I am a huge fan of For Entrepreneurs’ seminal work on SaaS metrics. I’ve read it several times over the years, I require our interns to read it and it’s a suggested resource in my class. If you are an entrepreneur running a SaaS business or even considering it, do yourself a favor and stop reading this post and read that post immediately.
One “state” that is mentioned in the post is “negative net churn”, which is when additional monthly recurring revenue (MRR) from existing customers (“expansion MRR”) exceeds MRR that is canceled from customers that are leaving (“churned MRR”) and customers that are downgrading (“downgrade MRR”). There is no doubt that negative net churn is a good thing, after all, the name connotes a negative bad thing (churn) so it must be good, right? But I’ve heard several entrepreneurs mention negative net churn as the nirvana. That if the company achieves this milestone it will be in great shape and churn will be in check.
I’d say it’s a nice goal to have but it is far from nirvana. In addition, focusing on negative net churn as a goal can be dangerous. Consider climbing up a steep, icy slope. Through great effort, you climb 4 steps up the mountain. But then you slip back 3 steps. Would you declare ultimate victory? No. Yes it’s net progress but so much of the effort is wasted and then has to be duplicated. You can do that for some period of time but it’s not sustainable. You have to ask why the hell are you slipping back 3 steps all the time? Can you take longer strides so that the same effort that previously produced 4 steps can produce 5 steps worth of distance? Or simply how can you make more progress with less effort?
In addition to looking at the progress overall, be it net MRR (new MRR + expansion MRR – gross churned MRR – downgraded MRR) or negative net churn, it’s crucial that companies also examine gross churned MRR in isolation. You have to talk to customers, look at cohorts, build loyalty, increase switching costs, evaluate usage and other tactics to attempt to stem the bleeding. 2% MRR churn per month may not seem like much but it means that you will lose 25% of your customers in a year. Can you afford to lose a quarter of your revenue? That marketing cost to acquire those churning customers has also gone to waste, which you now have to spend again to replace the lost revenue to be back in the same spot.
So don’t let the excitement of achieving negative net churn cause you to take your eye off the ball in figuring out why you are sliding down the mountain.