Previously, we discussed the importance of knowing how much of your customer base is churning each month. But knowing the customer churn rate (CCR) doesn’t give you the entire picture.
It is equally important to know how much of your monthly recurring revenue (MRR) is associated with that churned customer base.
Despite this metric’s importance, the SaaS startup world is still debating exactly how to calculate it. Below, we walk you through the two common schools of thought on how to calculate MRR churn.
Calculating MRR churn: 2 methods
There are two possible ways to calculate MRR churn. One way is to calculate only the MRR that is associated with canceled accounts (simple MRR churn calculation). A deeper calculation includes MRR gained from contract expansion and reactivation, as well as MRR lost from contract contraction (detailed MRR churn calculation).
1. Simple MRR churn calculation
MRR churn is the MRR lost due to contracts canceled during a one-month period.
MRR Churn Rate = MRR Churn / MRR at the start of the period
Here's an example. Let’s say your total MRR at the start of the month is $100,000. That month, you lose $10,000 in MRR due to contract cancellations.
Your MRR Churn Rate is 10% (10,000/100,000).
2. Detailed MRR churn calculation
To understand the detailed calculation, it helps to first define three key terms:
Contraction MRR: any decrease in MRR due to existing customers downgrading to a lower plan or getting a new or increased discount on services during the month.
Expansion MRR: any increase in MRR due to existing customers upgrading their subscription or adding a new subscription during the month.
Reactivation MRR: any increase in MRR due to former customers who reactivate their subscription during the month.
MRR Churn = (Churn MRR + Contraction MRR) – (Expansion MRR + Reactivation MRR)
MRR Churn Rate = [(Churn MRR + Contraction MRR) – (Expansion MRR + Reactivation MRR)]/ MRR at start of the period
Using the same example from before, let’s say that, in addition to losing $10,000 in MRR due to cancellations, you also lost $5,000 in MRR from customers downgrading (but not canceling) their accounts. You gained $6,000 in MRR due to existing customers upgrading or expanding their service, and then gained another $4,000 in MRR due to former customers reactivating their accounts.
Now, your more detailed MRR Churn Rate = [(10,000 + 5,000) – (6,000 + 4,000)] / 100,000 = 5%
Note that if you have contracts with varying lengths, it’s best to only measure churn using the contracts up for renewal.
In this example, you want to count the MRR for those contracts that are up for renewal that period that cancel in the numerator. In the denominator, you want to only count MRR from the contracts that are up for renewal.
Joel York’s blog Chaotic Flow had a great visual that illustrate the different components of a detailed MRR Churn Analysis and the impact they have on your ultimate MRR.
Which MRR churn calculation is best?
Whether you should calculate MRR churn using the simple or detailed calculation depends on how you want to use the data. Here's are simple guidelines to help:
Use the simple calculation if you just want to know how customer churn affects MRR.
Use the detailed calculation to help forecast your future revenue performance — including what to expect from lost customers, existing customers expanding or reducing their subscriptions, or lost customers coming back.
From our 10+ years of experience working with SaaS startups, we've observed that entrepreneurs are able to more accurately predict the future performance of their businesses when they collect more granular MRR churn data.
It can be a lot of work to track these different metrics, but in the end the visibility into business performance helps to diagnose potential problems early on. For entrepreneurs, that means having the ability to focus efforts in the right places to successfully grow the business.