Gross Churn VS Net Churn In SaaS: What’s The Difference?
Why do we need to know the difference between the gross churn VS net churn SaaS metrics?
Well, for SaaS businesses, the word “churn” is one of the most dreaded terms in the industry. After all, who enjoys losing their customers?
However, churn is inevitable. There will always be customers who don’t find value in your product and move on.
Still, that doesn’t mean you can’t do something about it. Churn may be inevitable, but you can still have strategies that would lessen its impact on your business.
And as the saying goes, “Knowing is half the battle.”
In the struggle against churn, measuring how many customers leave and how much it impacts your bottom line can be your first step towards reducing churn and retaining more customers.
And in this article, we will be focusing on the “bottom line” part. We will talk about your gross and net revenue churn, the difference between the two, and how to lower your overall loss in annual or monthly revenue.
The Gross Churn VS Net Churn SaaS Metrics: What’s The Difference?
Gross revenue churn and net revenue churn are two metrics that measure the impact that customer churn has on your overall recurring revenue.
While they both measure the recurring revenue you lose due to customer churn and downgrades, they have some slight variations that lead to bigger differences in terms of implications and insights you can draw from them.
So let’s take a closer look at gross revenue churn and net revenue churn:
What Is Gross Revenue Churn Rate?
The gross revenue churn rate measures the percentage of the recurring revenue you lost due to customer churn and downgrades within a given period. It’s also sometimes called the gross MRR churn rate or gross dollar churn.
To calculate your gross revenue churn rate, starting by adding your churned revenue and contraction revenue (the recurring revenue you lose due to downgrades). Then divide the sum by your recurring revenue at the start of the period.
For example, let’s say you made $100,000 in monthly recurring revenue (MRR) last month. But then, this month, customer churn led to a total loss of $7,000 in MRR while downgrades cut another $3,000 out of that MRR.
Your computation for your gross MRR churn rate would be something like this:
($7,000 + $3,000) / $100,000 = 10%
When To Use Gross Revenue Churn Rate
Your gross revenue churn rate is a great metric for tracking your overall progress toward reducing customer churn.
It could be an indicator of customer satisfaction with your SaaS product and various factors that may affect it. These factors include the quality of your product, product-market fit, customer support, customer success, and more.
What Is Net Revenue Churn Rate?
The net revenue churn rate, sometimes known as the net MRR churn rate or net dollar churn, also looks at your losses in recurring revenue due to customer churn and downgrades. But it also takes your expansion revenue into account.
Your expansion revenue is the additional recurring revenue you get from existing customers who upgrade their subscriptions or purchase additional products (if you offer any).
To calculate your net MRR churn rate, you need to subtract your expansion revenue from your lost revenue before dividing it by your total recurring revenue.
So let’s take it from our previous example. Let’s say that you have a starting MRR of $100,000 and lost revenue of $10,000 due to customer churn and downgrades. But then you also gained an additional $5,000 in expansion revenue.
Your net dollar churn calculation would look something like this:
($7,000 + $3,000 – $5,000) / $100,000 = 5%
When calculating your net revenue churn rate, it is possible to have a negative churn value.
If this happens, it means that your expansion revenue has more than made up for your lost revenue.
When To Use Net Revenue Churn Rate
Net revenue churn rate is a good metric to look at when you want to get a big picture of how much recurring revenue your SaaS business is actually losing.
Since it also takes expansion revenue into consideration, it is also a good indication of how well you’re doing when it comes to upselling and cross-selling.
If you have a negative net revenue churn value, it means you must be doing something right with your customer retention, upselling, and/or cross-selling strategies.
How To Lower Revenue Churn
Knowing may be half the battle. But the other half is using that knowledge to win the fight.
Now, lowering revenue churn (whether gross or net) is obviously a matter of reducing your customer churn rate.
And reducing customer churn rate is all about delivering a great product, providing an excellent customer experience, and building strong relationships with your customers.
While we will discuss a few immediate strategies for lowering your revenue churn rate as a metric, we will also talk about practices that can help you address churn down to its root causes.
1) Minimize Involuntary Churn
Did you know that there is such a thing as involuntary churn?
The more common form of churn that people know about is voluntary churn, which is when a customer deliberately cancels their subscription.
But there is also involuntary churn, which occurs when a customer fails to pay for or renew their subscription. This could be because of technical problems in the billing process, expired credit cards, or sometimes even insufficient funds.
A good strategy to prevent customer churn is to keep the customers who don’t even want to cancel their subscriptions in the first place.
Given the common causes of involuntary churn, one of the best ways to minimize it is to set up pre-dunning messages.
These are automated emails sent out to customers before their subscription is due for renewal. Pre-dunning messages give them enough time to settle any payment issues they may have or update their credit card information.
What’s more, you can also reduce involuntary churn by providing a considerable grace period.
This way, if a customer misses the renewal deadline, you can still give them an opportunity to renew and keep their subscription running.
2) Establish Product-Market Fit
It almost goes without saying that delivering a quality product to the right target market is one of the most important keys to success in the SaaS industry.
After all, if your customer base doesn’t have a real demand for your SaaS product, no amount of customer retention gimmicks can keep them from leaving.
That’s why it’s important to establish a solid product-market fit.
Now, this comes with a lot of market research.
To do this, you can send surveys, hold focus groups, or conduct interviews with them. These can help you find out what features they want to see and what problems they are facing.
You may also want to look at what your direct competitors’ customers are saying, through their user reviews.
What features do they find helpful? What are they disappointed about? What capabilities do they wish they had access to?
With this information, you can then tweak and adjust your SaaS product to fit their needs. Or you could shift to a new target market whose needs would be a better match for your SaaS solution.
This puts your SaaS product in a better position to provide value to the right customers, making them more likely to stay.
3) Provide Excellent Customer Support
As we have briefly mentioned earlier, one of the things that affect the overall user experience for your customers is the customer support you provide.
No matter how good your SaaS product is, your customers are bound to encounter some issues with it.
So, it’s important to make sure you have a great customer support team in place. This way, you can ensure that your customers get the help they need when they encounter any problems or confusion with your product.
A good technical support practice is to make it easy to reach your support team through various channels, such as email, live chat, and phone.
Also, make sure that your customer support team is adequately trained and knowledgeable about your SaaS product. This way, they can answer any inquiries quickly and accurately.
What’s more, you can also have a knowledge base or an FAQ page in place. These may help customers find the answers to their questions without the need to reach out to your support team.
Having an excellent customer support experience helps build customer trust and loyalty, making your users more likely to stick around and keep using your SaaS product.
4) Make Customer Success A Priority
Customer success is a key factor that can make or break a SaaS business.
When your customers are achieving their goals with the help of your SaaS product, they’re more likely to stay and keep using it.
So, what can you do to ensure this?
The first thing you can do is build an efficient onboarding process for your new customers. Whenever you acquire a new customer, a solid onboarding experience can set them up for success with your platform, which could go a long way in turning them into loyal customers.
Your customer success team can also be in charge of monitoring your customers’ in-app behavior.
By knowing how each customer is engaging with your SaaS product, your customer success managers can give them personalized recommendations on achieving the outcomes they want.
What’s more, customer success can also be a huge factor in driving more expansion revenue, which will reduce your net revenue churn.
And that brings us to our next strategy.
5) Increase Your Expansion Revenue
While churn is inevitable for any SaaS business, you can make up for the losses with steady growth in expansion revenue.
However, upselling and cross-selling shouldn’t just be about milking more money out of your customers.
The upgrade or the add-on product should be something that actually brings more value and benefit to your customer.
That’s where your customer success and monitoring your customers’ product usage comes in.
Suppose you have a customer relationship management (CRM) platform. Now, imagine that you have an existing customer subscribed to your “Basic” plan, which allows them to store up to 1,000 contacts.
Then, you notice that they are already approaching this limit.
This would be a good time to reach out to them and present a personalized upsell offer, highlighting how the next plan would allow them to store more contacts and close more deals.
With this approach to upselling, you’re not only increasing your expansion revenue. You’re also showing your customers that you really do care about their needs and know the best solutions for them.
6) Offer Downgrades To Customers Who Are Canceling
Sometimes, there’s really nothing you can do to keep a customer from canceling their subscription. When that happens, it’s tempting to just let them go.
However, you may still be able to soften the blow to your bottom line by offering them a downgrade option instead of cancellation.
This is especially true if their reason for churning is due to pricing or if they don’t really need all the features included in their plan.
For example, let’s say you have an existing customer on the “Advanced” plan but then their company goes through some hard times and decides to lessen their spending on SaaS solutions.
In this case, you can offer them a downgrade to the “Basic” plan. You can even highlight how it has the essential features that can help them bounce back.
This also gives them an easy way for them to upgrade back once their company’s finances improve and they’re ready to move up again.
By offering this option instead of cancellation, you might be able to bring back some revenue from them that would have otherwise been lost due to churn.
After all, less revenue is still better than no revenue at all.
7) Perform A Root Cause Analysis
One of the best (and most lasting) ways to address churn and make sure it doesn’t keep on happening is to perform a root cause analysis.
According to the Iceberg Model, every external issue we see (including churn) is just “the tip of the iceberg”, so to speak. There are always underlying factors that could be causing the issue.
And when you find out what they are, you can address the problem from the inside out, causing a more lasting change.
This process generally works by starting from the event or the surface-level issue and what causes it. You keep asking until you find a mental model or prevailing mindset among your employees (or maybe yourself) that’s causing the reasons why your customers are leaving.
Once you’ve identified that root cause, you can start looking at ways to address it. It could be anything from making changes in your product’s user interface to changes in how your customer service team handles complaints.
By performing a thorough root cause analysis and addressing the underlying issues, you can get to the bottom of what’s causing churn and take action accordingly.
This could result in a long-term reduction of churn and an improvement in your customer retention rate.
Final Thoughts About Revenue Churn
Churn may be inevitable for a SaaS business, but that doesn’t mean you can’t do anything about it.
The thing is that there are a lot of possible reasons why customers churn and a lot of ways to address them.
To accurately identify which are causing your customers to leave, you need to track the right metrics and use that data to make informed decisions about what you should do.
And while your gross revenue churn and net revenue churn would be a good start, you also need to track other retention metrics that can pinpoint the reasons why your customers might leave. These may include your customer satisfaction (CSAT) score, net promoter score (NPS), customer health score, and more.
And remember to see every problem as an iceberg. You need to dive deeper and look underneath the surface-level issues to uncover the very root causes of customer churn for your SaaS business.
Only then can you make long-lasting changes that may revolutionize your product itself, its user experience, or your customer retention strategy.
The result? Happier customers, increased customer retention rate, and more profitable long-term relationships. That’s definitely worth putting in the effort for.
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