Net MRR Churn Rate
What is net MRR Churn Rate?
MRR (Monthly recurring revenue) is one of the most important metrics for a SaaS enterprise. Your whole business model hinges on whether or not you can generate and maintain a profitable MRR. Monthly recurring revenue is, put simply, the amount that you earn from subscriptions to your service. MRR gives you a clear view of your enterprise’s health.
Now that we know what MRR is, it’s important we understand what “churn” is.
Your MRR churn rate is the frequency at which you lose users and subscribers. To put it in simple terms, the smaller your churn rate is, the better, and enterprises with a high churn rate, be it gross or net MRR churn rate, will most likely fail at one point or another. If you’re hoping to grow as a business, or just retain clients and users, churn rate is one of the more important metrics you want to track.
MRR churn is separated into two parts:
- net MRR churn rate
- gross MRR churn rate
Here we’ll take an in-depth look into net MRR churn rate, what it is, how is net MRR churn calculated, as well as the pros and cons of tracking gross churn vs net churn rates.
How to calculate net churn?
Net Revenue churn rate is calculated a bit differently than gross revenue churn. It is calculated by deducting MRR from expansion, which would be the revenue that you gained from service expansions or upgrades, from your churn MRR. You then divide that number by your Monthly Recurring Revenue at the beginning of a month, then multiply it by 100 to make it into a percentage. For example, if a company’s Monthly Recurring Revenue at the beginning of a month is 20,000 and let’s say there’s 2,000 worth of cancellations, that means that 2,000 / 20,000 x 100 = 10%
You have to note that a net MRR churn rate of 10% is pretty high, which is bad. What you want for net MRR churn is to be 0%, or even negative because negative net MRR means that you’re growing.
It’s also worth noting that the net MRR churn rate is directly affected by your net customer churn rate.
Gross churn vs Net churn SaaS
There are pros and cons to tracking both gross and net churn rate.
Tracking net MRR churn rate is important if you want to understand and get a better view of the health of your business because it pretty clearly shows your growth rate while tracking gross MRR churn rates helps your business see exactly how much money you’re losing. As a result, tracking gross MRR churn shows you how satisfied your customers are and if your enterprise is attracting more and more users in a much clearer way than net MRR.
While net MRR churn rate can be inaccurate and it can hide some information, the one advantage it has is that it can go into the negative, which is a very good thing. In fact, having a negative MRR rate is impactful enough that enterprises with a negative churn rate can still grow, even if not adding any new MRR.
Calculating both your gross and net churn rates is important. However, having a negative churn rate is a pretty powerful characteristic of any SaaS business and it gives you a clear view of how healthy your business is.