Generally speaking, you don’t want your SaaS metrics to be negative.
Negative daily active users? Bad.
Negative revenue? Horrible.
Negative net revenue churn? Amazing!
Net revenue churn is the exception to the rule, and it’s one of the few times you’ll hear founders get excited about a KPI being in the negative.
So, why does everyone have such a positive attitude about negative churn?
Read on to find out:
Customer churn vs revenue churn
Let’s set the stage with a couple of quick definitions.
There are two types of churn:
- Customer churn: How many customers you’re losing each month from cancellations or involuntary churn (i.e. failed charges)
- Revenue churn: How much monthly recurring revenue (MRR) you lose each month from cancellations, involuntary churn and contraction MRR (i.e. downgrades).
When we talk about negative churn, we’re specifically talking about revenue churn (aka MRR churn).
It’s important to differentiate between the two, because negative customer churn isn’t really a thing.
Now that we have that out the way, let’s dive in.
What is net negative churn?
Negative churn is when the amount of new revenue from your existing customers is greater than the revenue you lose from cancellations and downgrades.
Unless you’ve built the perfect product and all your customers are willing to pay you the same price (or more) forever, you’re going to experience revenue churn at some point.
But when you’re able to get additional revenue from your existing customers through upgrades and cross-sells, it counterbalances the revenue you lose to churn.
A lot of the times when SaaS businesses think about churn, the focus is “how do we keep as many customers and as much revenue as possible?”
Net negative revenue churn forces you to also think about how you can expand the revenue you get from your current customers which shifts you from a scarcity mindset to an abundance mindset.
How to calculate negative churn
To calculate net negative revenue churn, you use the net revenue churn formula:
[(Churned MRR - Expansion MRR) / Starting MRR 30 Days Ago X 100]
If your expansion MRR is greater than your churned MRR, you’ll get a negative number, which means you gained more revenue from existing customers than you lost.
Here’s an example.
Let’s say your company has 100 customers, with a $50/month revenue per customer. That’s a total MRR of $5,000. Two of those customers cancel, resulting in $100 in churned MRR.
But three other customers upgrade their accounts and are now paying $100/month, resulting in $300 in expansion MRR.
Let’s plug these numbers into our formula:
(100 - 300) / 5000 X 100 = -4% revenue churn
And your new MRR is $5,200 without having to acquire new customers.
How to track negative churn
If you’re like me, you probably don’t want to deal with calculations. Even if you have a spreadsheet to track it all, it’s still messy.
Luckily, there are tools for that. Shameless plug, we have one.
You can track your net revenue churn in Baremetrics and see how it changes over time. You can even see a live demo of what the dashboard looks like here.
If you want to get really fancy, you can segment your customers and see exactly what’s contributing to your negative churn.
For instance, if we wanted to compare revenue churn for customers who don’t use one of our add-on products, we can add in those segments.
Looking at this data, we can see that if we were to get the customers not using our add-on products to sign up, we could reduce our net revenue churn even more.
Slicing the data with segments is a great way to do some in-depth churn analysis that can change the trajectory of your business.
If you’re interested in analyzing your churn and other metrics, you can see all your data with a free trial!
How to achieve negative churn
If you’ve gotten to this point you might be thinking “Ok, that all sounds great. But how do I actually get my net revenue churn to be negative?”
It all goes back to the formula I mentioned earlier. There are two inputs:
- Churned MRR
- Expansion MRR
In order to get it in the negative, you need to optimize the inputs so that your churned MRR is lower than your expansion MRR.
In other words, you need to lower your revenue churn and increase your expansion revenue.
Here’s how to do it.
Step 1. Increase MRR from existing customers
No matter how low your revenue churn rate is, you’ll never achieve negative churn without increasing your MRR from existing customers.
So step one needs to be customer expansion.
For most SaaS companies, customer expansion comes from these three strategies:
- Upgrades: Offering a higher priced version of your product with better features
- Cross-sells: Offering a complementary product
- Add-ons: Offering additional functionality or features to your customer’s current subscription.
Here’s my favorite graphic to illustrate the difference between them.
Let’s take a look at examples of how to do all three.
How to increase MRR with upgrades
Upgrades are the most common ways to increase expansion MRR. If you have a tiered pricing model, your goal should be to get customers to upgrade their account over time.
Depending on your product, this can be difficult or easy.
For instance, look at a product like Later.
They have three pricing tiers.
Each tier gives you more posts per social profile and more users. Ideally, as their customers grow their social media accounts, they’ll need to post more and grow their team, so account upgrades are inevitable.
Compare that to Docusign, who also uses tiered pricing. But their prices are based on features.
If someone signs up for the Standard account, they’ll only need to upgrade if they want to try new features.
Later’s approach has expansion baked into their pricing model, while Docusign’s customers might need a little more of a “push” to upgrade.
Both approaches work, but Later’s is a little more automated.
How to increase MRR with cross-sells
Cross-selling is a good way to increase expansion MRR if you have (or want to make) additional products to complement your flagship one.
Baremetrics is a good example of this. We have a couple of other products we offer that fit well with our primary metrics product—Recover for dunning management and Cancellation Insights for reducing churn.
Both of these can be purchased on their own, but when you combine them with our metrics, they’re insanely more valuable.
For our customers who use our metrics but not our add-ons, we give them the ability to add-on either within their account.
Buffer is another company that started cross-selling a while ago.
For a long time, they had their flagship product that allows you to schedule social media posts. Now, they have an additional product that allows you to analyze the content you’re publishing.
As you can see with both of these examples, cross-selling works with products that are a natural extension of your main SaaS product.
Think of additional subscription products you can offer on top of your main offering that’ll help your customers get even more value. You could even send a survey to your current customers and ask them for ideas.
How to increase MRR with add-ons
Last but not least are add-ons. Unlike cross-selling, add-ons are additional features or extras that build on top of a customer’s current plan.
The best example of this is seat expansion. That’s when a SaaS company charges for additional users, like Ahrefs.
Hubspot is another example. They have a range of add-ons for their marketing suite, that increase your monthly payments.
Be careful with add-ons though. You can risk coming off like the greedy company that’s trying to nickel and dime customers for every little thing if you go overboard.
Your customers should be able to get value out of your base product regardless of whether or not they pay for add-ons.
Step 2: Reduce churn
The other part of the negative churn puzzle is reducing your revenue churn rate. The less MRR you lose each month, the less additional MRR you need to make up for with customer expansion.
For instance, a company that’s churning $1,000/month needs to get at least that amount in expansion revenue to get close to a net negative churn rate.
Also, don’t fall into the mistake of thinking you can just rely on expansion revenue to fix your churn problem. If you have a 10% churn rate, the chances of you making that up with expansion revenue are slim.
So, how do you reduce revenue churn?
A good place to start is to find out why customers are cancelling or downgrading in the first place.
Here’s how we do it at Baremetrics.
Whenever a customer cancels, we send a cancellation survey to find out why.
Once they select an answer, we send a follow-up email based on their response.
And we collect all the data so we can spot any trends.
We use our Cancellation Insights add-on to automate the process, which you can check out here if you’re interested.
One reason I really like Cancellation Insights is because it allows you to see exactly how much recurring revenue you’re losing each month for specific reasons.
You can use that data to prioritize what changes to make first, starting with the cancellation reasons costing you the most money.
Over time, your revenue churn rate should go down which will get you one step closer to achieving negative churn!
6 Proven Strategies to Reduce Churn (With Real Examples)
Negative churn isn’t “the norm”
Yes, having a negative revenue churn rate is nice. But it’s not something every SaaS company achieves, and definitely not on a consistent basis.
We’ve had negative net revenue churn in certain months, but most months it’s not. And that’s ok.
Your ultimate goal should be to retain and expand as many customers as possible, while also acquiring new ones (at a reasonable customer acquisition cost of course).
If you can do that long term, you’ll grow. And if you can do it while keeping your revenue churn negative, even better!