Successful software-as-a-service companies work hard to minimize every kind of churn to keep their recurring revenue streams growing. But there is one kind of churn that’s an exception: negative churn.
Despite sounding like it could have a negative connotation, high negative churn is actually very positive for companies that rely on recurring billing. This is because while other types of churn measure the loss of subscribers or revenue in a certain period, negative churn instead indicates net revenue expansion from your existing subscriber base.
While some take churn as inevitable, many SaaS companies are now striving for negative churn and using it as a key performance indicator that can be used to better inform revenue projections and customer lifetime value.
Specifically, negative churn means that the recurring revenue from plan upgrades and add-ons more than offsets revenue lost from customer unsubscribes or downgrades. So, the more negative your churn, the stronger your recurring revenue growth, especially when combined with new customer acquisitions.
Here is a formula for calculating churn as a percent of your net monthly recurring revenue:
As an example, a company has $100,000 of recurring revenue (MRR) at the beginning of the month. By the end of the month though, churn and downgrades equal to $5,000 result in MRR only being $95,000. However, a major push for upsells and cross-sells has resulted in $10,000 in expansion revenue from existing users. Here’s the math:
Therefore, their churn as a percent of their net monthly recurring revenue is -5% meaning that their revenue from this group of users is actually higher month over month. Remember that a negative result means that your churn rate is negative and the higher the negative churn rate, the better.
Acquiring new customers to replace revenue lost from high customer churn and plan downgrades is costly and difficult. Luckily, churn is not inevitable and you also have the opportunity to increase revenue from your existing customer base by offering more value.
Therefore, the best way to achieve negative churn is to prevent customers from unsubscribing while also finding ways to increase the value available to customers, so that they are willing to pay more.
A few quick strategies to ensure your customers stay subscribed over the long-term are a streamlined onboarding process upfront, providing ongoing tips on how to get the most out of your service and having multiple ways for customers to reach out to get support when they need it.
Once you have your customer churn under control, you can focus on increasing your “expansion revenue.” Expansion revenue is the amount of revenue generated above your initial selling price. As more customers upgrade and purchase cross-sells, expansion revenues can increase significantly and begin to exceed the (hopefully) smaller amount of revenue lost from customer churn. Make the process to upgrade or buy a complimentary product as simple and easy as possible. Also, use your customer data and market research to determine what elements of your platform to further develop so you can keep providing more value to your customers.
It can be hard and costly to consistently acquire new customers as your company matures. Accordingly, your revenue growth should not rely solely on acquiring new customers. Tapping into your existing customers to boost recurring revenue should be core part of your growth plan. And the best way to do that is to maintain a service that provides ongoing and increasing value.
When negative churn is combined with new customer acquisitions, your company’s revenue growth can really take off.