What is Net Negative Churn in SaaS
Net negative churn occurs when your expansion revenue from existing customers totals more than your lost revenue from existing customers. This SaaS metric does not factor in any revenue from new customers, just existing customers.
As Nathan Latka puts it in his “The Top” podcast, this is the holy grail of SaaS. Your recurring revenue is expanding without adding new customer revenues. Obviously, that’s a great thing. Plus adding revenue from existing customers is typically much more cost effective than new customer acquisition.
By the way, The Top is a great podcast to learn more about SaaS metrics and economics.
Net Negative Churn Formula
Expansion revenue includes upsells and add-ons from existing customers while lost revenue includes downgrades and/or completely lost customer revenues. The numbers are above are just an example.
The formula above is in percent, but you can also calculate by dollars or even flip the formula around. The main point is that expansion revenue more than covers lost revenue to get to net negative churn.
Track your Bookings
The net negative churn formula is pretty straight-forward, right? However, if you are not in the habit of tracking the correct data, even this formula will cause you headaches.
Each month you should be tracking your bookings and cancellations data, so that you can calculate net negative churn. Make sure that you track lost logos as well, because logo and revenue churn metrics are also critical metrics.
Don’t Stop Now
I like to take the net negative churn data and advance it one step further by tracking total new inflow or outflow of MRR or ARR each month. To do this, you simply add new customer revenue to the equation.
As a CEO or CFO, this is a fun and critical metric to track each month. As David Skok states, this is the cornerstone chart/data that management should use to run their business. Needless to say, if you are racking up net outflows each month, it’s time to reassess your business. The goal is to have the blue line in the chart below above zero.
Track your bookings and cancellation data! Net negative churn is the holy grail in SaaS as Nathan puts it, but it’s just as important to understand year-over-year expansion in your customer base (i.e. same store sales in the retail world), logo churn, and revenue churn.
What’s an important churn metric for you? Please share below in the comments section.
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