Revenue is the lifeblood of a SaaS business. Making strategic decisions requires knowing how much revenue your customers are bringing in, and even more importantly, how revenue is churning, or bleeding out of your business when customers cancel or don't renew their subscriptions.
High revenue churn can suck the life out of your SaaS business, so it’s important to suss out issues early. Further, scaling can be particularly challenging if you don’t know where your revenue is growing and shrinking.
Below we’ll show you how to calculate and analyze SaaS revenue churn metrics.
What is revenue churn?
Revenue churn is a measure of how much revenue a company loses in a set period as customers fall away. It’s different from customer or logo churn, which measures the number of customer accounts your business loses in a given period.
There are two types of revenue churn:
Gross revenue churn: The portion of total monthly revenue that is lost when customers cancel or choose not to renew subscriptions.
Net revenue churn: The portion of total monthly revenue that is lost when customers cancel or choose not to renew subscriptions, reduced by any additional revenue captured via upgrades or service expansions from remaining customers.
What's the difference between gross and net revenue churn?
Gross churn is best for objectively comparing your business to others in your industry. Net revenue churn is often a more useful calculation than gross revenue churn, since it provides a more complete picture of your business health, showing how your recurring revenue changes as your actual customer base changes.
Some SaaS businesses may have strong enough growth from their installed customer base to offset revenue losses — something you can see with net revenue churn but not gross revenue churn — and that valuable insight guides smarter business decisions.
Pay attention to disparities in your net and gross churn rates
Let's say you started the month with $100K monthly recurring revenue (MRR) and churned $30K worth of contracts but expanded service to the tune of $20K. That puts your gross MRR churn rate at 30% and your net MRR churn rate at only 10%. This is less sustainable than it looks at first, because what it means is customers are quitting at a faster rate than they’re expanding service.
SaaS revenue churn rate calculations
Generally, a SaaS business calculates revenue churn by taking the revenue lost from existing customers in a given period and dividing it by total revenue at the beginning of that period. This produces a number between 0 and 1, which is expressed as a percentage.
You can measure churn rate across any time period — typically SaaS businesses measure revenue churn monthly and annually. Monthly rates let you take the pulse of your company on a smaller scale, while annual churn rates often deliver better insight into broad trends.
Annual revenue churn rate (ARR churn) gives you a snapshot of the entire year, which can provide a better benchmark for SaaS revenue churn since your data is somewhat normalized over a longer period.
Say you started out a given year with $100,000 in revenue from existing customers. You lost $10,000 of that over the course of the year as people canceled subscriptions, then gained back $2,000 as a few existing customers upgraded.
ARR churn = $100,000 - $8,000 / $100,000 = 0.08 x 100
In this scenario, your net revenue lost is $8,000, and your net annual revenue churn is 8%.
Monthly revenue churn (MRR churn) helps you stay ahead of potential business problems and avoid a serious cash crunch from lost revenues if you’re a growing startup.
Calculating gross MRR churn is fairly simple and works just fine if you want to know how customer churn affected your MRR. Calculating net MRR is more complex, but the detailed calculation will more accurately help you forecast your future revenue, by factoring in dynamic business metrics.
Below, we’ll walk you through both MRR churn calculations.
1. Gross MRR churn rate
Gross MRR churn rate is the percentage of total monthly revenue lost due to contracts canceled during a one-month period.
Gross MRR churn =
Monthly revenue lost from existing customers
MRR at the start of the period
Let’s say your total MRR at the start of the month is $100,000. That month, you lost $10,000 in MRR due to contract cancellations.
Gross MRR churn rate = $10,000 / $100,000 = 0.10 x 100
Your gross MRR churn rate is 10%.
2. Net MRR churn rate
This calculation includes MRR gained from contract expansion and reactivation, as well as MRR lost from contract contraction. It helps to first define these three types of revenue:
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.
Net MRR churn rate =
(Churned MRR + Contraction MRR) – (Expansion MRR + Reactivation MRR)
MRR at start of the period
Continuing from the previous example, let’s say you lost $5,000 in MRR from customers downgrading (but not canceling) their accounts, in addition to losing $10,000 in MRR due to cancellations. 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.
Net MRR churn rate = [($10,000 + $5,000) – ($6,000 + $4,000)] / $100,000 = 0.05 x 100
Your net MRR churn rate is 5%.
Note that if you have contracts with varying lengths, it’s best to only measure churn using the contracts that are up for renewal.
In this example, you count the MRR for canceled contracts that are up for renewal that period in the numerator. In the denominator, you want to only count MRR from the contracts that are up for renewal.
How can you improve net revenue churn?
Expanding your business with existing customers is the best way to improve your net revenue churn rate. Even if your churn is low (or zero), expansion revenue always helps! Retaining all of your customers and expanding their engagements will result in negative net revenue, and that means you can scale ARR more efficiently.
Here are some ways to increase revenue from your existing customers:
Raise your prices: This is a very effective way of increasing revenue from existing customers. However, doing so may also lose you customers, so it’s best to proceed carefully and with good analysis. There are various methods for raising SaaS prices without impacting customer churn.
Introduce new products or features: Getting more business from current customers requires having new things for them to buy. Introduce a new product or a new set of features on an existing product so they can expand or upgrade their business with you.
Expand subscription options: Offer your customers tiered pricing plans that come with extra features or perks. Provide incentives for upfront yearly payments, especially for those upgrading from monthly subscriptions.
Offer discounts for upgrades. Encourage customers to upgrade or expand their subscriptions by offering exclusive discounts on new products or features. Provide real value and draw your customers into a deeper engagement.
Keeping an eye on your revenue churn is essential as you work to grow your business or startup.
There are many ways to improve your churn numbers if you notice trouble; just make sure you identify the need early and take action quickly to keep your SaaS business booming.
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