The Guide to Negative Churn: the Holy Grail of Subscription Retention

The higher your churn rate, the more capital you need to maintain your revenue. That’s why low churn rates are essential for long-term success.

But what’s better than a low churn rate? A negative churn rate.

Get ready for a deep dive into negative churn. We'll define negative churn, how to calculate it, and how you can engineer negative churn into your subscription business. Plus, we’ll take a look at some examples of SaaS companies that have achieved negative churn.

What is negative churn?

Net negative churn is when your total revenue generated from existing customers is greater than the revenue you lose from cancellations or downgrades. It means that your current customers generated enough from their basic subscriptions—while adding expansion revenue from upsells, etc.—that your revenue has outpaced the amount you’re losing to churn.

And if your recurring revenue grows without even acquiring new customers, this is known as positive net revenue retention.

If you can achieve it, net negative churn is an incredibly attractive trait for a subscription business. According to investor Tomasz Tunguz, negative churn is

like high-yield savings accounts. Every month, more money comes in, without much effort. This is a powerful effect and can fuel SaaS companies to huge success, as we saw in New Relic’s S-1.

He goes on to illustrate the effect of a hypothetical company with 5% vs. -5% negative churn 👇

—versus—

How do you calculate negative churn?

Start with your basic MRR churn equation. In order to calculate your MRR churn for a specific period, take the sum of your MRR cancellations and add it to the sum of your delinquent MRR. The number you get is your MRR churn, which measures the overall erosion of your recurring revenue.

Equation: ​​MRR churn = Sum of MRR Cancellations + Sum of Delinquent MRR

For your net revenue churn rate, you’ll need to bring in some additional information. Net revenue churn takes into account your expansion revenue (like upsells, add-ons, or tier upgrades), along with the churned revenue, including things like downgrades, cancellations, payment failures, and other revenue losses.

In order to calculate net revenue churn, you’ll want to subtract your total expansion revenue during a given period from the total churned revenue in that same period. Then divide that number by the total revenue at the beginning of the period and multiply that number by 100.

Equation: Net Revenue Churn = (Total Churned Revenue in a Period - Expansion Revenue in a Period) / (Total Revenue at the Beginning of a Period) x 100

By working that equation, you’ll end up with your net revenue churn rate and be able to assess whether you’ve achieved net negative churn.

But even if you attain net negative churn, churn as a whole under control remains essential. You can't just run your business on autopilot and stop adding new customers. Relying solely on expansion revenue could make your business more brittle as you come to rely more on existing customers. The risk they pose to your business increases, and if larger customers end up churning, you could be facing some bigger problems.

Pay attention to your revenue base. If a handful of customers make up a significant portion of your income, it'd be worth diversifying account sizes.

How do you achieve negative churn?

Of course, now comes the big question… how do you accomplish that? How do you actually achieve negative churn as a SaaS business? The truth is, it’s not really that complicated. Most SaaS companies that manage to achieve negative churn use at least one of the two following strategies…

Upselling

In B2B contexts, selling your product to more people at a company is a common strategy to upsell expansion revenue (Slack, Salesforce, etc.)  

For B2C, selling customers to use more capabilities of your product or use it more often is common for up-selling.

In both contexts, tiered pricing models aligned on value metrics ensure that your revenue can grow as your customer needs evolve.

Cross-selling

Cross-selling to current customers is a great way to increase your expansion MRR and achieve negative churn. All you need is additional products that complement your flagship one.

At Buffer, for example, they added adjacent products (analytics) to their core offering (socail media post scheduling). Accessing the analytics suite requires an extra $50 per month.

The cross-selling strategy works for them because they’ve created an additional product that complements their original one, appeals to the same audience, and can easily be used as a natural extension of the product they’re already subscribing to. By cross-selling, you can provide your current customers with additional value via a product that performs a different function and fulfills a different need.

SaaS companies with negative churn

Slack

Slack has one of the best net dollar retention rates that a public SaaS company has ever reported.

Much of Slack’s success can be attritibuted to their tiered pricing plan, which has made it easy for customers to shift to higher-priced plans without any friction. They also have highly-efficient customer acquisition costs: every dollar that Slack spent in sales and marketing generated $1.11 in profit in the next year.

Shopify

With two revenue streams—subscription and merchant solutions—Shopify’s negative churn can be largely attributed to their ability to upsell and cross-sell, along with the natural need for their users to expand.

As merchants become more successful on Shopify, they contribute more and more towards Shopify’s revenue by upgrading to a higher tier (an upsell) or buying additional products (a cross-sell) to meet their needs or by spending more on transaction fees (usage expansion) as an increasingly higher number of customers transact on a merchant’s store.

Twilio

As a business with a usage-based pricing model, it’s easy and natural for Twilio's customers to continue to spend more and more money as their need for the product grows.

This is compounded by Twilio's continuous expansion beyond SMS and into voice and video messaging.

In their S-1, Twilio reported that their dollar-based net expansion rate was 170%, 153% and 155% for the years 2013, 2014, and 2015 respectively. Every year, Twilio’s existing customers generated roughly 59% more revenue than they did the year before.

Are you ready to achieve negative churn?

Engineering ways for your business to achieve negative churn is worth it. With net negative churn, your business will smash through future growth walls and endure hiccups in customer acquisition.

So if you want to supercharge all aspects of customer retention, Churnkey can help. Churnkey is the only platform that fixes every type of churn for you. We’re everything your customer-obsessed team needs to improve retention and achieve net negative churn automatically.

If you want to learn how Churnkey outsmarts legacy retention products, find out more with a demo or get started now with a free trial.