Financial Glossary
SaaS churn
SaaS churn measures the rate at which a subscription business loses customers or revenue over a given period. Customer churn rate = customers lost in period divided by customers at start of period. Revenue (or MRR) churn rate = MRR lost from cancellations and downgrades divided by MRR at start of period, net of expansion revenue from existing customers. Negative net revenue churn -- where expansion from existing customers exceeds losses -- is a hallmark of healthy SaaS unit economics. Gross revenue churn and net revenue churn can diverge significantly in businesses with strong upsell motion.
Problem & Application
A campground software company starts a quarter with 200 customers paying an average of $150 per month ($30,000 MRR). During the quarter, 8 customers cancel (customer churn rate of 4%). However, 5 existing customers upgrade from a basic to a premium tier, adding $600 in MRR. Gross MRR churn is $1,200 (8 lost customers x $150); net MRR churn is $1,200 minus $600 = $600, a net churn rate of 2%. Separately, the company acquires 12 new customers adding $1,800 in new MRR -- but this is new business, not retention. Investors evaluate gross churn to assess product stickiness and net churn to assess the upsell engine. A company with 4% customer churn but negative net revenue churn is far healthier than one with 2% customer churn but no expansion revenue.
In Short
Understanding and mitigating churn is crucial for SaaS businesses to maintain revenue stability and achieve sustainable growth.