Gross Churn vs Net Churn: Calculator, Formulas, and Tactical Tips

What Is Gross Churn, and How to Calculate It

Gross Churn is the total percentage of customers or revenue lost during a certain period. It does not considering new sales or upgrades. Here's how to calculate gross churn:

Gross Churn Rate = Revenue Lost from Cancellations and Downgrades / Total Revenue at the Start of Period * 100

What is Net Churn, and How to Calculate It

Net Churn accounts for both losses and gains among customers. It includes revenue lost from cancellations and downgrades, as well as revenue gained from expansions. Here's how to calculate net churn:

Net Churn Rate = (Revenue Lost from Cancellations and Downgrades - Revenue Gained from Upsells/Cross-sells) / Total Revenue at the Start of Period)*100

If gains exceed losses, Net Churn can be negative, indicating overall growth in customer value.

What’s the Difference Between Gross Churn vs Net Churn

Gross Churn focuses solely on the loss, providing a clear picture of the rate at which customers are leaving or reducing their spending. Net Churn provides a more comprehensive view by considering both the losses and the gains within the existing customer base.

Example

If a company starts the month with $100,000 in MRR, loses $10,000 due to cancellations and downgrades, but gains $5,000 from upsells to existing customers, then:

• Gross Churn Rate = ($10,000 / $100,000)*100 = 10%)
• Net Churn Rate = ($10,000 - $5,000) / $100,000) * 100 = 5%)

Interactive Gross Churn vs Net Churn Calculator

Simply input your numbers and we'll automatically calculate your gross churn and net churn for you.

Key Points to Remember

• Revenue at the Start of Period: This is the monthly recurring revenue (MRR) or annual recurring revenue (ARR) at the beginning of the period you're analyzing. This should not include any new sales from that period to accurately reflect churn.
• Revenue Lost: This includes all revenue that was lost due to customer cancellations or downgrades to cheaper plans.
• Revenue Gained: Only applicable for net churn calculations, this includes additional revenue from existing customers who have upgraded their plans or purchased additional items like add-ons.

How to Improve Your Gross Churn and Net Churn

To effectively manage and improve Gross and Net Churn Rates, it starts with understanding your customers and delivering value.

1. Identify Churn Reasons

Conduct exit surveys or interviews with churned customers to understand their reasons for leaving. Common reasons might include pricing, lack of certain features, or poor customer service.

Quick solution: Duplicate the templates mentioned in this exit survey blog post.

Better solution: You can use Churnkey's cancel flows

2. Analyze The Feedback

Some businesses might have a lot of volume. Churnkey is used by PLG companies like Jasper, Veed, Copy.ai that have a relatively higher volume of users. If your business is self-serve then you should analyze that feedback at scale.

Quick solution: Use ChatGPT. Export the feedback in a CSV format and run a cluster analysis. This is what I personally used before I discovered Churnkey.

Better solution: You can use Churnkey's Insights AI. It surfaces the most important trends you should be paying attention to each week and categorizes feedback volume by MRR.

3. Offer Timely Customer Support

Kyle Poyar was onto something when he said that churn is not just a customer success problem. However, a dedicated support team can help resolve problems before they lead to churn. If you plan to use Churnkey, consider setting up a system that encourages trialing users, enterprise users, or users who cannot find a specific feature, to contact support before it's too late. You can segment by a user's status and plan.

3. Offer Flexible Pricing Plans

When people complain about price, it simply means that the perceived value that they're getting out of your product is lower than the price they pay. It doesn't mean that your product is too expensive.

While overhauling your entire pricing plan can be challenging, there are tools like Orb that can help manage usage based pricing changes.

Most SaaS companies have far more plans than they ever disclose on their pricing page. You can offer hidden plans to users when they're about to churn via Churnkey. This helps match expected value to their price.

4. Focus on Customer Onboarding

A well-structured onboarding process can significantly reduce churn by helping customers realize the value of your product or service faster.

You can use tools like Dopt for onboarding flows or Navattic for interactive demos. Both seem to be gaining a lot of traction lately!

5. Engage At-Risk Customers

Use analytics to identify and engage low-usage customers proactively. Personalized outreach or training can help them get more value from your product. Mixpanel and Amplitude are product analytics tools that can help. The best way to start is to analyze your natural usage of frequency before you label a customer as low-usage or high-usage. For example, infrequent products like Zillow (housing site) might be used once per year, whereas something like ChatGPT would have a weekly natural frequency of use.

Churnkey also has a predictive AI tool that can help identify at-risk customers.

6. Well-Designed Cancellation Flows

Every cancellation attempt is an opportunity to craft a better relationship with your customer. When you do that, you'll build a bigger subscription business. Churnkey's cancel flows are designed to retain your users. We've distilled only the most user-friendly, customer-centric practices to guide your business into retention nirvana. We exist to make your customers happier while increasing your top line.

7. Encourage Upgrades

Gross churn helps reduce losses. While net churn also accounts for gains. So, you can improve net churn by increasing the amount of revenue you receive from existing customers. Pocus and Endgame are two tools that help you identify the best accounts to upsell to.

8. Implement Loyalty Programs

Reward loyal customers with discounts, exclusive content, or early access to new features. This can increase customer lifetime value and encourage positive word-of-mouth. If you're in a category where switching costs are low, it might be helpful to have a loyalty program

9. Extended Trials

Spotify offers a 3 month trial. Youtube also offers a 3 month trial. Why so? Why does a food delivery app offer discounts for the first 3 orders if redeemed within the first 30 days? They're all trying to build a habit moment. With Churnkey, you can let people extend their trials while monitoring for abuse. Plus, you can even A/B test the offers.

10. Reactivation Campaigns

Send dunning campaigns and win-back emails to users that have churned. Not all churned revenue is possible to recover but with a good offer and a one-click purchase button, it might just turn around your churn rates.

With Churnkey, you can win back up to 34% of former customers through timed, personalized, and targeted offers. Leverage our one-click reactivation campaigns to maximize revenue potential.

By focusing on these strategies, you can not only reduce your gross churn by retaining more customers but also potentially achieve a better negative net churn rate, where revenue growth from existing customers outpaces revenue lost from churned customers.

What is MRR Churn

MRR Churn and Churn Rate are metrics closely related to both gross churn and net churn, specifically within the context of subscription-based businesses.

• MRR Churn (Monthly Recurring Revenue Churn) measures the amount of recurring revenue lost in a month due to customers cancelling or downgrading their subscriptions.
• Churn Rate is the percentage of customers or subscribers who cancel during a given time period.

To calculate your MRR churn rate automatically, use our churn rate calculator. It will also proactively predict the churn rate over the next 12 months.

Why is Gross Churn and Net Churn Important

Gross and Net Churn Rate are crucial metrics for SaaS businesses, especially those operating on a subscription model, for several reasons:

• Health Indicator: High churn rates can signal underlying issues with customer satisfaction, product-market fit, or competitive positioning.
• Revenue Forecasting: Gross churn provides a clear picture of revenue loss due to customer departures, while net churn accounts for growth within the existing customer base, offering a nuanced view of future revenue streams.
• Customer Satisfaction: A low net churn or a negative churn (where gains from existing customers exceed losses) suggests high customer satisfaction and a strong value proposition.
• Clearer Decision-Making: They help identify whether efforts should be focused on acquiring new customers, retaining existing ones, or upselling/cross-selling to current customers.
• Investor Confidence: For startups and companies seeking investment, low churn rates, especially low net churn, can boost investor confidence.
• Resource Allocation: High gross churn may require more investment in customer support and retention, whereas low or negative net churn could suggest focusing on expansion and upselling.

Having said that, revenue is not a metric. It's an outcome.

Many leaders obsess with revenue. And rightfully so, because revenue is the outcome of any business. But revenue is a lousy metric to goal the team against because it assesses past performance instead of predicting the future. Tracking revenue as a metric is equivalent to navigating a ship with a map that only shows you where you've been, not where you're going. So let's put revenue in the 'outcome' corner and focus on the metrics that will help us understand the future potential of revenue instead. 

Elena Verna, Growth at Dropbox, Amplitude, Miro and 30+ other PLG companies.

Thanks for reading!