This article will continue the previous content and continue to discuss the most important SaaS indicators for SaaS startups.
Many friends asked before, what does SaaS refer to?
Here I will briefly reply.
SaaS, that is, Software as a Service. SaaS providers build all the network infrastructure, software, and hardware operation platforms required for informatization for enterprises, and are responsible for a series of services such as all early implementation and later maintenance. Enterprises do not need to purchase software and hardware, build computer rooms, or recruit IT personnel. The information system can be used via the Internet. SaaS is a software layout model and the best way to implement informatization using advanced technology.
The DataFocus mentioned in the previous article is a typical platform that provides SaaS services. It supports cloud deployment. There is no need to download local plug-ins separately. Data analysis can be performed by logging in to the website. At the same time, data security is also very guaranteed.
In (1), we have already discussed an indicator, the net MRR growth rate. Next, this article will discuss the net MRR churn rate and the total MRR churn rate.
Net MRR churn rate
What is net MRR churn rate?
Net monthly recurring revenue (MRR) churn rate measures monthly revenue loss (churn and account downgrades) after taking into account revenue from existing customers (new customers and account upgrades). Net MRR churn shows revenue churn minus revenue gain, contrasted with total MRR churn, and is therefore presented together.
Big Guy Quotes: Why Net MRR Churn Is Crucial
- “MRR churn sucks your business dry. That’s why I think SaaS companies should strive to get their MRR churn down as close to zero as possible, or even better to negative MRR churn rate."
How to calculate the net MRR churn rate:
[churn MRR ($) - expanded MRR ($)] / total MRR at the beginning of the month ($) * 100 = net MRR churn rate (%)
Net MRR churn rate The calculation method is to first subtract the expansion MRR from the churn MRR (churn includes customer churn and account downgrades, expansion includes cross-sell and account upgrades), then divide the result by the total MRR at the beginning of the month, and multiply by 100 to convert to a percentage.
For example, if a company's total MRR for the month is $50,000, churn is $2000, and account expansion is $800, the net MRR churn rate for the month is:
(2000-800)/50,000*100=2.4%
But When the expansion MRR for the month is higher than the churn MRR, the net MRR churn rate for the month may be negative. Negative churn actually represents growth, which is what all companies strive for. In addition to calculating the net MRR churn rate on a monthly basis, the net MRR churn rate can also be calculated based on similar groups. Everyone is welcome to try it.
Pros and Cons of Net MRR Churn
Pros:
Tracking net MRR churn is crucial to understanding the health of your SaaS business, as it is one of the top barriers to growth. Net churn focuses on sustainability by considering scaling MRR - can the business keep growing at this churn rate? Ideally, companies should aim for zero or even negative churn to optimize the impact of new MRR.
Objectively speaking, companies that achieve net negative churn can grow without adding new MRR (which is not recommended).
Disadvantages:
Generally speaking, the meaning of customer churn is to make the product more and more valuable by tracking and understanding the right customers. If you only track net MRR churn, you may hide some useful information because it combines unhappy customers (customers who canceled) and satisfied customers (customers who upgraded or expanded account ), so you can expand by tracking both MRR and total MRR churn rate to simultaneously analyze this information.
Total MRR churn rate
What is the total MRR churn rate?
Monthly gross recurring revenue (MRR) churn rate is the percentage of revenue lost due to churn or downgrades. It estimates the company's total losses, excluding expansion.The inverse of this metric is Total MRR Retention Rate, which focuses on revenue retained each month.
Quotes from Big Guy: Why Gross MRR Churn Rate is Used
- “High churn rate is harmful to any SaaS business.”
- “A lower gross MRR churn rate can indicate whether the business is healthy. Net MRR can be measured by scaling and New flag to "improve", but if total MRR churn is higher than 1-2%, then there seems to be a problem with the product or ROI."
How to calculate total MRR churn:
Total MRR churn this month ($)/beginning of this month Total MRR ($) * 100 = Total MRR churn rate (%)
Calculate the total MRR churn rate by dividing the total MRR churn (current month) by the total MRR (current month), multiplied by 100 to generate a percentage. Similarly, in addition to calculating the total MRR churn rate on a monthly basis, it can also be calculated based on different cohorts.
Pros and Cons of Total MRR Churn
Pros:
Tracking gross churn instead of net churn helps businesses understand exactly how much revenue is being lost without “sugar-coating” it. Therefore, total MRR churn rate gives a clearer and more accurate indication of product satisfaction or whether the business is attracting the right customers.
Disadvantages:
If showing SaaS metrics to investors, calculating and tracking net MRR churn can be useful because it is possible to have negative churn. It is impossible to have a negative churn rate when it comes to MRR churn rate.
Industry Benchmarks
Benchmarks for churn rates vary by company stage (SMB, mid-market, or enterprise). There's also quite a bit of ambiguity surrounding the benchmarks of gross versus net churn and customer churn versus revenue churn. Many of the available benchmarks focus on customer churn rather than revenue churn, but the scope of each company's segment can still be helpful.
A company's maximum feasible churn rate depends on how quickly the startup can increase customer growth through upselling. It goes without saying that less churn is better, but estimating a cap on churn can help with financial modeling and internal prioritization of customer success efforts.
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