Negative Churn: Definition, formula & how to achieve it
Does hearing “negative churn” send you into panic mode? Well, it’s actually a good thing. Sometimes, closing the month in red numbers is synonymous with success, and this metric is the perfect example.
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 the number of consumers who have canceled your service versus your total clientele.
Now, negative churn indicates when a business’s monthly revenue (MRR) from existing customers is greater than the revenue lost from cancellations and downgrades. In other words, the upgrades from your remaining customers have helped increase your income, even though you’ve lost subscribers.
How to calculate negative churn
Churn is calculated by subtracting the expansion MRR from the churned MRR and dividing it by the starting MRR.
Net Churn = (Churned MRR - Expansion MRR) / Starting MRR
Let’s picture it with 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, but three upgraded their plans and now pay $30 monthly for extra customization on their book covers.
The formula would look similar to this:
Churned MRR: 2 subscription cancellations = $40
Expansion MRR: 3 upgraded plans = $90
Starting MRR: 100 customers with $20 monthly subscription = $2,000
($40 - $90) / 2,000 = -2.5% churn
In this case, expansion MRR is higher than churned MRR, meaning you’ve earned more from existing customers than you lost.
Learn more: SaaS billing platforms: Understanding negative churn in the subscription industry
How to achieve 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 two strategies your team can focus on:
1. Increase MRR from existing customers
Keep your current customers falling in love with your service by adding more value to their subscriptions through
Upgrades: Offer a better version of your basic plan with more features at a higher price
Add-ons: Give the option to enhance a subscription with extra products or services
Cross-sells: Offer complementary products or services across your business
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.
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.
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.
Conduct regular surveys to current subscribers to measure their satisfaction and feedback from churned customers to get the insight foundations for optimization. Check out our article on the 7 Strategies to Reduce Customer Churn to learn more.
Defining negative churn may seem complex at first, but once you get the hang of it, you won’t be able to wait to start calculating and tracking your own. Remember that more than your next goal, this is your ultimate goal.
Whether by engaging more, restructuring your pricing strategy, or offering different payment methods, think of your customers and the value your service provides in their daily lives and how you can keep improving it.