Does hearing “negative churn” send you into panic mode? Although it may sound counterintuitive, it’s actually a good thing. Sometimes, closing the month in red numbers is synonymous with success, and this metric is the perfect example. 

As more companies turn to subscription-based models, it becomes more important to understand what leads to revenue growth and what prevents customer attrition.

By the end of this article, you’ll fully understand what negative churn is, how to calculate it, and how to achieve it for your company.

What is negative churn, and why is it good?

Before diving deep into the definition of negative churn, it’s important to understand the churn rate concept first. Churn rate is an essential metric in the subscription industry, as it measures customer retention or the number of consumers who have canceled your service versus your total clientele.

Now, negative churn was first popularized by David Skok, who defined it as the point "when the expansions/up-sells/cross-sells to your current customer base exceed the revenue that you are losing because of churn." 

When a business’s monthly recurring revenue (MRR) from existing customers is greater than the revenue churn from cancellations and downgrades, it’s a sign of negative churn. 

In other words, the upgrades from your remaining customers have helped increase your income and successfully achieve net revenue retention, even though you’ve lost revenue from churned subscribers. 

How to measure negative churn

Calculating negative churn

Churn is calculated by subtracting the expansion MRR from the revenue churn of that month and dividing it by the starting MRR. 

(Churned MRR - Expansion MRR) / Starting MRR = Net Churn

Let’s picture it with an example: Heart Fiction is a company that delivers fiction books with limited-edition, hand-painted covers. 

Heart Fiction started March with 100 customers paying a $20 subscription to receive one original copy. Two people canceled the service by the end of the month, but three upgraded their plans and now pay $30 monthly for extra customization on their book covers.

The formula would look similar to this: 

  • Churned MRR: 2 subscription cancellations = $40

  • Expansion MRR: 3 upgraded plans = $90

  • Starting MRR: 100 customers with $20 monthly subscription revenue per customer= $2,000

($40 - $90) / 2,000 = -2.5% churn

In this case, Heart Fiction’s expansion MRR is higher than churned MRR, meaning their customer revenue is higher than what they lost from the previous month.

Learn more: SaaS billing platforms: Understanding negative churn in the subscription industry.

How to achieve a negative churn rate

Before you think about how to reduce churn, you must understand your voluntary average churn. All businesses and their subscribers are different, so there isn’t a mystical potion to drink and magically find ourselves with a negative churn rate. However, there are two strategies your team can focus on:

1. Increase MRR from existing customers

Companies with a net negative churn increase their expansion revenue through value-adds. You can keep your current customers falling in love with your service by adding more value to their subscriptions through

  • Upgrades/upsells: Offer a better, more powerful version of your basic price core product with additional features at a higher price

  • Add-ons: Give the option to enhance a subscription with extra products or services

  • Cross-sells: Offer complementary products or services across your business

Define the strategy that leads to more conversions by reviewing all payment and incentive alternatives. Don’t be afraid to play around with promos or new integrations to enhance your customers’ experience and improve your expansion revenue.

You can use Recurly’s Monthly Recurring Revenue reports to identify trends before mapping out an optimization strategy. Remember that the less MRR you lose monthly, the less you have to make up for it. 

Learn More: How to calculate MRR.

2. Reduce churn from deserting customers 

You can’t only rely on expanding your MRR to fix your churn issues; try digging deeper into the main reasons your subscribers are canceling. 

Make sure your customer success team has the means to get feedback from your subscription base. Conduct regular surveys with current customer accounts to measure their satisfaction. Reach out for input from churned customers to evaluate their reason for leaving.

As part of a customer success strategy, listening and engaging with current and past customers will help your business get the insight foundations for optimization, better understand the reasons for your customer churn rate, and understand elements affecting your business model, such as involuntary churn. 

Check out our article on the 7 strategies to reduce customer churn to learn more.

Wrap up

Although understanding negative churn may seem complex at first, knowing how to calculate it and how to achieve it will be a powerful growth mechanism for your business.

Whether by engaging more, restructuring your pricing strategy, or offering different payment methods and pricing models, think of your customers and the value your service provides in their daily lives and how you can keep improving it.

The better your service and the more versatile your plan options are, you can ensure a longer customer lifetime and new revenue growth even without new customer acquisition.