For SaaS and subscription companies, churn is one of the most important metrics to track for business success. Customer churn has a massive impact on the primary KPI of subscription-based companies: monthly recurring revenue (MRR).
However, there are many different ways to measure churn, and each calculation can reveal different insights about the health of a subscription business. Understanding where (and why) your revenue is growing and shrinking can have a huge impact on scaling your subscription business.
Read on to learn more about gross churn, net churn, and negative net churn. We’ll cover the differences between these metrics and when you should use them to analyze the health of your SaaS business.
What Is Gross Churn?
Gross revenue churn is the overall percentage of revenue that you’ve lost in a given period from subscription cancellations or downgrades. Customers might voluntarily cancel or downgrade their subscriptions due to dissatisfaction, or their subscriptions might end involuntarily due to a failed payment.
When you have a high gross churn rate, it’s a good idea to dig deeper and find out why you’re losing customers or revenue. That way, you can understand whether you need to improve your customer experience or consider a revenue recovery solution to reduce involuntary churn.
How to Calculate Gross Churn
You can calculate gross churn by taking the revenue lost for a given period and dividing it by the revenue at the beginning of the period. For example, if you perform this calculation for the last 30 days, you can discover how much MRR you lost. Many companies choose to calculate monthly and annual churn regularly to identify any trends.
Customer churn is calculated in a similar way, but it focuses on lost customers rather than lost revenue. While customer churn is another great metric to track, it doesn’t factor in the amount of revenue a customer took with them. This makes gross revenue churn more useful for businesses with multiple subscription tiers and add-ons.
What Is Net Churn?
Net revenue churn is the percentage of revenue lost from existing customers during a given period. By subtracting out expansion revenue — which is revenue from subscription upgrades or add-ons — you can gain a better picture of the revenue changes from your existing customer base.
How to Calculate Net Churn
The net churn formula is as follows: subtract the amount of expansion revenue from the revenue lost. Then, divide this by the total revenue at the beginning of the period.
A positive net churn rate indicates lost revenue is slowing business growth, while a negative rate suggests your business is growing without any upsells. If your net churn rate is close to zero, this means that churn is negating any revenue from upsells.
Gross Churn vs. Net Churn: Key Differences
The primary difference between gross churn and net churn is whether you’re factoring in the impact of expansion revenue.
Gross churn might give you a more realistic understanding of how much revenue you’re losing without sugarcoating the numbers by including upsells and add-ons. Net churn reveals more about the revenue changes you can expect from your existing customer base.
When to Use Gross Churn
Gross churn is useful for understanding whether you're attracting the right customers and providing a high-quality product. When you factor in expansion revenue with net churn, you’re not able to clearly see how many of your existing customers are dissatisfied. Gross churn is the best metric to track when optimizing your customer experience.
When to Use Net Churn
Net churn is helpful in understanding the impact upsells are having on revenue. Although you might have a high gross churn rate, if your net churn is negative, your revenue from existing customers is still growing. That means net churn is a great metric for understanding the revenue growth potential of your existing customers.
For most SaaS startups, net churn is an important indicator of business sustainability. If the business doesn’t have a negative or zero net churn rate, it can’t fully take advantage of new revenue. This can dramatically limit business growth over the long term.
When Should You Use Negative Net Churn?
Negative churn occurs when net revenue churn is negative. While this sounds like a bad thing, it actually means your expansion revenue exceeds your overall churn rate. This suggests your business will continue to grow without new sales if the net churn rate holds steady. A negative churn rate is a great metric to showcase to potential investors during fundraising.
Related Reading: How to Reduce Churn for Large Companies
Track Your Churn Metrics With Baremetrics
As you can see, there are many different ways to measure churn, and they’re all crucial indicators of business health. But it can quickly get overwhelming to calculate all of these metrics — along with other important KPIs like MRR and customer lifetime value — without an automated subscription analytics solution.
Baremetrics is a metrics, dunning, and engagement platform that automatically tracks over 15 KPIs for SaaS and subscription businesses. You can measure churn and other critical metrics using simple dashboards to make better decisions that propel your business forward. Start your free 14-day trial today.