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Churn MRR is the amount of monthly recurring revenue lost due to customer cancellations. It’s often calculated against MRR to extract a percentage called Churn MRR Rate. Putting Churn MRR into a percentage provides a quicker understanding of the impact churn is having on the business.
To calculate Churn MRR, add up the MRR of lost customers for a given time period.
To calculate Churn MRR Rate, divide the Churn MRR by MRR for the same time period.
(MRR of Lost Customer #1 + MRR of Lost Customer #2 + …) / (Time * MRR)
The top part of the equation is your Churn MRR and the result of the equation is your Churn MRR Rate. The Time can be any time interval from hours to years.
If you give customers the opportunity to downgrade their plan to a lower pricing tier, you have to factor this in too. Simply add these losses to the top part of the equation. (We’ll discuss this more below.)
An important metric for SaaS with pricing tiers
Churn MRR is a good metric to track for SaaS businesses that have different pricing tiers and customers paying different amounts. For these businesses, one customer isn’t usually worth the same as the next. One customer can generate $5 per month, another can generate $500 per month.
Looking at the number of cancellations doesn’t show you the impact the cancellations have on the bottom line. Looking at Churn MRR does. It adds meaning to the number of cancellations there are.
Assume you lose 10 customers this month and 5 customers the next month. The value of the 10 cancellations was $50 (ten $5/month customers) and the value of the 5 cancellations was $500 (five $100/month customers).
These scenarios show that if you only look at the number of cancellations and not the value of cancellations you’ll miss out on discovering deficiencies in your service. Perhaps you improved the experience for lower paying customers but, in doing so, damaged the experience for higher paying customers.
In summary: Churn MRR and the numbers responsible for it help you identify weaknesses as a whole and for specific types of customers.
Other contributors to Churn MRR
Cancellations usually account for the bulk of lost MRR but downgrades are a contributor as well.
As shown in a visual from Chaotic Flow, calculating your gained MRR (new customers and upgrades) against lost MRR (cancellations and downgrades) paints a clear picture of how churn affects growth.
On the right side of the visual are the two primary sources of MRR Churn: lost customers and downgrades.
Lost customers include active cancellations and delinquent cancellations. The former are customers who go through a formal cancellation process; the latter are customers who have credit cards on file you’re unable to charge. To reduce delinquent cancellations, you can use a transactional email service to remind customers when their card is invalid.
Downgrades include the removal of a monthly add-on service or a switch to a lower-priced base service. To reduce downgrades, think of ways to enforce the value of a customer’s current plan or add more inclusive features to their existing plan.
Putting it all together
If you have lower pricing tiers that customers can downgrade to or add-ons they can remove, it’s important to expand the top part of the equation beyond lost customers:
[(MRR of Lost Customer #1 + MRR of Lost Customer #2 + …) + (MRR or Downgrade #1 + MRR of Downgrade #2 + …)] / (Time * MRR)
Like our initial equation, the result here is your Churn MRR Rate.
An article by Lighter Capital shows another approach to calculating Churn MRR that’s worth checking out. It discusses how to use contraction MRR, expansion MRR, and reactivation MRR — in combination with Churn MRR — to figure out your Churn MRR Rate.
