Did you know that the difference between ordinary and extraordinary companies is 70% MRR? Ordinary companies have around 60% MRR retention while extraordinary companies have a 130% MRR retention rate. That is a massive difference that can either lead to stagnant growth or exponential growth of the company. I bet you would love to be a market leader in your field. But for that, you have to make negative churn your friend.
What is Negative Churn?
Negative churn happens when the expansion revenue is more than the revenue churn.
Basically if the net MRR churn become negative, you have achieved negative churn.
If you understand this sentence and implement it well, it can change your business forever.
Expansion revenue consists of upgrades, upsells and cross sells. Revenue churn can be due to downgrades and cancellations.
Once you have negative churn, even if you don’t bring in any new customers, the company will be able to sustain itself.
But since most of the companies already have a sales team that brings in new customers, negative churn acts as gasoline on fire (revenue from new customers) and the company’s growth is similar to a rocket launch.
I know that was a long analogy but I hope you got my point.
How do you calculate Negative churn?
Net MRR Churn = Total MRR Expansion Revenue – Total MRR Revenue Churn
Total MRR Expansion Revenue= Revenue from ( Upgrades + Upsells + Cross sells)
Total MRR Revenue Churn= Revenue from ( Downgrades + Cancellations)
Make sure you don’t add the revenue from new accounts in Total MRR Expansion Revenue.
If Net MRR Churn turns out to be positive; congratulations, your company has the elusive negative churn and will grow as time progresses.
Advantages of Negative Churn
Since the start of this blog, I have been telling you that negative churn can be life changing for your company.
What if you have a kick ass sales team who are able to bring in “sufficient” new accounts every month. Should you still focus on negative churn?
Let me give you an analogy here.
Assume that you are trying to fill a bucket with water but there is a hole at the bottom of the bucket. No matter how much water you put in the bucket eventually the bucket will be empty.
Even in SaaS, if you are unable to control your churn rate, you are doomed.
The major advantages of Negative Churn are:
- Signing new customers is resource intensive compared to upselling to customers.
- SaaS business becomes self sustaining which reduces pressure on the sales team to achieve high targets every month (all new customers may not be the right ICP).
- Customer Success becomes a revenue center instead of being a cost center.
- The more problems you solve for your customers, the more integral and irreplaceable you become for those customers.
- Eventually your SaaS business will not need investors’ money as with time the renewal and expansion revenue will become much larger than revenue from new customers.
How to achieve Negative Churn?
Now it is time to discuss how exactly can you achieve negative churn.
There are 3 major ways to achieve negative churn:
Pricing is a major way to engineer negative churn. Usually when the company is in its initial stages, it has a simple and linear pricing package based on one or two features.
The most common way to price a product is based on the number of seats/licenses. As your customer grows and your product continues to solve their problem they will need more licenses.
For example, Buffer uses a similar pricing strategy. You can start with a single license but as your requirements increase, you can move on to higher plans which have multiple licenses.
Another way to price your product is based on the resources used by the customer. Resources can be storage, cell phone minutes, etc.
For example, Dropbox uses storage as a metric for various pricing plans.
You can even combine multiple metrics, say number of licenses along with storage limits to give more options to your potential customers.
As the size of the company increases, the product becomes more complex and solves multiple use cases.
Here you can even price your product based on the value that it provides to the customer. Depending on the money that the customers is saving by using your product, you can charge between 1-10% of the money being saved.
Value based pricing requires several trials before you reach an ideal pricing plan but it is beneficial for the consumers and your company.
You should try different pricing axes before finalizing what works best for you.
2. Upsells + Upgrades
Upsells allows you to sell a more expensive version of your product to an existing customer depending on their requirements.
The higher level plans usually have more features and are for larger enterprises.
For example, CustomerSuccessBox has 3 different plans.
Assume that your customer is on the basic plan. After a few months you launch a feature that is going to help your customers achieve their goals by putting in much lesser efforts.
If you can convince your customer of the value that the higher level plan is going to provide to them, Congratulations! You have just increased the MRR and LTV of the customer without increasing the CAC.
Upsells are not as easy as it seems.They don’t happen by chance but have to be engineered. You need to convince the customer of the disproportionate value that the more expensive plan will provide.
Upselling strategies like including upselling plans are required to upsell to the right customers at the right time.
We recorded a video with our Founder & CEO, Puneet Kataria that discusses the different ways you can upsell:
3. Cross selling
Cross selling is basically selling complementary products that help customers get more out of the product.
To cross sell you need to have deeper insights into your customers’ problems to actually understand what other corresponding problems can be solved.
The important thing is that those problems should be common for several customer segments and should be within the vision of your company. A customer success platform should not build a CRM solution even if there is a lot of demand because that is not their core competency.
The best example of this is Twilio which sells several complementary products which can be subscribed to as per the requirements of different companies.
Twilio is a cloud communications platform and they have different plans for Voice, SMS, Email, Whatsapp, Chat, Video, etc. Depending on what type of communication the company wants to use, they can subscribe to that specific plan.
These are the 3 main ways that you can achieve negative churn. But don’t try to do all the 3 ways at once as that would mess up the product and can confuse the potential customers.
Start with one way depending on what your product is and at which stage the company is. Once you nail one way then move to the next way. This will also give the customers ample way to adjust to your product as everything would not be happening in the same quarter.
Even in the same industry, different companies can use different ways to achieve negative churn. You may have to tweak some of the methods to get optimum results.
Understanding your product deeply and how different customers use it will help you make a better plan to have over 100% MRR retention.
To make sure that you continue to have negative churn year after year, it is important that the product evolves with time and you continuously perfect the above methods.
As a SaaS company, which method would you pursue now?