Negative churn and the formula to achieve it
As more companies turn to subscription-based models, it becomes more important to understand what leads to revenue growth and what prevents customer attrition.
By the end of this article, you'll fully understand what negative churn is, how to calculate it, and how to achieve it for your company.
What is negative churn, and why is it good?
Before diving deep into the definition of negative churn, it’s important to understand the churn rate concept first. Churn rate is an essential metric in the subscription industry, as it measures customer retention, or the number of consumers who have canceled your service versus your total clientele.
Negative churn, or net negative revenue churn, refers to earning more revenue from your current customers than from any revenue lost from churned customers. It was first popularized by David Skok, who defined it as the point "when the expansions/up-sells/cross-sells to your current customer base exceed the revenue that you are losing because of churn".
One of the clearest signs of negative churn is when a business analyzes their monthly recurring revenue (MRR) from existing customers and compares it to what they're losing from downgrades and cancellations. Making more monthly revenue from a narrower customer base means you're achieving something special: Finding your niche. Some subscribers will always churn. That lost revenue still hits your bottom line, but it's offset by loyalty and commitment from a set of remaining customers who believe in your service and want to spend more on it.
One of the most important positives to negative churn is how it changes a business owner's thinking. Expanding revenue from your current customers is going to shift you from a scarcity mindset to an abundance mindset. Measuring this will puts you into the mindset of expanding revenue from current customers. That's how you build loyalty.
Negative churn is also a strong sign of customer loyalty because its calculation hinges on expansion revenue and excludes those one-time, cross-sell purchases.
ProfitWell does an excellent job of showing why negative churn is so important. Check out the chart below:
How to measure negative churn
Getting those churn calculations can be tricky. As we explain in another post, churn is calculated by subtracting the expansion MRR from the revenue churn of that month and dividing it by the starting MRR.
(Churned MRR - Expansion MRR) / Starting MRR = Net Negative Churn Rate
As an example: Heart Fiction is a company that delivers fiction books with limited-edition, hand-painted covers.
Heart Fiction started March with 100 customers paying a $20 subscription to receive one original copy. Two people canceled the service by the end of the month. Either they weren't interested in the selection of stories from Heart Fiction or they weren't impressed with the hand-painted covers. Essentially, they were not the ideal customer for Heart Fiction so they self-selected out, turning into a bit of revenue churn for the custom book company.
Three other customers found the value proposition from Heart Fiction more compelling. They upgraded their plans to a premium option. Now they pay $30 monthly for extra customization on their book covers.
Here's the key analytics from Heart Fiction:
Churned MRR: 2 subscription cancellations = $40
Expansion MRR: 3 upgraded plans = $90
Starting MRR: 100 customers with $20 monthly subscription revenue per customer = $2,000
The example formula would look similar to this:
($40 - $90) / 2,000 = -2.5% churn
It's the same churn formula, but because of the upgrading behaviors in their customer base, the churn rate turned negative. The Heart Fiction financial analysts could miss this point if they focused only on revenue churn. In this case, Heart Fiction's expansion MRR is higher than their churned MRR, meaning their customer revenue is higher than what they lost from the previous month.
Even though they ended the month with 98 subscribers, their total monthly revenue increased by $50.
Learn more: SaaS billing platforms
Three steps to achieving a negative churn rate
Before you think about how to reduce churn, you must understand your voluntary average churn. All businesses and their subscribers are different, so there isn’t a mystical potion to drink and magically find ourselves with a negative churn rate.
However, there are three strategies your team can focus on:
1. Build up MRR from existing customers
Companies with a net negative churn increase their expansion revenue through value-adds. You too can keep your current customers falling in love with your service by adding more value to their subscriptions through
Upgrades/Upsells: Offering a better, more powerful version of your base price core product with additional features at a higher price. In the example above, Heart Fiction customers could upgrade to request cover designs custom to their profiles and styles. Another upsell could include increasing how many books per month they would receive.
Add-ons: Give the option to enhance a subscription with extra products or services. Heart Fiction could offer large prints of that month's design to ship with each book.
Cross-sells: Offer complementary products or services across your business. Heart Fiction may partner with a merchandiser to turn their most popular custom covers into art for mugs and T-shirts, and an enhanced subscription turned into discounts for what would ordinarily be one-time purchases.
Define the strategy that leads to more conversions by reviewing all payment and incentive alternatives. Don’t be afraid to play around with promos or new integrations to enhance your customers’ experience and improve your expansion revenue.
You can use Recurly’s Monthly Recurring Revenue reports to identify trends before mapping out an optimization strategy. Remember that the less MRR you lose monthly, the less you have to make up for it.
Learn More: How to Calculate MRR
2. Reduce churn from deserting customers
You can’t only rely on expanding your MRR to fix your churn issues; try digging deeper into the main reasons your subscribers are canceling.
Make sure your customer success team has means to get feedback from your subscription base. Conduct regular surveys with current customer accounts to measure their satisfaction. Reach out for input from churned customers to evaluate their reason for leaving.
As part of a customer success strategy, listening and engaging with current and past customers will help your business get insight foundations for optimization, better understand the reasons for your customer churn rate, and understand elements affetion your business modelsuch as involuntary churn.
Check out our article on the 7 Strategies to Reduce Customer Churn to learn more.
3. Focus your revenue retention strategies
Trying to hold onto every additional user isn't the point, and negative churn proves it. Your marketing teams could delve into customer retention metrics to seize onto everyone. Instead, direct your retention efforts and tactics toward the customer segments who pay more.
Excellent customer service is table stakes for your premium customers. How might your team offer additional services that customers can activate and deactivate at will --- without reducing your revenue per user. Your tactics for building up MMR can also become retention tactics by offering an ability to customize their service while building on the flagship product your customers grew to love.
Race to Negative Churn Rates
Negative churn rates are better than they seem. Although understanding this may look complex at first, knowing how to calculate it and and how to achieve it will be a powerful growth mechanism for your business.
Whether by engaging more, restructuring your pricing strategy, or offering different payment methods and pricing models, think of your customers and the value your service provides in their daily lives and how you can keep improving it. The better your service and more versatile your plan options are, you can ensure a longer customer lifetime and new revenue growth even without new customer acquisition.