SaaS Metrics 2 – Know Where You Stand For Monthly Recurring Revenue (MRR) Churn

Mitch Williams.

 

While there are different views on which metrics to track in your SaaS business, it’s critical for you, your employees and your potential investors that you follow indicators that show your business is healthy and growing. In this short series we will explain four important metrics – CMRR, Customer Churn, MMR Churn Rate and Lifetime Value (LTV) over Customer Acquisition Cost (CAC) Ratio – to help you validate your company’s revenue stream, product/market fit, and ability to achieve profitability. In this post we explain Monthly Recurring Revenue Churn.

Having a well-received product with strong-product market fit is the foundation you need to create for a well built, and profitable SaaS company. By both acquiring and retaining customers you will grow a solid recurring revenue stream. It’s important that you can easily determine if your product is well-received by your customer base and be able to throw light on any masked performance indicators. Monthly Recurring Revenue Churn is a great metric for gathering some more insight into product-market fit.

 

How to calculate MRR Churn

Understanding MRR Churn will help you determine how big an impact losing customers will have on your revenue. Let’s define a couple of terms:

  • MRR Churn is the monthly revenue lost from canceled contracts during a particular month.
  • The MRR Churn Rate is the MRR Churn compared to the MRR at the start of the month.

Let’s see how this works in practice over time. At the beginning of a month you have 100 customers with a total revenue of $100,000. In this hypothetical scenario, your business has 100 customers with MRR of $100,000. During the month the following occurs:

 

Total Customers Revenue Revenue

+/-%

Start with 100 customers and a total revenue of

$100,000.

100 $100,000
Add 10 new customers who buy $3,000 in services for a total of $30,000 in new MRR. 110 $130,000 +30%
Four current customers increase the services or subscriptions they buy by $2,500 each or $10,000 total 110 $140,000 +10%
Two customers decrease the services or subscriptions they buy by $2,500 each or $5,000 total. 110 $135,000 -5%
Four customers stopped buying your product altogether. Their purchase was typically $2,500 per month or $10,000 total. 106 $125,000 -10%
Net MRR Increase/Decrease +25%

The formula for the Net MRR Increase/Decrease in the scenario set out in the table is as follows: ($30k + $10k – $5k – $10k) / $100k = +25% Net MRR Increase

 

Why is it important?

Understanding MRR Churn shines a light on the magnitude of the impact of lost customers on your revenue. It will also tell you if those losses are manageable, especially when you compare it to the MRR new customers are adding each month.

As your business begins to grow and you start to add and lose more customers than you can easily keep a track of, it will help you better forecast future revenue and can be an early-warning system for your SaaS business performance.

In the beginning, your MRR can be growing fast as you add new customers willing to give your offering a try. Your MRR Churn can be quite high early on as you work out the kinks in your product and customer service. But over time, if your MRR Churn is not decreasing – even if your MRR is still growing – it’s likely you are not delivering a product or service that satisfies your customers. An MRR Churn that stays high or increases means it’s time to pivot, invest in more rapid product development to enhance your offering or invest in better service experiences before it catches up with you.

 

The Multipli churn buffer

By paying you the agreed value of your signed contracts upfront, Multipli’s subscription pre-payment funding can help protect your revenue and cashflow from a high MRR Churn. It is recommended to still track your MRR Churn without the benefit of Multipli’s pre-payments. This way you can keep an eye on the real direction of your customer churn and whether or not you are maintaining or improving your product-market fit.

 

Next steps

Read SaaS Metrics 1 – improving your Committed Monthly Recurring Revenue (CMRR)