What is Negative Churn?
Negative churn, also known as net negative churn, is a key performance indicator (KPI) used by SaaS (Software as a Service) companies to measure their growth and profitability. While churn rate typically signifies the percentage of customers or revenue lost over a certain period, negative churn flips this concept on its head.
In the realm of SaaS businesses, negative churn implies that the revenue generated from existing customers (through upsells, cross-sells, and expansions) outpaces the revenue lost from those customers who cancel or downgrade their subscriptions. In essence, even if some customers depart, the overall customer revenue still increases.
This fascinating phenomenon of negative churn is the holy grail of customer success, reflecting a business's ability to not just retain, but also maximize value from its existing customers.
Why is it such an important metric?
Negative churn is an essential metric for SaaS businesses, underlining the sustainability of growth and profitability. It's especially relevant to B2B SaaS companies, where the lifetime value (LTV) of a customer can be substantial, and the cost of customer acquisition (CAC) can be high.
One renowned example of a B2B SaaS company that has mastered negative churn is Slack, the team collaboration tool. Slack's model focuses heavily on user engagement and expansion within companies. Once a few team members start using the platform and find value in it, they tend to invite more team members and, eventually, entire departments or the whole organization. This 'land and expand' approach leads to increasing revenue per customer over time, which in turn leads to negative churn.
Another instance is Zendesk, a customer service software company. Zendesk encourages customers to start with basic service packages and then expand their usage based on growing needs. This expansion can occur by adopting more advanced features or by increasing the number of customer service agents using the software. By continuously adding value for its customers and promoting expansions and upsells, Zendesk often achieves negative churn.
These cases highlight why negative churn is an important metric. For Slack, negative churn signals successful user engagement and product adoption strategies. It ensures that the company's growth doesn't only rely on new customers but is also driven by increasing revenue from existing customers.
For Zendesk, negative churn showcases its ability to add continuous value for its customers. It provides proof that the company's product meets the evolving needs of its users and that the users are willing to pay more for additional services or features as their own businesses grow.
In both examples, negative churn is a significant factor in these companies' successful growth strategies. It reduces their reliance on new customer acquisition, which can be expensive and uncertain. Instead, it allows them to focus on expanding their relationships with existing customers, which is more cost-effective and likely to yield steady growth. In the fiercely competitive SaaS landscape, such an approach is not just a strength – it's a necessity.
How to calculate negative churn in Saas?
Negative Churn Rate, often expressed as a percentage, is calculated by assessing the revenue growth from existing customers, taking into account the losses from downgrades or cancellations. This is contrasted against the revenue at the start of the period to give the rate of change, indicating whether the business has achieved negative churn. Here's the formula:
Negative Churn Rate = [(MRR at End of Period - MRR at Start of Period - New MRR + Downgrades) / MRR at Start of Period] * 100
To unpack this for a more straightforward understanding:
MRR at End of Period: This is the total Monthly Recurring Revenue (MRR) at the end of the time frame you're measuring, say a month or a quarter.
MRR at Start of Period: This is the total MRR at the beginning of that same time frame.
The difference between the MRR at the End of Period and the MRR at the Start of Period represents the change in MRR during that time. However, we want to isolate the change due to existing customers, so we subtract new MRR.
New MRR: This is the MRR gained from new customers during the period. We subtract this because we want to focus on the changes in revenue from existing customers.
But there's another factor we need to account for – the downgrades.
Downgrades: This is the MRR lost due to existing customers downgrading their plans or reducing their usage.
We add the Downgrades to the equation to correct for the lost MRR. By adding it back, we're adjusting our calculation to reflect the net gain or loss from existing customers, not including those who've left entirely.
This figure is then divided by the MRR at the Start of Period. This step normalizes the value, allowing us to compare periods of different lengths or companies of different sizes. It essentially answers the question, "What percentage of our starting MRR did we gain or lose due to changes among our existing customers?"
Finally, multiplying by 100 converts the rate to a percentage.
If the result is a negative number, congratulations! You have achieved negative churn. This means that despite some customers downgrading or canceling, the overall revenue from existing customers has increased. It's counterintuitive – 'negative' churn sounds like a bad thing, but in this context, it's very positive. It means your SaaS business is growing its revenue from its existing customers, which is a strong indicator of business health and profitability.
What are the actions you need to take to achieve a good negative churn rate?
Achieving a negative churn rate involves several strategic actions:
Focus on customer success: Ensure your customers achieve their desired outcomes while using your product. The better they succeed, the more likely they'll be to upgrade or add services.
Upselling and cross-selling: Identify opportunities to sell higher-tier plans or additional features that can add value for the customers.
Excellent customer service: Providing stellar customer support ensures customers feel valued and are less likely to churn.
Regular customer engagement: Keep in touch with customers through regular check-ins, sharing useful content, and offering tips on how to better use your service.
Listen to customer feedback: Understand what customers want, what they like, and what they don't like about your product. Then act on this feedback to improve.
How can using this metric help make better business decisions?
Negative churn provides insights that enable better business decisions in various ways:
Product Development: It helps identify which features or services customers value the most, guiding the focus of future product development.
Pricing Strategy: A high negative churn rate might indicate that customers are willing to pay more for your service, suggesting that there might be room for adjustments in pricing.
Customer Success Initiatives: Negative churn rates can indicate the effectiveness of customer success and support initiatives, highlighting where improvements may be necessary.
Investor Relations: Investors find negative churn attractive as it implies a strong business model with potential for substantial growth. Demonstrating a negative churn rate can help attract additional funding.
Budgeting: A consistent negative churn rate can provide a more predictable revenue stream, making budgeting and forecasting more accurate and reliable.
In conclusion, negative churn is a powerful metric for SaaS businesses. It shows the potential for growth in customer value over time, making it a critical focus for customer success teams. By understanding and striving to achieve negative churn, teams can significantly contribute to the overall success and profitability of their organization.