would be:

($-20,000 / $100,000) × 100 = -20%

In this case, you have a negative net churn rate of -20%, meaning you’re growing revenue within your existing subscriber base at a rate of 20%, accounting for churned customers and irrespective of new customer acquisition.

Calculating the dollar value or percentage rate of MRR churn is something that’s easily done in your subscription management platform. In most cases, the system does it for you automatically.

Gross MRR Churn vs. Net MRR Churn

As mentioned above:

  • Gross MRR churn measures the percentage of monthly recurring revenue lost from cancellations and downgrades.
  • Net MRR churn measures whether you were able to offset losses from cancellations and downgrades with upgrades or expansion.

So, which of these customer metrics should you care about more? The answer depends on your business’s specific goals and priorities.

If you’re primarily focused on customer retention, then net MRR churn is the key metric to track. If you want to know the true impact of customer churn on revenue, or you’re focusing on maximizing your subscription revenue through upselling and expanding your accounts, then gross MRR churn is the metric you’re looking for.

Benefits of Reducing MRR Churn

High acquisition costs and low customer lifetime value drain a business’s resources quickly. That’s why reducing your MRR churn directly translates to higher revenue and profitability. In SaaS, specifically, retaining a customer is between 5x and 7x more profitable than acquiring a new one.

By reducing MRR churn, you can:

  • Increase CLV. When churn rates decrease, customers stay longer with the company, thereby increasing the total amount of revenue generated from each customer over their lifetime.
  • Improve customer acquisition efficiency. With fewer customers leaving, businesses need to spend less on marketing and sales efforts to replace lost customers.
  • Boost customer satisfaction. Efforts to reduce churn involve making existing customers happier with the product or service and helping them achieve ongoing value with it.
  • Grow your brand reputation. Engaged customers who find value in your products will advocate for and promote your brand, leading to more referrals, positive word-of-mouth, and a better reputation.
  • Stabilize your revenue streams. Predictability is the #1 benefit of the recurring revenue model. With lower MRR churn, businesses have ultimate revenue predictability from one month to the next (i.e., for forecasting and planning).

How to Reduce MRR Churn

For subscription businesses, making calculated efforts to reduce MRR and ARR churn is crucial to improving sustainability and profitability.

Here are seven actionable strategies for getting that number as close to zero (or in the negatives) as possible:

  • Improve the onboarding experience and time to value. A strong customer onboarding process significantly reduces churn by helping customers quickly see the value in your product. Personalizing the onboarding experience to match user needs and providing interactive in-app walkthroughs ensures they properly engage with the product from the outset​.
  • Make customer-driven product improvements. Regularly updating and improving your product based on user feedback and behavior keeps your service relevant and valuable to customers, thereby reducing the likelihood of churn. This includes fixing bugs, upgrading features, and ensuring the product meets the evolving needs of your users​.
  • Proactively engage with your customers. Monitoring user behavior, like feature usage and login frequency, allows you to engage customers who may not be fully utilizing the product or who are at risk of churning. You might send them educational content, personalized emails, or reminders and in-app pop-ups about features that they are not using but could find valuable​.
  • Create customer feedback loops. Implementing regular feedback mechanisms throughout the customer journey helps understand your subscribers’ needs and address their issues before they consider leaving. Surveys, NPS scores, and direct feedback channels like site portals and in-app forms work well for this.
  • Personalize communication with every customer. Customize emails, create offers based on user behavior, and support that is responsive to individual customer queries and needs​.
  • Celebrate customer milestones. Acknowledging key points in the customer journey (e.g., onboarding completion, their anniversary) makes them more engaged with your product (and humanizes your brand). This could be as simple as sending congratulatory messages for completing onboarding steps or inviting them to use new features​.
  • Create and distribute supportive content. Providing customers with useful and authoritative content like how-to guides, webinars, business hacks, and tutorials related to your product or industry can help in increasing their engagement and dependency on your product, while also creating additional value for them​.

People Also Ask

What’s a good MRR churn rate?

A good MRR churn rate is less than 5% per month. In this area, you’re generally able to acquire new customers much faster than you’re losing existing ones, translating to a growing subscriber base and recurring revenue.

How often should I calculate MRR churn?

MRR churn is typically calculated on a monthly basis. This regular calculation allows businesses to keep a close eye on revenue fluctuations and quickly identify negative trends or improvements in their revenue streams from month to month.

For businesses that experience significant seasonal variations or have a rapidly changing customer base, it might be beneficial to calculate MRR churn even more frequently, such as weekly, to get a more immediate understanding of the impacts of any changes or interventions.

What is the difference between MRR churn and customer churn?

MRR churn focuses specifically on the revenue aspect. It measures the amount of recurring revenue lost due to customer cancellations or downgrades over a specific period. Customer churn measures the number of customers or accounts lost during a specific period, regardless of the revenue size of those accounts.

Customer churn is expressed as a percentage and helps businesses understand how well they retain customers. It does not take into account the revenue size of each customer, so losing a small customer counts the same as losing a large one.