Understanding where your revenue is growing and shrinking is key to scaling your business. Christoph Janz, co-founder and managing partner of Nine Point Capital, writes that “MRR churn sucks the blood out of your business… SaaS companies should work very hard to get MRR churn down as close to zero as possible, or even better achieve negative MRR churn.”
But before you can improve it, you have to measure it. This post will run through everything you need to know you to understand and calculate gross and net MRR churn.
What is gross and net MRR churn rate?
Gross MRR churn rate is the percentage of total monthly revenue lost from contracts that your customers canceled.
Net MRR churn rate is the percentage of total monthly revenue lost from canceled contracts, modified by any additional revenue from upgrades or service expansions from your remaining customers. Net MRR churn gives you a clearer picture of what revenue changes you can expect from your current customer base.
How to calculate net and gross MRR churn rate
To calculate gross MRR churn rate, take your MRR churn (the sum of any canceled contracts) divide it by your MRR at the beginning of the month, then multiply by 100 to get a percentage. This is your MRR churn rate.
For example, if SaaSy Co. begins January with $100K in MRR and customers cancel $10K worth of contracts, we can find their gross MRR churn rate this way:
10,000 / 100,000 = 0.1 0.1 * 100 = 10%
This month, SaaSy Co. had a gross MRR churn rate of 10%.
Calculating net MRR churn is a little trickier. Start with your MRR churn and subtract any revenue you gained from customers expanding their contracts. Take that number and divide by your MRR at the beginning of the month and multiply 100 to get your net MRR churn rate in the form of a percentage.
Let’s look at SaaSy Co. again. We know they opened the month with $100K in MRR and lost $10K worth of contracts. But two of their customers moved from the basic service tier to the top service tier, resulting in an additional $5,000 in MRR.
10,000 – 5,000 = 5,000 5,000 / 100,000 = 0.05 0.05 * 100 = 5%
Factoring in MRR expansion from customers’ upgrades, SaaSy Co. has a net MRR churn of 5%.
Why are gross and net churn rate important?
Gross churn rate gives you a barebones, objective view of lost revenue. It also allows you to accurately compare your business to others. On the other hand, net MRR churn rate gives you a snapshot view of growth in your installed customer base—which, in fact, may be strong enough to offset losses, creating a negative churn rate.
Pay attention to disparities in net and gross churn. If SaaSy Co. started the month with $100K and churned $30K worth of contracts, but expanded service to the tune of $20K, that means SaaSy Co.’s gross MRR churn rate was 30% and their net MRR churn rate was only 10%. This is less sustainable than it looks at first, because customers are quitting at a faster rate than they’re expanding service. SaaSy Co.’s CEO better hope that their top service tier customers have a crazy high retention rate!
Remember, you can measure churn rate across any time period you prefer. Monthly rates let you take the pulse of your company on a minute scale. Annual rates might be better at giving you insights into broad trends. It’s much easier to look at a 40% annual gross MRR churn rate than a 2% monthly MRR churn rate.
Both metrics are important, and both tell very different stories. This is why MRR churn rate should be measured both ways: net and gross.
Want More SaaS Metrics?
Want a more comprehensive look at the most important metrics investors look for when funding tech companies? There are many numbers, statistics, and metrics to calculate, track and assess the health of your technology business; so many, in fact, that reliable measurement can seem overwhelming.
This guide explains the core metrics used to measure SaaS company success. Using simple examples, we’ll show you how to calculate each metric, and describe why specific indicators are important to investors.