What Is Gross MRR Churn Rate?
The gross monthly recurring revenue (MRR) churn rate is a metric used by SaaS companies to estimate revenue losses from service downgrades or subscription cancellations by users.
It is the percentage of recurring revenue loss and a high churn rate of 8-9% per month means there is scope for improvement. However, it may soon stabilise to 4-5% a month.
Why Gross MRR Churn Rate Is Critical For SaaS Companies
The MRR churn rate indicates the value of the product/service that prompts users to subscribe, upgrade, downgrade, or cancel the SaaS subscription. Such actions also reveal the performance of a SaaS company’s product team. If there are frequent cancellations or downgrades or the monthly recurring revenue (MRR) churn rate is consistently high, it means the product team must improve the product features.
The MRR churn rate is a valuable metric for a SaaS company’s finance and operations teams, allowing them to estimate critical outcomes such as profit, loss and cash burn rate based on which the company can make informed decisions. The MRR churn rate provides a SaaS player valuable insights into its financials and helps it plan hiring and scaling up in response to growing customer acquisition.
Differences Between Gross & Net MRR Churn Rates
The gross MRR churn rate only measures the loss of recurring revenue due to subscription cancellations or service downgrades during a specific month. On the other hand, the net MRR churn rate considers both revenue loss and gains in a given month, revealing if the gains are offsetting losses and thus indicating sustainable growth.
To calculate the gross MRR churn rate in a given month, we need to divide the lost revenue of that month (cancellations+downgrades+delinquent accounts) by the previous month’s recurring revenue. In contrast, you get the net MRR churn rate by calculating the difference between the revenue expansion (earned through upselling, cross-selling and upgrades) and the revenue loss due to churn and dividing it by the previous month’s recurring revenue.
For instance, a software company with 1K customers paying $100 each, 50 people cancelled (losing $5K), 20 upgraded (gaining $2K) and 30 downgraded (losing $3K). The gross MRR churn rate just looks at losses compared to the starting revenue and is 5%. But the net MRR churn rate considers both losses and gains and it’s 0%.
This means the money made from upgrades balanced out the losses from people leaving, showing the business can keep growing steadily.
The gross MRR churn rate is another useful metric as it enables a SaaS company to assess its customer turnover compared to industry standards. Meanwhile, the net MRR churn provides a more holistic overview of the business by factoring in losses and gains.
According to Dhruvil Sanghvi, CEO of LogiNext, the net MRR churn rate and net revenue retention (NRR) are similar as both focus on understanding how a company’s revenue from its existing customers changes over time.
For instance, the NRR considers all changes in revenue from existing customers, accounting for customer departures, spending reductions and the rise in spending. This means both metrics assess how businesses retain and grow their revenue from existing customers.
How SaaS Companies Calculate Gross MRR Churn Rate
SaaS companies can calculate their gross monthly recurring revenue (MRR) churn by dividing total MRR churn of the given month by total MRR at the start of the given month, which will be multiplied by 100.
The formula to calculate gross MRR churn rate:
Gross MRR Churn Rate (In %) = Total MRR churn in the given month / Total MRR at the start of the given month x 100
What Are The Limitations Of Gross MRR Churn Rate
- This metric only measures the loss of revenue but does not consider the revenue gained from new customers/subscribers or the additional revenue earned through upgrades, upselling and cross-selling. Therefore, we get an incomplete picture of overall revenue growth as the gross MRR churn rate focusses only on customer attrition.
- The calculations can be affected by changes in pricing. When a company increases its prices, it may experience a temporary spike in churn as customers often react to price hikes. In such cases, businesses will find it challenging to interpret churn rate changes accurately.
- Gross and net churn rates should be combined with other essential metrics to understand a company’s financials. Businesses typically combine churn rates with various metrics such as customer acquisition costs (CAC), customer lifetime value (CLV/CLTV) and customer satisfaction scores (CSAT) to estimate their growth potential and profitability.
- Also, the gross monthly recurring revenue (MRR) churn rate does not decode the reasons behind customer attrition/dissatisfaction. Businesses usually address this by conducting surveys, gathering feedback and analysing sentiments.
Four Tips For SaaS Businesses To Reduce Overall MRR Churn Rate
Here are four must-follow tips to help SaaS businesses reduce overall MRR churn and improve customer retention.
- Revive failed payments: Many SaaS companies experience MRR churn due to failed credit card payments. It stems from expired or underfunded credit cards registered with SaaS providers. A lot of regulatory restrictions can also hamper recurring payments. This means SaaS players must have a robust system to manage failed payments. For example, there is an automated system called dunning to notify customers about failed payments and prompt them to update payment information. By recovering these failed payments, businesses can reduce overall churn and retain revenue that would be lost otherwise.
- Deal with customer disconnect: Increasing the number of active users is the way to go. Customers not actively using SaaS products will be more inclined to cancel subscriptions when they receive the invoice. To prevent such customer disconnects, SaaS players should improve user onboarding, provide valuable and scalable features, and offer incentives for regular usage.
- Align pricing with product value: Keeping product prices realistic can further reduce MRR churn rates. Ideally, the pricing should be aligned with product value. This means customers should pay for what they get. SaaS companies should explore various pricing strategies and implement the most suitable ones to ensure user-friendly pricing models.
- Pay attention to feedback funnel: To prevent churn, businesses should collect feedback from former and existing customers. Surveys and conversations regarding churn can be most effective to address this area. Feedback can help understand the primary reasons behind attrition, identify pain points and improve the overall scenario, including product development, customer support, price parity and more.
