Why is Negative Churn important
Negative Churn refers to a scenario where a company's revenue is growing at a faster rate than its customer acquisition costs. This means that the company is acquiring new customers and increasing revenue from existing customers at a rate that is greater than the rate at which it is losing customers. Negative churn is considered a highly desirable situation for a business as it indicates that the company is not only retaining its customers but also increasing revenue from them.
The formula for calculating negative churn is (MRR Growth Rate - Churn Rate) x 100.
For example, if a company has a monthly recurring revenue (MRR) growth rate of 10% and a customer churn rate of 5%, the company would have a negative churn rate of 5%. This means that the company is growing its revenue at a rate that is 5% greater than the rate at which it is losing customers.
Examples: A SaaS company that starts out with 100 customers paying $100/month and gaining 10 more customers paying $150/month, resulting in a 15% increase in MRR from the previous month and a 5% churn rate. In this case, the negative churn is 10%.
A retail company that starts out with 100 stores and gaining 20 more stores and increasing the average transaction revenue by 10% resulting in a 30% increase in revenue from the previous month and a 5% store closure rate. In this case, the negative churn rate is 25%.
Negative churn is important because it indicates that a company is retaining its existing customers and increasing revenue from them, which is a key driver of sustainable long-term growth. It's also a strong indicator of customer satisfaction, retention and the effectiveness of upselling and cross-selling efforts. Additionally, it also indicates that the company's pricing strategy is effective and that the company is well-positioned to fend off rivals. Companies that are able to consistently achieve negative churn are likely to be successful in the long-term, as they are able to generate revenue growth while keeping customer acquisition costs low.
