Some consider negative churn the holy grail of SaaS (Software as a Service). It simply means that there was an increase in MRR from existing customers that was greater than the MRR lost from churned customers. Hence, a negative of a bad thing, is a good thing.
To have a financial model template that lets one understand what must be true to achieve this metric, there must be assumptions for either upsells (moving from lower tiers to higher tiers) and/or a percentage increase in contract value at renewal (usually used for B2B or enterprise SaaS organizations).
Explaining Negative Churn Calculations
I've only done this specific logic in two templates:
- Pure B2B/B2C SaaS Model - Has an option for % increase in total contract value at renewal for each customer type configuration.
- Security Monitory Service Model - Has assumptions about how customers move between pricing tiers over time.
The bottom line is that a SaaS business really wants to have negative churn, but it is not easy. It requires very high retention rates and/or very loyal existing customers who spend more money the longer they are on the platform.
A good analogy for describing negative churn in SaaS businesses is a "fitness gym gaining more muscle than losing fat." In this analogy, the gym (SaaS business) doesn't just maintain its weight (revenue) but actually gains muscle (additional revenue from existing customers) at a faster rate than it loses fat (loses revenue from churned customers).
Just like a person getting fitter by gaining muscle and losing fat, a SaaS business experiencing negative churn is seeing its revenue health improve. Existing customers are buying more services or upgrading their plans (gaining muscle), which more than offsets any lost revenue from customers who leave (losing fat). This indicates a strong, growing business where customer value and engagement are increasing.
Calculating Negative Churn from Actual Data
If you have an existing SaaS business and want to calculate your churn rate to see if it is indeed negative, there are a few steps. Here they are:
- Find out how much monthly recurring revenue (MRR) was earned from existing customers at the end of a given period, such as the end of the previous month.
- Find out how much MRR was earned from only that pool of customers in the following month.
- The difference between the following month and the previous month is your churn. If the following month was greater than the previous month, you have achieved negative churn.
- You can also do this on an annual basis. The difficult thing to understand is you don't count anything related to new customers added in the period you are calculating your churn rate. The purpose is to understand how existing customers behave over time.
I've also build a pretty useful cohort analysis template that was designed specifically for actuals.
What can you do to have a better chance at achieving negative churn?
- Analyzing Customer Usage and Feedback: Use customer data and feedback to understand usage patterns, which can help in identifying opportunities for upselling or improving the service to reduce churn.
- Value-Added Services: Offering additional features, integrations, or services that can add value to existing customers, prompting them to spend more.
- Pricing Strategies: Dynamic or tiered pricing models can encourage customers to move to higher tiers as their needs grow, contributing to negative churn.
- Great Customer Success and Retention: Good customer success teams reduce churn by ensuring customers are satisfied and engaged, thus more likely to upgrade or add services.
- Customer Loyalty Programs: Implementing loyalty programs or incentives for long-term customers, which can lead to increased spending over time.
- Upselling and Cross-selling Strategies: SaaS businesses can encourage existing customers to upgrade to more expensive plans or buy additional products or services, thereby increasing the average revenue per user (ARPU).
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