Churn is arguably one of the biggest enemies of a SaaS startup business. If it gets uncontrolled, it can significantly slow your growth. And the hard part is that you can’t eliminate it. There will always be customers dropping out of your service now and then.
But then, there is also something called negative churn. And this concept can help you deal with this SaaS challenge. Let’s find out how it works and how you can get more out of this for the business.
So, What Is Negative Churn Anyway?
Okay, this might seem an odd term to encounter, considering that we already said there is no way to eliminate churn. But this isn’t about that. Instead, negative churn is the point where the revenue you generate from existing customers is higher than the revenue loss from departing customers.
Image from Baremetrics.
When this happens, that revenue offsets the lost one, essentially lowering your churn to a negative amount. This situation helps your startup business attain a more sustainable growth path. You also better position your business for other revenue generation activities.
Why Negative Churn Matters To Your Startup Business
Getting negative churn isn’t just about overcoming revenue loss through churn. It also offers you an idea of how well your startup business is doing. The biggest takeaway here is that you are doing great in delivering added value to your customers. This added value is what encourages them to stay and spend more.
Image from Vision Edge Marketing.
Negative churn is also an indicator that your business growth is picking up. This is always welcome news. It gives you insights on what strategies attract new customers and encourage them to spend more like your current ones. On the other hand, you become more confident that your current approach works with existing customers.
Calculating Negative Churn.
Now that you have an idea of what negative churn is, we can go into calculating it. But for that, you should first understand the two types of churn that a SaaS startup business has to deal with.
The first one is customer churn. Simply put, this is the number of customers that leave your service each month. That is often due to them voluntarily canceling their accounts. However, there are also instances when they simply abandon their accounts after issues like payment failure. Your service then automatically cancels these accounts.
Image from Pointilist.
Note that customer churn isn’t directly involved with negative churn. After all, there will still be people leaving you no matter what. But it still serves as an essential measure for the eventual churn that you have to deal with.
The second kind of churn is revenue churn. As the name implies, this is the actual revenue per customer that you lose due to them leaving. This is what you have to track when trying to achieve negative churn. Here, the negative churn means that you are already generating more profits from your existing customers to cover the revenue lost from those exiting.
The Net Revenue Churn Formula
To determine if you are already getting a negative churn, use the following formula.
Net revenue churn=(Churned MRR-Expansion MRR)/Starting MRR
Where:
- Churned MRR: The monthly recurring revenue lost from churned customers
- Expansion MRR: The monthly revenue generated from each remaining customer through your expansion revenue streams.
- Starting MRR: The total starting revenue generated from all your customers.
As you can see from the above equation, you start to get negative churn when your expansion revenue becomes higher than the revenue lost from churned customers.
To demonstrate this, let’s say that you have 100 customers that generate $10 worth of revenue each. Two of these customers cancel their accounts, resulting in a $20 loss in your monthly revenue. However, four of your existing customers decide to spend more, generating a $20 revenue each. Plugging the numbers into the above equation, we have:
Net revenue churn=($20-$80)/$1000
=(-60)/$1000
=-.06
With that, you get a negative churn rate of 6%. That means you are getting 6% more revenue despite losing two customers. This is thanks to the additional purchase made by your other customers.
Like regular churn, you would want to monitor your negative churn rate regularly. Note that this can require constant calculations on your part. Various tracking software automate this for you, giving you a continuous stream of data. That helps you determine how fast your revenue growth is happening.
These tools also let you segment your revenue data. That makes it easier to track which revenue streams are generating the most. From there, you can chart the direction of these streams to generate more.
How Your Startup Business Can Induce Negative Churn
This is perhaps the most challenging part of the effort. After all, you need to get your remaining customers to spend more to induce the state. There are several strategies that you can do to achieve that.
Expanding MRR From Existing Customers
The first way to increase the MRR from your existing customers is through the various expansion revenue generators. These include:
- Upgrades: Switching to a higher version of the product with more features.
- Cross-sell: Offering complimentary products for your customers.
- Add-ons: Purchasing additional features for your current version of the product.
These revenue streams are designed to encourage increased use of your main product. Because of that setup, your customers also spend more on the main product.
Reducing Your Startup Business Churn Rate
Interestingly, we go back to dealing with churn to achieve negative churn. Note that, as said earlier, you can’t eliminate it. But reducing churn helps you better achieve the negative one.
Virtua Solutions can help you reduce that churn by providing all means of business support. Quick customer service response, in particular, is one of the best ways to slow down churn. Our team will ensure that every customer concern is resolved quickly. With that, your customers not only have the incentive to stay but also to spend more to enjoy that great service.
Our team also proactively responds to any possible concerns. We review the different customer metrics and engagements to find out signs of churn. From there, our agents can spring to re-engage these customers and convince them to stay.
Achieve The Impossible And Create Negative Churn For Your Startup Business
Achieving negative churn might seem impossible at first glance. But with the right strategy and team, you can actually make that happen. Sign up with us today and we will help you get started in accelerating your startup business growth.