Negative churn in SaaS

Negative churn is one of the highest goals for most SaaS companies. However, it’s often misunderstood.  What is negative churn, why is it important, and how do you achieve it?

Let’s start with defining a good churn rate.

What is a “good” churn rate?

Many SaaS CEOs might argue that any churn rate above 5% is too high and unacceptable, but others such as Bessemer Venture Partners have disagreed. They say that any churn rate as high as 7% is perfectly acceptable.

This may vary, however, based on your niche industry and how your subscription base changes and grows over time. 

There are several methods to reduce churn and increase customer retention. When you reduce churn and increase your revenue to a certain point, you end up with negative churn.

What is negative churn?

Negative churn, also referred to as net negative revenue churn or negative revenue churn,  is when expansion revenue from existing customers surpasses churned revenue. The metric does not include net new customers.

SaaS experts almost unanimously agree that achieving negative churn is the primary focus for SaaS companies. However, achieving negative churn is no easy task.

How to calculate negative churn.

Calculating negative churn is quite simple. To find your negative churn rate, divide your expansion revenue by your lost revenue.

Expansion revenue = (total monthly recurring revenue (MRR) at the end of the period – total MRR at the beginning of the period) + new MRR in the period

Lost revenue = (MRR canceled in the period – MRR at the beginning of the period)

Net negative churn rate = expansion revenue / lost revenue

Why is negative MRR churn good?

For a company to achieve and maintain a net negative churn rate, it must do two things well: expand its customer base and retain more customers than it loses.

Maintaining a net negative churn rate is a clear indicator that your company is doing something right. As your company grows, the importance of minimizing churn and maintaining a net negative churn rate will only become more important.

How to achieve a net negative churn rate.

There are several strategies you can use to achieve and maintain a net negative churn rate.

1. Upselling and upgrading

Offer your customers an upgraded version of products they already use. This is the most effective method to achieve a net negative churn rate, and has the added benefit of providing more value to your customers as well.

Upselling is sometimes given  a bad reputation from businesses that preemptively try to sell customers more before they’ve realized value from a product. However, there are ways  to upsell without coming across as pushy or greedy. 

By timing your upsells carefully and educating customers on how consistent use of your product can help continue to increase their ROI, you’ll drive the natural progression of the customer relationship while helping the customer feel like they’re still in control.

2. Cross-selling

Cross-selling is selling additional products to your customer base that complement or are related to the product they already use.

This technique is effective in achieving a net negative churn rate, but is often more difficult than upselling because it requires the selling of a new product. Additional customer stakeholders might be involved in the purchase if the use case crosses into different roles and teams. 

3. Expansion of resources

To achieve a net negative churn rate, many companies must expand their resources to accommodate their growing customer base. This might mean expanding your sales and marketing teams, or increasing the development team to create new features and products.

4. Seat expansion

Seat expansion is when you upsell customers to add additional licenses to their current accounts. This is a popular SaaS tactic to achieve a net negative churn rate as it increases revenue from an existing customer base without the acquisition of new customers.

5. Improved customer support

One of the most important ways to achieve a net negative churn rate is by providing excellent customer support. When your customers are always happy and satisfied with your product, they’re much less likely to cancel their subscription and churn.

To provide excellent customer support, you need to have a team dedicated to this goal. They should be easily accessible through a variety of channels such as email, live chat, or phone lines.