Like every other business, SaaS businesses have their good days as well as bad days. When the companies are doing good in their efforts for customer acquisitions, the half of the story turns out to be valuable for them. But until the holistic picture of the company’s performance is measured, it becomes difficult to get a clear view of the health of their businesses. There are many ways through which a company’s growth can be measured but the most realistic measures cannot be obtained until the SaaS churn metrics are taken into consideration.
Churn rates are nothing but the percentage of customers that terminate their subscription over a given period of time. It can also be calculated on the revenue as the amount of money lost due to cancellations of subscriptions over the total revenue earned in that period.
Hence, to further breakdown the SaaS churn metrics on 4 different methods, we can measure them in following ways:
- User Churn
- Monthly Recurring Revenue Churn
- Gross MRR churn
- Net MRR churn
User churn rate
User churn rate is the rate at which the users of your company are cancelling their subscription of your service. It is calculated as:
(Number of cancelled customers / Total number of customers) x 100
So, for example in a given year, there were 10 cancellations out of your total 200 customers then the User churn rate would be 5% as shown below:
(10 / 200) x 100 = 5%
According to a survey, two-thirds of the SaaS companies in the world have experienced churn rates of 5% or more.
This SaaS churn metric rate is the most useful for the early stage startups based on which they can plan to implement customer retention strategies. Only through this metric can they measure the loss in their business in terms of number of users and take appropriate actions to further prevent it.
Monthly Recurring Revenue Churn
This is the rate at which monthly recurring revenue (MRR) is lost due to cancellations of subscriptions of customers from your existing customer base. Unlike User churn rate, the MRR churn rate is a financial metric, and one of the widely used SaaS metrics, which shows the impact of loss in the total revenue of your company. It is calculated as:
(Churn MRR / MRR at the beginning of the period) x 100
So for example, in a month, your loss of revenue due to churn is $100 and your total MRR in the beginning of the month is $1000 then your MRR churn rate is:
(100 / 1000) x 100 = 10%
MRR churn rate is one of the most useful metrics to measure the health of a business every month and to see if there are any quick adjustments that can be made to the service your company is providing. It is helpful in making financial forecasts of a business and accordingly the pricing of the services or product or the expenses of the company can be adjusted to produce yearly financial profits. Hence, MRR churn rate acts as an early warning system for many businesses.
Gross MRR churn
Gross MRR is the sum of loss of MRR caused by cancelations of subscriptions and downgrades (contraction) chosen by customers. Monthly downgrade is nothing but the customers paying less than the previous month to the company by switching to a lower priced package of the service.
Hence, Gross MRR churn = Churn MRR + Contraction MRR
Similarly, the Gross MRR churn rate can be calculated as the percentage of Gross MRR churn from Total MRR in the beginning of the month.
Gross MRR churn rate = (Churn MRR + Contraction MRR) / Total MRR x 100
If the Gross MRR churn rate is low then it means your business is doing well on the financial front and it is one of the key parameters for the investors to consider investing in your company. Because it considers the loss in MRR due to downgrades too, it is a more clear and key indicator of the performance of your business.
Lincoln Murphy, a renowned author and a Customer Success consultant, says that if you have acquired lots of new customers but your revenue remains the same then it means your Gross MRR churn rate is too high.
Net MRR churn
Net MRR churn is the sum of MRR lost due to subscription cancellations and downgrades and MRR gained due to expansion and reactivation of previously lost subscriptions.
Similarly the Net MRR churn rate is calculated based on the percentage of MRR lost due to cancellations and downgrade plus MRR gained due to expansion and reactivation out of total MRR of your company.
Hence, the formulae to calculate it is:
Net MRR churn rate = (Net MRR Churn / Total MRR at the beginning of the month) x 100
Since, Net MRR churn rate considers both happy (expansion and reactivation) and unhappy (churn/downgrade) customers, it is the key parameter through which you can gauge how much are you succeeding or failing in your business. It considers both positive and negative sides of the business and hence provides a clear picture of average SaaS churn metrics through which business owners can predict the future of their business if they don’t acquire new customers.
Why Vanity metrics are misleading?
Most of the startups, in order to acquire easy fame and quick success, love to point out vanity metrics rather than the saas logo churn metrics which often distorts their image. No doubt, Vanity metrics will show you bigger numbers for the parameters like number of registered users, downloads and page views but they are in no way an accurate indicator of your business health. What really matters is not the number of users but number of active users, not the number of page views but actual number of qualified leads. Based on the latter information, appropriate actions can be taken which can give you the favourable results.
A mobile app can have millions of downloads but only a few thousands of active users. Similarly, the freemium service can have a huge traffic but only a very few of them actually convert to purchase the service. Hence, the vanity metrics may give you the false sense of success and businesses must refrain from considering them as a key indicator of their performance.
Based on the SaaS churn metrics mentioned above, the businesses should aim for reducing churn as much as possible. Only through qualified use of those metrics can you gauge how well is your company performing in the SaaS industry and what measures can you take to thrive in this competitive environment.