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Understanding why your SaaS company’s revenue is shrinking or rising – and what that says about the product or service you’re offering – is an important part of growth. That’s why MRR churn is such an important metric. Find out everything you need to know, including the MRR definition for finance and how to calculate MRR churn, right here.
MRR definition for finance
Before defining MRR churn, it’s important to understand MRR itself. MRR stands for monthly recurring revenue, which is an incredibly important metric for SaaS companies. Put simply, it’s a measure of the recurring revenue of your subscription business, excluding one-time fees and variable fees, and normalised into a monthly amount. So, what’s MRR churn? MRR churn refers to the total amount of lost monthly revenue (due to account downgrades or cancellations). This means that both involuntary churn (cancelled or expired cards) and voluntary churn (active customer cancellations) are taken into consideration.
There are two main types of MRR churn metrics that you’ll need to pay attention to: gross MRR churn and net MRR churn. Gross MRR churn refers to the percentage of your monthly revenue that’s been lost as a result of churn. Net MRR churn is a little more complicated. This metric refers to the percentage of your monthly revenue that’s been lost, modified for additional revenue from service expansions or upgrades by your remaining customers. In net MRR churn, a cancelled subscription may end up being offset by a customer choosing to upgrade their service and moving up to the next tier of your pricing model.
How to calculate MRR churn
As with other churn metrics, there’s no industry-wide MRR churn formula. However, working out the gross MRR SaaS metric is relatively straightforward. All you need to do is add up all the monthly recurring revenue that’s been lost as a result of cancellations or delinquencies, before dividing it by the figure for your SaaS monthly recurring revenue at the start of the month. Then, to get a percentage value, you multiply by 100. As a result, the gross MRR churn formula is as follows:
Gross MRR Churn = ((MRR Cancellations + MRR Delinquencies) / MRR) x 100
So, how do you work out the rate for net MRR churn? In this case, you’ll need to work out your MRR churn before subtracting any revenue that’s been gained from upgrades or expansions. Then, you take that number and divide it by your figure for MRR at the start of the month, before once again multiplying by 100.
Net MRR Churn = (((MRR Cancellations + MRR Delinquencies) – Increased MRR) / MRR) x 100
To see how that works in practice, let’s look at an example. Say Company A begins the month with around £150,000 in MRR, before throughout the course of the month, around £8,000 worth of subscriptions churn, either due to delinquency or cancellation. However, Company A also receives around £2,000 in upgrades and account expansions. You would work out the net MRR SaaS metric like so:
((8000 – 2000) / 150000) x 100 = 4%
Why is the churn rate of MRR for SaaS companies important?
It’s important for SaaS companies to understand and keep a close eye on MRR churn for a couple of reasons. First, it helps your finance team determine how much SaaS monthly recurring revenue is being lost. In turn, this enables them to predict your finances (such as profit/loss and burn rate) and understand how to scale when your customer acquisition efforts start to pick up. In addition, MRR for SaaS can be a great way to learn more about the value of your product or service. Theoretically, you could get to an MRR churn rate of 0% (or even a negative MRR churn rate) for a product that’s been optimised to a high enough level.
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