As a SaaS entrepreneur, there are countless numbers, statistics, and metrics that you need to track and calculate to assess the health of your business, but the sheer number of acronyms can be overwhelming. In this six-part series on key SaaS metrics, we’ll walk you through the most common—and helpful—metrics you need to know to successfully run and grow your SaaS business. 

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.

 

What is MRR churn?

MRR churn is the monthly revenue lost from canceled contracts during that month, and the MRR churn rate is the MRR churn compared to the MRR at the start of the month.

Another school of thought suggests that a more accurate picture of MRR churn can be calculated by including the revenue lost through contract contraction, as well the MRR gained through contract expansion and reactivation.

 

Why MRR churn is important

Understanding MRR churn can help you determine the magnitude of the impact of lost customers on your revenue. It can also help you understand if those losses are manageable, especially when you compare it to the MRR associated with new customers you are bringing on each period. As you move forward and your business begins to grow, it can even help you forecast future revenue performance.

Following your MRR churn closely can also serve as a sort of early-warning system for your SaaS business. That’s because initially, your MRR can be growing at a good clip while your MRR churn is quite high. But over time, if you’re not delivering a product that customers want, eventually this failure to achieve product/market fit will catch up with you. By tracking your MRR churn early on, you can identify problems that may not show up right away if you’re just tracing MRR, giving you time to pivot before your company goes bust.

 

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.

Want more metrics?

Download our guide, The 8 SaaS Metrics that Matter, to learn more about calculating metrics and using them to quantify your company’s successes for investors.

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