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What is Net Negative Churn?
Net negative churn refers to a scenario where a company’s revenue from existing customers is growing at a faster rate than it’s losing revenue from customer churn and downgrades. In simpler terms, it means expansion revenue is enough to offset the total value of customer churn. When a company achieves net negative churn, its net revenue retention is above 100%.
There are a few ways to achieve net negative churn:
- Upselling or cross-selling to existing customers
- Retaining satisfied customers who increase their spending as they grow their business
- Developing new features to sell as add-ons
- Increasing prices for existing customers
- Reducing customer churn rate (while also doing the above)
Although net negative churn essentially means a company’s current customers are upgrading and expanding enough to compensate for lost revenue, it doesn’t mean customer attrition isn’t a concern. It’s still an issue if the company fails to acquire new customers or if the expansion rate slows down. Plus, high turnover within the customer base almost always indicates a poor customer/product experience or lack of product-market fit, which harms long-term growth.
- Customer retention
- Negative subscriber churn
- Negative MRR churn
- Negative churn rate
- Net churn rate
Importance of Measuring Net Negative Churn in SaaS
It’s worth mentioning that not every company can achieve net negative churn. So, the ability to measure it at all means a company is already ahead of the game (or, at the very least, keeping customers satisfied with its product).
But why is measuring net negative churn so crucial in the SaaS industry?
- It’s a strong indicator of customer satisfaction and loyalty.
- It shows the success of upselling and cross-selling strategies.
- It highlights product-market fit.
- It’s a predecessor to scalability.
Revenue retention is one of the main metrics SaaS investors look at because it highlights the overall health of a software company’s subscriber base. In fact, most successful companies have achieved net negative churn.
Here’s a look at some of the most successful SaaS IPOs and their net revenue retention rate:
- Datadog — 146%
- Fastly — 130%
- Okta — 119%
- PagerDuty — 139%
- Slack — 143%
- Snowflake — 158%
- Twilio — 155%
- Zoom — 140%
SaaS businesses have scalability built into their business model. Recurring revenue is their main source of income, so they don’t constantly need to chase new customers for every additional dollar in revenue.
The flip side to that is they’re nothing without customer retention. From a buyer’s perspective, SaaS subscriptions are higher-cost and longer-term commitments. So, a company’s inability to retain its customers means it will eventually run out of customers to sell to.
Calculating Net Negative Churn
Net negative churn is fairly straightforward to determine. You just have to know is your MRR (monthly recurring revenue) at the beginning and end of a certain period. Of course, you’ll also have to know where it came from (i.e., your current subscription base vs. new customer acquisition).
Churned Monthly Recurring Revenue
Churned MRR is the sum of MRR lost from downgrades and customer churn during a specific period. It represents the monetary value of your customer churn rate.
Expansion MRR is the sum of MRR gained from upsells, cross-sells, seat expansion, and price increases within your current customer base during your specified period.
MRR at the Beginning of the Period
You can find your MRR at the beginning of the period on your sales dashboard or in your accounting software. This is the total value of your recurring subscriptions before churn/expansion. It’s what you’ll compare your MRR at the end of the period to.
Net Negative Churn Formula
Toi calculate your revenue growth from churn, you’ll use the same formula you would for net revenue churn rate. Whether or not that figure is negative determines whether or not you’ve achieved net negative churn.
The formula for calculating net negative churn is as follows:
Net Churn Rate = (Churned MRR – Expansion MRR)/MRR at the Beginning of the Period) x 100
If churned MRR is less than expansion MRR, the subtraction will result in a negative number, giving you a net negative churn rate. If expansion MRR is less than churned MRR, then the subtraction will give you a positive number and result in a net positive churn rate.
Let’s say a SaaS company has $100,000 MRR at the beginning of a certain period and ends with an MRR of $110,000. During that time frame, they lost $10,000 in churned MRR and gained $20,000 from expansion. The formula would look like this:
($10,000 – $20,000)/$100,000) x 100 = -10%
So, this company has a net negative churn rate of 10%. And 10% is the rate its loyal customers are increasing their spending and offsetting the lost revenue from churned customers.
Ways to Achieve Net Negative Churn
Really, there are two things subscription businesses have to do to achieve a negative churn rate:
- Find ways to increase your MRR from existing customers to offset the loss of revenue from churned customers.
- Reduce your customer churn so you have fewer lost subscribers to make up for.
Let’s look at a few strategies you can use to expand MRR and prevent churn.
Increase Expansion MRR
To achieve negative churn, you have to increase expansion MRR somehow. Even if you retain every subscriber, the lowest your revenue churn rate will be is 0%.
These the three ways you can increase expansion MRR:
Even just a 1% increase in customer upgrades can make a huge difference on your bottom line. Let’s say your yearly average revenue per user is $15,000 and you have 10,000 customers. If you can get just 1% of those customers to upgrade to a plan worth $25,000 per year (or, an additional $833/month), you’ve increased your yearly revenue by $1 million.
Obviously, this depends entirely on the type of product you sell and your pricing strategy. But it goes to show how a seemingly insignificant proportion of your customer base can significantly contribute to revenue growth. That’s the power of upselling.
There are a few ways to boost the number of customers who upgrade:
- Offer an intermediate tier between your basic and premium offerings.
- Ask customers how they’re using your product, then suggest the features in a higher plan that could benefit them based on their response.
- Use a customer data platform to analyze which customers are most likely to benefit from an upsell or see value in spending more money with you. For example, if you offer integration capabilities, you could see that customers who aren’t fully using them are less likely to convert to a higher plan.
Product development also plays a huge role in your ability to upsell. Focus on adding additional products, features, and functionality based on your customer data. This could mean investing in a new team or hiring more developers, but it can pay off big time by allowing you to expand your product offerings and get customers on board with higher-priced plans.
Cross-selling is the practice of suggesting a complementary product or service to an existing customer. It’s similar to upselling, but rather than pushing a larger plan, you’re selling something different that still adds value to the customer’s purchase.
The classic example of cross-selling is McDonald’s asking if you want fries with your burger. The initial purchase decision (burger) is already made, so consumers are more likely to say yes to additional products because they’re already in a buying mindset.
A SaaS company’s Sales or Customer Success team can apply this same logic. They might suggest a bundle of products that work well together, or they could offer an add-on to a customer who’s already using one of your features.
From a business standpoint, product bundling is the best way to increase cross-sells. It might add some complexity to your pricing structures, but it’s fairly easy to set up in CPQ software and guarantees more revenue and product usage from subscribers who would have otherwise purchased only one of your products.
Add-ons are similar to cross-sells. But, where you’re suggesting a complementary product in a cross-sale, an add-on is something that may not be necessary or even related to the original purchase.
For example, let’s say your SaaS company offers project management software. At the enterprise level, deploying it companywide is quite a challenge. So, you offer implementation support as an add-on to help customers get started.
It’s important to note that add-ons shouldn’t be frivolous or unrelated — they should provide value and enhance the overall user experience. Solution selling is typically the approach Sales/CS take when selling additional products.
In addition to increasing MRR, add-ons can also help reduce churn by giving customers more reasons to stick with your product. If you’re able to offer more features and functionality, you’ll become a more integral part of their business operations and it will be harder for them to switch to another provider.
Reduce Revenue Churn Rate
You won’t reach a negative churn rate solely by reducing revenue churn (you can only retain 100% or less of your customers). But it’s an important factor in the equation because it helps make up for the revenue you lose from customers who churn. And,
Here are a few tips to reduce your customer churn rate:
Improve the Onboarding Experience
Customer onboarding is the process of getting new customers set up and using your product. It’s a critical stage in the customer lifecycle, as it sets the tone for their entire experience with your company.
A smooth, well-structured onboarding process can make all the difference in whether a customer sticks around or not. Think about it this way: If someone has difficulty learning how to use your product or can’t see the value in it, they’ll just find a product that’s easier for their team to use.
To improve your onboarding experience:
- Create clear and concise onboarding materials, including tutorials, PDFs, videos, and FAQs.
- Offer personalized assistance through live chat or phone support.
- Include popups and guided product tours when new users first log into your platform.
- Benchmark and measure KPIs like time to first value and activation rate to gauge the success of your onboarding process.
It’s a good idea to continuously nurture your customers during and after onboarding through email. Part of your content marketing strategy should be focused on educating customers about your product and how to use it effectively.
Actively Monitor Customer Health
A key aspect of churn prevention is understanding which customers are at risk of cancelling their subscription. This is known as customer health monitoring and involves tracking certain metrics that indicate a customer’s satisfaction or likelihood to churn.
Some common customer health metrics to track include:
- Product usage: Are customers using your product frequently, or have they stopped completely?
- Customer support tickets: Do you notice an increase in support tickets from a particular customer? This could be a sign of dissatisfaction or confusion.
- Engagement: Are customers opening your emails and engaging with your content? Or are they ignoring your communication efforts?
- Feedback surveys: Ask customers for their feedback and use their responses to identify areas of improvement.
Assign a numerical value to these metrics and use them to calculate your customer health score. You can also calculate NPS (Net Promoter Score) to gain insight into your customers’ overall satisfaction with your product.
Provide Excellent Customer Support
In addition to being a source of potential expansion MRR, customer support is another crucial aspect of reducing churn. When a customer has an issue or needs help with your product, they want quick and efficient resolution. If they don’t receive satisfactory support, it’s likely they’ll look for another vendor.
That’s why it’s important to invest in providing excellent customer support. This includes:
- Offering multiple channels for customers to reach you (e.g., email, phone, chat)
- Implementing a ticketing system or help desk software to prioritize and track customer inquiries
- Providing 24/7 support, especially if customers use your product globally
- Regularly training and educating support staff on your product and best practices for handling customer issues
- Sending out satisfaction surveys after customer interactions to gather feedback and make improvements
One unhappy customer may not seem like a big deal, but it can quickly add up and affect your churn rate. But, only 1 in 5 customers say they’d forgive one instance of bad customer service. And, a dissatisfied customer will tell 9-15 people about their experience.
Let Customers Pay a Year Upfront
Most SaaS companies let customers choose betwen annual or monthly billing. If they choose “annually,” they’ll pay for the year upfront. If they choose “monthly,” they’ll be billed each month. The benefit to annual billing (for the customer) is that they’ll receive a discount.
But, annual billing also provides an opportunity for you to reduce churn. When customers pay annually, they’re less likely to churn because they’ve already made a long-term commitment. At the very least, you’re guaranteed that revenue for the year. And, a customer willing to commit by the year is much likelier to be satisfied with your product (which is a positive signal for long-term retention).
Solicit Customer Feedback
To reduce churn, it’s important to understand why customers are leaving. The best way to do this is by asking for customer feedback.
Reach out to customers who have cancelled their subscriptions and ask them why they made that decision. Was it due to a specific issue with your product or service? Was there something missing that they needed? Or was there simply a change in their business needs?
You should also periodically ask for feedback from your current customers through surveys and polls. They’re relatively unintrusive if you send them through email or directly within your product. And you can use this feedback to constantly improve your product and address any concerns or issues that may arise
How Effective Subscription Management Helps Companies Achieve Net Negative Churn
Subscription management software is essentially the difference between “good” and “great” when it comes to managing your subscription-based business. It enables you to streamline and automate many aspects of the customer lifecycle, from onboarding to billing and renewal management. By using a robust subscription management platform, companies can achieve net negative churn.
Here are some ways how effective subscription management can help companies achieve net negative churn:
- Automated billing. Subscription management software automates recurring billing for all types of SaaS pricing structures, which reduces errors and verifies all payments are processed on time. This leads to increased customer satisfaction and reduced churn.
- Real-time analytics. With comprehensive dashboards and reporting capabilities, businesses can gain clear insights into subscription metrics, such as MRR, churn rate, and customer lifetime value. This information can be used to identify trends and make data-driven decisions that enhance customer retention.
- Efficient onboarding. Effective subscription management systems can streamline the customer onboarding process, ensuring a smooth and pleasing first experience for new customers, which is crucial for reducing early-stage churn.
- Renewal management. Subscription management software prevents involuntary churn by automating renewal notifications and simplifying the process for failed payments or expired credit cards.
- Personalized offers. Subscription management tools can automatically segment your user base, meaning you can offer personalized plans, upgrades, and discounts based on a customer’s usage patterns, thus increasing customer satisfaction and retention..
Customer self-service. By enabling customers to manage their own account details, payment methods, and subscription plans, companies empower customers and reduce the workload on their support teams, leading to higher customer satisfaction and lower churn.
People Also Ask
What is an example of negative churn?
To understand negative churn, consider this hypothetical example with Company A. Initially, customers sign up for the basic package but upgrade as they realize the value of premium features. This leads to spending more over time. When the rate of this spending surpasses the churn rate, it results in negative churn.
Is negative net churn a good thing?
A negative churn rate is a good thing. It’s often what companies shoot for and investors look for when evaluating a SaaS business. It means that even though you’re still losing some customers (through churn), the remaining customers are spending more and making up for that loss. This leads to overall revenue growth and underscores a successful product-market fit.