Last week, 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.
This week’s post will walk you through the two common schools of thought on how to calculate MRR churn.
How to calculate MRR churn
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).
Simple MRR Churn calculation
MRR Churn = MRR lost due to contracts canceled during a one-month period
MRR Churn Rate = MRR Churn / MRR at the start of the period
For 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).
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
Continuing with the example above, 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. But, in addition, 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, the 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 case, in the numerator you want to count the MRR for those contracts that are up for renewal that period that cancel. 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.
Whether you should calculate MRR churn using the simple or detailed calculation depends on how you want to use the data. If you just want to know how customer churn corresponds to MRR churn, calculate the simple version. But if you want to use the MRR churn 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—then the more detailed version is more appropriate.
What do we suggest? In our experience, looking at the companies we’ve funded, the more granular the data collected, the more accurately entrepreneurs have been able to predict the future performance of their business. Yes, it’s a lot of work to track these different metrics, but in the end a careful analysis helps to diagnose potential problems early on, enabling entrepreneurs to focus their efforts in the right places when growing their business.
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