The biggest threat to your SaaS business’ success? Churn.
MRR Churn threatens your Monthly Recurring Revenue by losing users and dollars through cancellations and delinquent charges. Correctly tracking your MRR Churn will allow your team to create a better product, market it more effectively, and gain momentum through compounding growth.
Successful SaaS businesses understand and calculate MRR Churn properly and ultimately use that information to reduce churn and increase their revenue.
To help you join the ranks of the successful, let’s walk through why MRR Churn is so important, how to calculate it, and ways you can optimize MRR Churn for growth.
What Is MRR Churn and Why Should You Care
To sum up MRR Churn in one sentence - MRR Churn is the monthly erosion of your SaaS monthly recurring revenue. You can define the metric as an absolute dollar amount (-$40,256 MRR) or as a percentage, which is more useful and much more actionable (-6.34%) to track over time.
Why understanding your MRR Churn is so important?
MRR Churn’s importance exists in two main areas - product and finance.
Product should constantly be optimizing to reduce the MRR Churn Rate: The product team should focus on reducing the MRR Churn Rate every single month. Churn is a key indicator about the value of the product and its features. If product does their job well, the rate of active cancellations should get to $0 monthly.
MRR Churn is a critical financial metric influencing MRR velocity: Your finance and operations team need to to know MRR Churn in order to see how much MRR is being lost. This allows them to model and predict finances including your Profit and Loss and burn rate. Tracking MRR Churn overtime will give them insight into how to hire and scale when customer acquisition grows rapidly.
"Not tracking MRR Churn is like flying a plane with your fuel tank on fire."
What do you include in MRR Churn - Only the MRR leaving your business
More specifically (and digging deeper), MRR churn is the sum of all of the MRR that was lost in a given period. You lose accounts in two main ways:
Active cancellations: These are the customers who actively choose to cancel their accounts for a number of reasons (didn’t like the product, can’t afford it anymore, etc.).
Delinquent cancellations: These are customers who officially churn after you are unable to bill their credit cards. Typically you don’t count them as officially churned until your billing system has attempted to complete the charge a number of times over a number of days.
What should you not include in MRR Churn - Upgrades, Downgrades, and Refunds
There’s a debate in the SaaS community whether or not you should include expansionary and contractionary MRR (upgrades and downgrades) in this calculation. The problem with doing this is you begin to mask the gross MRR that’s leaving your business and the momentum at which it’s leaving.
This is why you should not include these aspects of MRR in this calculation, and instead look to your Retention MRR as the “God” metric for retention revenue. As a result, MRR churn then allows you to know exactly the amount and rate at which cash is actively leaving your business to optimize accordingly.
Ok, so how do I calculate MRR Churn?
Calculating MRR Churn and your MRR Churn Rate is actually fairly straight forward. Here are some formulas to help:
MRR Churn: Here we simply add up all of the MRR lost from cancelled accounts and delinquent accounts in a given time period. This gives us the MRR Churn for that given period.
MRR Churn Rate: Here we’re simply taking the MRR Churn over a given period and comparing it over a previous period. As such, if we lost $1000 in MRR in June and brought in $10000 in MRR in May, then our MRR Churn Rate would be 10%.
What Are Four Ways You Can Reduce MRR Churn?
MRR Churn and its respective rate are designed to help you optimize and strengthen the areas that are causing customers to churn. In that realm, here are a number of the main axes to focus on to reduce this number as much as possible.
Implement a delinquent credit card dunning system: We’ve found that across SaaS roughly 20-40% of MRR churn is actually because of failed credit cards. That’s an enormous piece of low hanging fruit given it is simply a customer’s expired credit card. Simply putting a system in place to recover these numbers is immensely valuable. Shameless plug that ProfitWell has a system for this that you can set up with one click.
Increase your active users: This is easier said than done, but a lot of active cancellations come from individuals who don’t get hooked into habitually using your product. When they see an invoice for something they aren’t using, then they’ll have a higher propensity to cancel.
Fix your pricing: We’ve found through our pricing strategy research at Price Intelligently that improper pricing heavily influences why folks churn out. After all, if you’re aligning your product to the value that a persona sees in the product, you shouldn’t be losing those customers. Read more on value based pricing here.
Run Churn Loss Surveys and Conversations: There are likely a plethora of main reasons folks are churning, from missing features to bad support experiences. You should have a product development process in place for identifying these reasons. Churn surveys work well for many SaaS companies. These surveys ask customers to choose the biggest reason they’re churning and the smallest reason they’re churning. These are exceptionally powerful because they end up allowing you to pinpoint your biggest areas of opportunity. Read more about relative preference campaigns here.