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Net Monthly Recurring Value (MRR) Churn rate

What is Net MRR Churn Rate?

Net Monthly Recurring Value (MRR) Churn rate is the percentage of total revenue lost due to cancellation and downgraded subscriptions, altered by any added revenue from expansion or upgrades from your existing client base.

Why is Net MRR Churn Rate important?

Net MRR Churn Rate is a crucial metric for SaaS business because of the following reasons:

  1. It gives you an idea about the business growth or decline in a particular period. 
  2. It offers a more detailed insight into the customer subscriptions and revenue compared to the Gross MRR Churn rate.
  3. A lower Net MRR Churn rate (or a negative Net MRR churn rate) helps SaaS businesses to optimize the effect of new MRR.

How to calculate Net MRR Churn Rate?

To calculate the Net MRR Churn Rate, first, you need to subtract Expansion MRR (New MRR earned because of upgrades) from the total MRR churn (MRR lost because of subscription cancellation and downgrades). Then you need to divide it by the total value of the MRR at the start of the month. Finally, you can convert it into a percentage by multiplying it by 100. Here is the general formula that you can use to calculate Net MRR Churn Rate:

Net MRR Churn Rate = ((Total MRR Churn - Expansion MRR) / Total MRR at the start of the month) * 100

For instance: Suppose a company has a total MRR of $60,000 and some existing clients canceled $4,000 worth of subscriptions. Additionally, the company has an expansion MRR of $2,000. Then the Net MRR Churn Rate would be:

Net MRR Churn rate = (4,000 - 2,000 / 60,000) * 100

Net MRR Churn rate = 3.33 %

Please note that you can also have a negative Net MRR Churn Rate if the expansion MRR exceeds the total MRR churn.

Advantages of Net MRR Churn Rate:

The advantages of the Net MRR Churn Rate are as follows:

  1. The Net MRR Churn rate is considered to be an important factor that leads to lower business growth. Hence, tracking this metric helps us understand a subscription-based company's health. 
  2. Unlike the Gross MRR Churn rate, the Net churn rate helps us to understand if the business is sustainable with the current churn rate of subscribers.

Disadvantages of Net MRR Churn Rate:

The disadvantages of the Net MRR Churn Rate are as follows:

  1. The Net MRR churn rate should be assessed along with other metrics (E.g., Gross MRR churn rate) to have a significant insight. Suppose you track only the Net churn rate. In that case, you will need help to differentiate between happy customers (the ones who upgrade their subscriptions) and unhappy customers (the ones who cancel their subscriptions).

Industry Benchmarks

The benchmark for net MRR churn rate varies based on the company's ongoing development phase, for instance (Small-Medium Businesses (SMB), mid-size businesses, and enterprises). Below are some benchmarks for the Gross MRR Churn rate that can help a company to make sense of this metric:

  1. SaaS companies try their best to get the Net MRR churn rate as close as possible to zero or obtain a negative Net MRR churn rate. 
  2. The top eminent businesses have a negative Net MRR Churn rate. This indicates that the business expansion MRR exceeds the cancellation and downgrade MRR.