Rethink Commerce Blog

Negative Churn, and Why It Should Be Your Goal as a SaaS Business

Posted on September 11th, 2015 by

If you’re not familiar, the term negative churn sounds like something a SaaS company should avoid at all costs. And if you understand churn as the rate at which you lose current customers, you could be forgiven for mistaking negative churn for a particularly bad churn rate.

But that couldn’t be further from the truth. Negative churn, as it turns out, refers to the point at which your new and existing customer revenue exceeds that lost from unsubscribing customers .

While the term negative churn may be unfamiliar to some, what it represents is or should be the goal of every SaaS business.

The path to achieving negative churn is pretty simple. Obviously, some amount of churn is to be expected for any SaaS company, no matter how great the products. But if you’re successful with acquiring new customers and do well to increase the value of your best subscribers with cross-sells and up-sells, your new monthly revenues should exceed that being lost to churn.

A negative churn rate is reflective of a company that understands where its revenue is coming from and is doing everything it can to maximize it.

Consider this simple formula from InsightSquared, for calculating negative churn:

Negative Churn = (New Customer Revenue) + (Existing Customer Revenue) – (Churned Customer Revenue)

When Negative Churn Becomes Crucial

While negative churn should always be your goal, it becomes increasingly important as your business grows and matures. Regardless of your churn rate, as your business grows, your revenue from new and existing customers should also continue to increase and offset the amount lost to churn and downgrades. If it doesn’t, your revenue growth will slow, and you’ll run the risk of plateauing.

Achieving Negative Churn

As this article illustrates, implementing a strategy that looks to achieve negative churn starts as early as your pricing model. But in essence, there are three paths to success:

  • Keep your customer churn rate low. The fewer of your customers that churn each month, the less revenue is lost, and the easier it will be for you to offset and surpass that lost revenue each month. Keeping a low churn rate through responsive customer service (among other strategies) should be the basis of your SaaS business strategy, but it bears mentioning again how crucial it is for negative churn as well.
  • Cross-sell and up-sell effectively. The other side of the equation is your monthly new revenue, which you can increase through continuous cross-sell and up-sell We have extensively covered both of these options in this space in the past: Getting your customers to upgrade their current solutions or to add additional products to their subscription base is crucial in adding to your monthly revenue.
  • Grow your qualified user base. While adding new subscribers provides a great opportunity to increase revenues, it comes with the risk of increasing losses from churn – and making achieving negative churn more difficult. But, as your business grows, you should become more adept at attracting and retaining – and maximizing the value of – the most qualified customers. As a result, adding customers and growing your business should be at the core of your SaaS strategy, and achieving negative churn.

Finally, it’s unrealistic to think that you’ll be able to achieve negative churn by taking only one of the above paths. In reality, you’ll need to become proficient at all three before you can even begin. The first step is understanding the concept, and the measures you’ll need to take to get you there.

Avangate powers modern Digital Commerce, solving the complexity of online commerce, subscription billing, and global payments for Software, SaaS and Online Services companies. Backed by a proven cloud platform, unmatched expertise and a depth of digital commerce services, Avangate helps digital business leaders drive the fastest path to revenue, maximize the value of every customer, and expand global reach. Contact us for more information about how our digital commerce services can help you grow your business.

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Raj Badarinath

VP, WW Product Marketing and Alliances

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