Negative Churn

melting-ice-psd (1)In a board meeting yesterday, we had a brief discussion around “negative churn”. Negative churn is a catchy phrase and apparently a hot-topic in some SaaS circles. I like some of the concepts and disciplines that an understanding of negative churn implies, but I also think it is an unnecessary concept that actually makes it more difficult to understand the inner workings of an MRR based SaaS business. Some background…

What is Negative Churn?

Negative Churn is an increase in revenue which occurs when the change in revenue within an installed base of customers is net positive from one period to the next. Negative Churn implies that the revenue gained from existing customers who purchase more over time exceeds revenue lost from existing customers who purchase less over time, including customers lost outright.

The term “negative churn” is an attempt to understand net organic revenue growth within an installed base of customers in the context of churn. Understanding the change in revenue within an installed base of customers is really important. But seeking to understand organic installed base growth in the context of churn begs a question: What if the revenue gained from existing customers who purchase more over time is less than revenue lost from existing customers who purchase less over time. Such a scenario would indicate that Negative Churn is NEGATIVE! Can Negative Churn be negative? Should we call this scenario Negative, Negative Churn? Of course not.

Conflating Churn and Revenue Lift

The fact that Negative Churn is a double negative is the first reason to not like it. Further, Churn is always and unambiguously revenue reducing. Therefore, Churn is always negative. Churn is never, ever positive.

Churn should be analyzed independently from the revenue lift from upsell (or extension) that has the potential to drive organic revenue growth in an installed base of customers. Conflating the two is dangerous. To some degree, the concept of Negative Churn is a response to companies having difficulty calculating a churn rate. Calculating churn is never as easy as it seems it should be. There are two types of churn that are critical to measure and analyze, each separately.

Customer Loss Churn

Customer loss churn is the easiest type of churn to understand and measure. Customer loss churn occurs when a customer is no longer a customer and all of the revenue (MRR and otherwise) that the company earned from that customer is no longer.

Customer\,Loss\,Churn = \frac{MRR\,Lost\,From\,Customers\,who\,Terminated\,Services}{MRR\,at\,the\,End\,of\,the\,Prior\,Period}

Customer loss churn can be measured in terms of either customer count or revenue; the revenue version used above. Unless your customers are homogeneous in terms of their monthly revenue, the revenue-based version of Customer Loss Churn is a far better indicator of the impact of churn on your business.

Revenue Churn

Revenue Churn occurs when the revenue you receive from a customer falls in total dollar amount. Several factors drive Revenue Churn. Common examples including a customer using less of your service (fewer seats, lower utilization, etc.), and a customer renegotiating the rate at which they buy from you downward. The customer is still a customer, but you’ve incurred a revenue reduction. I recommend that for each period over which you are measuring churn that you capture all of the Revenue Churn from customers whose revenue declined during a period and state it as a % of the MRR at the end of the prior period.

Revenue\,Churn= \frac{MRR\,Lost\,From\,Customers\,who\,Decreased\,in\,Revenue}{MRR\,at\,the\,End\,of\,the\,Prior\,Period}

Once you have each of Customer Loss Churn and Revenue Churn nailed, you can add them together and derive Total Churn.

Total\,Churn = Customer\,Loss\,Churn + Revenue\,Churn

Installed Base Growth/Decline

So now that we’ve got churn nailed, lets turn attention to the organic growth/decline conundrum that the concept of Negative Churn was designed to address. One of the great facets of SaaS businesses is that they have the potential to capture more share of wallet from their customers over time. In my experience greater share of wallet comes from three primary sources:

  • Higher Utilization: Many SaaS models have a utility based component to their pricing model. Utilization can be based on an unlimited number of factors including, but not limited to the number of transactions processed, cpu/storage utilization, etc. Higher utilization means more revenue.
  • More Seats: Most SaaS models have a seat-based component to their pricing. The more seats (users), the higher the cost to the customer.
  • Cross-Sell: SaaS companies should strive to capture greater share of wallet by selling other services that are adjacent to the core service offering, thereby capturing additional revenue per customer by providing a broader array of services those customers demand.

Whatever the source, it is important to measure and maximize revenue increases that are attributable to these sources. One can capture these revenue increases in a factor I refer to as Revenue Lift.

Revenue\,Lift = \frac{MRR\,Gained\,From\,Customers\,who\,Increased\,in\,Revenue}{MRR\,at\,the\,End\,of\,the\,Prior\,Period}

Revenue Lift is the opposite of Revenue Churn. Just like Churn can never be a positive, Revenue Lift can never be a negative number, because the numerator includes only those customers whose revenue increased during a particular period and is therefore a positive number.

Organic Growth/Decline in the Installed Base

Now we can answer the question that Negative Churn is trying to address: What is the organic growth/decline in revenue from our installed base of customers? Given that we’ve done the work to parse apart Customer Loss Churn, Revenue Churn and Revenue Lift, the remaining work is a snap.

Organic\,Growth/Decline = Revenue\,Lift - Revenue\,Churn

Stated as a percentage:

Organic\,Growth/Decline\,Rate = \frac{Revenue\,Lift - Revenue\,Churn}{MRR\,at\,the\,End\,of\,the\,Prior\,Period}

If the Organic Growth/Decline calculations results in a positive number, congratulations, the revenue from your installed and continuing base of customers is increasing; you have organic growth in your installed base. Lets also hope that your new logo bookings more than offset your Customer Loss Churn. If the Organic Growth/Decline calculations results in a negative number, you have Organic Decline in your installed base. In order to fill the hole, you need to book an even greater amount of MRR from new logos to offset your Customer Loss Churn and Organic Decline in revenue from your installed base

Note that I prefer to exclude Customer Loss Churn from the Organic Growth/Decline calculation because I prefer to evaluate the revenue trend for customers who have made the choice to continue to be customers in isolation from Customer Loss Churn. I’m not suggesting ignoring Customer Loss Churn; quite the contrary; by isolating it, you have to focus on it. In fact, you need your bookings from new logos to fill the hold from Customer Loss Churn and then some, if your business is going to grow.

Organic Growth/Decline vs Negative Churn

For me, Negative Churn tries to accomplish too much with one statistic. And because the results of the Negative Churn calculations can actually be a negative number (i.e. Negative, Negative Churn), I strongly prefer the Organic Growth/Decline calculations above to the Negative Churn construct.  I don’t argue with the intent behind the concept of Negative Churn; the intent is good. I just believe that looking at Organic Growth/Decline in revenue from an installed user base and each of its component parts can yield far greater insight and understanding.

I should add that the statistics presented here aren’t comprehensive for understanding Organic Growth/Decline. It is important to understand the distribution of where both Revenue Churn and Revenue Lift are coming from. If Revenue Churn is highly concentrated among a small set of customers, it is important to understand but perhaps not a crisis. On the flip-side if Revenue Lift is concentrated among a small number of customers it might not be repeatable, so you should stop the high-fives immediately. You should always take a look at the distribution and dispersion of Churn and Revenue Lift across your customer base as well as the root causes behind the results.

Other Negative Churn Resources

Much has been written about negative churn. From what I can gather, Dave Skok of Matrix Partners first coined the term in a 2012 post about Why churn is SO critical to success in SaaS. Tomasz Tunguz of Redpoint wrote a piece focused on Negative Churn as did Lincoln Murphy of Sixteen Ventures. There is a lot of good stuff in these posts and others that I’ve read. They key take-away is that if you can drive net positive organic growth in your installed and continuing base of customers, you win, particularly if you continue to acquire new customers at a rate that exceeds your Customer Loss Churn.

Negative Churn

My Journey Into Meditation

RESTORE_000014185704ResizedA few weeks ago I wrote about how much I love coffee but that I had to give it up because it was starting to affect my ability to focus. I’m happy to report I’m still off the juice. Giving up coffee has helped to slow down my mind and body; no more raciness. But I’ve noted some remnant busyness in my mind that I’ve been itching to shake off. It sort of feels like I’m peeling an onion, working through the layers and getting closer to the core. Last week, I peeled another layer by starting a personal journey into meditation practice. Week 1 is in the rear view mirror and I’m seeing notable benefit already.

Meditation isn’t entirely new…

My Journey Into Meditation

The 40s: Decade of Self Awareness?

The movie This is 40 is a satirical look at the life of a husband and wife who are turning 40 years of age. They have challenges with their kids, their businesses/jobs, financial security and personal relationships. All manner of comedy ensues. It is said that the humor is the good natured side of the truth.  Although This is 40 is a caricature, it isn’t far off either. I’ve certainly seen a number of friends go through difficult times of late.

That said, while the 40s certainly present some challenges, I’ve come the conclusion that the 40s are an opportunity to develop self-awareness. My sense is that the accumulating pressures of career, family and of balancing the two crescendo during the 40s. That crescendo…

The 40s: Decade of Self Awareness?

Be Mindful of Strategic Effects

Yesterday, I was catching up with a friend and fellow youth soccer coach. He happens to be a public stock research analyst. Although we were talking soccer, not business, we ended our conversation musing over the stock market’s Monday decline, which now appears to have extended into Tuesday.

His read; it’s all about oil. For those that haven’t been paying attention, oil prices have dropped precipitously. There are a number of factors at play including weak demand in emerging nations, and the emergence of alternative fuels. But for the most part, this issue is oversupply. Did you know that the United States is now the World’s largest oil producer? Surprising right!

In most cases, a decline in oil prices (particularly a supply…

Be Mindful of Strategic Effects

Throw Out Your 2015 Strategy and Budget Right Now

The arrival of a new year (and the beginning of a new one) brings a flurry of cognitive churning. As individuals, we 1/ reflect on the year passed, 2/ ritualistically write and read predictions for the next year, and 3/ make resolutions and set goals that are intended to inspire us to greatness during the next twelve months.

I’ve come to see this all as distinctly human but also quite strange. 1/ We can’t do anything about what happened in the past, and many of our “reflections” end up being revisionist history. 2/ The predictions we make – at least the most interesting of them – are almost invariably wrong, but we make them anyway as a way to either “exert control” on our world or to show others how smart we…

Throw Out Your 2015 Strategy and Budget Right Now

Depressive Realism as a Force for Change

I generally enter and exit the period between Christmas and New Year in a state of depressive realism. I’m not talking about depression in a clinical sense. Rather, I’m talking about a mood or state of mind that borders on depressed.

This isn’t a new phenomenon for me. I’ve come to expect it. It occurs because I step away from work (as much as is possible), reflect on the past year and contemplate the next. I’ve come to the conclusion that I wasn’t build with the reality distortion module that most humans possess which evolution designed to cause us to believe we are better than we . As a result, my self-assessments and perspective on the reality around…

Depressive Realism as a Force for Change

Kindred Disciplines: Growth Equity and Growth Hacking

growth equity and growth hackingGrowth hacking is now a mainstream term in tech circles, particularly those that are consumer-focused. Growth hacking definitions abound, but generally emphasize a data driven, creative and flexibly opportunistic approach to customer acquisition. Many would argue that growth hacking is simply a new term for an old concept – marketing. While the functions, tools and skills require for growth hacking may be essentially the same as “marketing”, the psychology and mission of growth hacking feel totally different to me. When I hear “marketing”, I think soft, fuzzy, ambiguous, and cost center. When I hear “growth hacking”, I think maniacal focus on growth, scrappy, data driven, tech/tool savvy, and…

Kindred Disciplines: Growth Equity and Growth Hacking

I love coffee. I had to stop drinking coffee.

Devil latte.

Three months. That is how long its been since I had a coffee. I didn’t have to give it up; but I needed to.

I love coffee. Warm, frothy, aromatic, tasty, comforting, caffeinating… That last part is where my divorce from coffee begins. I used to be able to drink the stuff all day long with no discernible impact. For years, I’ve had two shots in the morning and two shots in the afternoon. But something changed. I got in a rut. If I didn’t have my afternoon coffee, I crashed. No big deal; have an afternoon coffee and all would be well. That worked until the afternoon coffee started making jittery.

I couldn’t focus. I felt…

I love coffee. I had to stop drinking coffee.

Vulnerability and Entrepreneurship

I was browsing through the new Tattered Cover store in the recently renovated Union Station in Denver a few weeks back and found myself standing in the Business Psychology section of the store. For some reason, I have a habit of finding that section without trying – gravity seems to pull me there. In any event, I started thumbing through a book by Brene Brown, named Daring Greatly. The subtitle of Daring Greatly reads: “How the courage to be vulnerable transforms the way we live, love, parent and lead.” There aren’t many books that stand-out to me as having altered my world view; Daring Greatly definitely did.

I had not heard of Brene Brown’s work before I picked up the book…

Vulnerability and Entrepreneurship

We Sell the Ultimate Commodity – Money

venture-capital-adLast week I participated in a panel discussion at Denver University organized by Maclyn (Mac) Clouse. Mac is a long-time educator and supporter Denver’s entrepreneurial community. I was joined by Peter Adams, Executive Director of the Rockies Venture Club. Mac’s setup for the discussion was “dangerous” because he offered both Peter and I the opportunity to speak for 15 minutes (thankfully without slides) about the angel, venture capital and growth equity investing landscape. No-one who knows me would ever give me that air time…

Peter led off and did an great job talking about the angel investing landscape and the do’s and don’ts of approaching angel investors. Peter is the co-author of Venture Capital

We Sell the Ultimate Commodity – Money