How to Calculate Net Revenue Churn
By James Bell
- Corporate Strategy , Finance , Higher Level Management , Metrics and Ratios , SaaS ,
- 23 Feb
Net Revenue Churn is the percentage of revenue that is lost from existing customers in a month. It helps describe the overall health of a SaaS business. You want the measure as low as possible as you make money when this number is negative. This sometimes makes the metric feel counter-intuitive as you want most metrics to go up, not down. This is different than Customer Churn in that we are looking at the revenue instead of the number of customers. You could have a lot of low margin customers leave and it affects both churn rates differently. Let’s take a look at the math on this one.
Net Revenue Churn Rate
![\[ RCR =\frac{(MRR_b - MRR_e) - MRR_u}{MRR_b} \]](http://stumptownfin.com/wp-content/ql-cache/quicklatex.com-58767c6496f324be7c98ad460eded241_l3.png "Rendered by QuickLaTeX.com")
where
Revenue Churn Rate
Monthly Recurring Revenue at the Beginning of the Period
Monthly Recurring Revenue at the End of the Period
Monthly Recurring Revenue from Upgrades
Revenue Churn Rate
Going into more detail about understanding this metric, if it’s zero then essentially the churn is cancelling out the growth you’d expect from selling upgrades. Positive numbers mean that your sales team is having to overcome the bleeding. Essentially we are finding the net change in MRR – upgrades and then dividing this by the beginning MRR to get a percentage.
Monthly Recurring Revenue at the Beginning of the Period
This is our starting point. It’s our baseline of where we started during the period when it comes to top line recurring revenue. Click here to read more about MRR!
Monthly Recurring Revenue at the End of the Period
This is the recurring revenue that is still left over at the end of the period. Or you can make predictions and enter what you expect at the end of the period.
Monthly Recurring Revenue from Upgrades
We include expansion revenue of existing customers in the upgrade portion of the formula. We subtract this to get the net amount of revenue churn.
Other Considerations
A company or industry in a growth stage may not need this metric. Products and industries mature over time and just because there isn’t a lot of growth, doesn’t mean that there isn’t money to be made. You may plan obsolescence for certain products or brands. In these situations, you can use this metric to measure the curve down. Knowing the pace of attrition and revenue can help with headcount and keeping costs low. In this way you can still make money on diminishing revenue growth.