Definition Negative Churn
A “Negative Churn”, and called Negative Churn Rate, occurs when the total expansion revenue from existing customers within a company is higher than the lost revenue from existing customers. This metric does not consider revenue from new customers, only existing customers. It can be said that in negative churn, recurring revenue expands without the addition of new customer revenue, resulting in positive net revenue retention. Negative churn occurs when the additional revenue for upgrades, add-ons, and new services from existing customers exceeds the amount you lost from existing customers. So in this post, let’s look at the definition and impact of that KPI and what it means for the subscription business.
How to calculate the negative churn?
The following equation can be used as a formula for calculation:
RAC – RP = Net Negative Churn
The abbreviations mentioned here stand for:
RAC = Additional revenue from current customers (feature updates + add-ons + services)
RP = Lost revenue (cancellations + downgrades )
Negative Churn in Subscription Business
In a subscription business it is impossible to avoid churn, even for the best of the known subscription models. With “net” negative churn, this turnover can be offset by the company’s current customers by improving their plans, adjusting values, and using other ways to retain these customers to the products offered.
Negative revenue churn is especially important because it can be a key tool to stabilize recurring monthly revenue (MRR) It can also create a mindset shift within an organization by beginning to recognize that current customers may be as valuable or more valuable than new customers. Many analyses and surveys have also shown that the likelihood of selling to a new customer is much lower than selling to an existing customer.
How can negative churn be optimized?
There are several strategies that SaaS companies can adopt when trying to generate more revenue from existing customers within a company, thereby increasing “negative churn.” Below are three alternatives that can be adopted:
- Cross Selling: when the company offers added value to customers through other features or additional products or services, this is referred to as cross selling. This can be, for example, the activation of new functions.
- Upselling: upselling is when the company sells to existing customers a new, more dynamic and more valuable version of the product they have already purchased. This can be a higher rate than what the customer currently has.
- Seat Expansion: generating expansion revenue – This method refers to allowing the existing customer to extend their rate to additional people, such as within a team or company, to gain access to the software or product being offered.
These methods can increase expansion revenue into the business and help increase net revenue as well.
Conclusion: negative churn as a powerful mechanism to increase a company’s net revenue
“Negative churn” is a powerful mechanism for a business, especially for subscription models, as it is usually more profitable to generate more revenue from existing customers than to acquire new ones. But it’s important to pay attention to both revenue and sales to make this happen. For those who think about the pricing model and customer success strategy, it pays to develop strategies to achieve “negative churn.” But as with all revenue growth strategies, it is important to start with a concrete and comprehensive understanding of who the customers are and what they want.
Only with a system that collects and analyzes this knowledge it is possible to confidently guide customers to sales opportunities that add value to the customer experience and thus increase sales.