Software as a Service (SaaS) businesses keep increasing. This has resulted in business owners searching for the right metrics to measure development in their SaaS financial model. The churn rate, along with its many variations, is a key metric used to measure progress for such businesses. A part of this metric is the MRR churn rate that is essential to analyze the financial performance in the SaaS financial model. If you want to know what is MRR churn, then we’re here to assist you with all the relevant details.
What is Churn In Saas Financial Model?
Before understanding what MRR churn is, let’s look at the basics as to what churn is for SaaS businesses. The churn rate is the percentage of customers that cancel their subscriptions over a given amount of time. It is a key metric that helps you figure out how strong your business is through your SaaS financial model.
While it may seem like a simple metric to apply, it doesn’t work as easily as you may think. You will need a service that can guide you through the application and analysis of it in your SaaS financial model. With the right CFO service on board, this calculation can become easier for you.
What is the Importance of Calculating Churn?
But why should you calculate the churn rate? Well, there are plenty of reasons as to why this is necessary. Firstly, you need to understand that this doesn’t tell you how much growth occurs in your business. Instead, it tells you the very opposite of this.
Operating a SaaS business comes with its downfalls and your churn rate can help you figure things out better. It gives you the knowledge of the average number of customers that leave your business within a time frame. This impacts your business as you run majorly on subscriptions.
Having the know-how of the number of people flowing out will help you assess what changes you can make at the decision-making end. However, to make the right decisions, you will also have to look at the SaaS financial model. This is when the MRR churn rate comes in.
MRR Churn Rate- The SaaS Customer Churn Rate Extension
The Monthly Recurring Revenue (MRR) churn rate helps your business identify how much in revenue you’re losing out. It essentially a more detailed churn rate that portrays the change in the revenue as customers leave your business.
Customer churn rates in your SaaS financial model help you figure out changes that will aid you in operational decision-making. But that is not all you need to work effectively. In your business platform, you also need to consider the SaaS financial model template. This is what the MRR churn rate helps you with.
The calculations and analysis of your MRR churn rate are done by a chief financial officer. You want to make sure that you are thorough in your quest for finding the ultimate CFO for your business. Don’t overlook this as it can make a huge difference in improving your overall MRR churn rate.
Why Should you Calculate the MRR Churn Rate?
Now, you must be wondering as to why you must calculate the MRR churn rate for your SaaS financial model template. Well, look no further as we have got this covered for you. You will find a multitude of reasons why doing this is essential. Here, we have picked out two of the core reasons as to why this rate should be calculated.
For B2B or B2C SaaS Businesses
Calculating the MRR churn rate is essential not just for B2B businesses, but also for B2C businesses. But why is it relevant? When it comes to B2B businesses, you work on making sure that your number of subscribers keeps increasing. However, this is not always the case. There will be times that you will lose out on consumers, and you will have to factor in the consequences.
Ultimately, with more customers unsubscribing from your B2B platform, you will lose out on revenue. To account for this, you will need to ensure that you have an MRR churn rate available. This will ensure that you have key figures that will help you understand how much you’re losing out over a certain period.
Now, the MRR churn rate is not only limited to B2B platforms, but it is also essential for B2C ones. This helps to track down how many customers stay with you as you go about your business. Since B2Cs deal directly with customers, the MRR churn rate is supposed to be highly necessary for them as well.
This helps in figuring out whether your marketing strategies create a temporary interest in the customers or a long-term one. Whether it is B2B or B2C, this rate will allow you to make effective decisions based on the revenue changes.
To Measure Upgrades and Downgrades
This rate helps you to figure out two of the most important things; the upgrades and downgrades of your business. Upgrades essentially refer to more customers flowing in and growth, whereas downgrades refer to customers leaving the business.
So, how does the MRR churn rate help you assess these two? Well, with this rate, you’ll be able to understand whether high-volume customers are going out of the business or not. The higher the percentage of MRR, the more outflow there is when it comes to revenue generation.
The opposite holds when the MRR is low. In such a case, you will be retaining more customers and will have a more stabilized revenue generation. Keep in mind, your MRR will not be zero, mostly because it takes a realistic approach.
Calculating the MRR Churn Rate In SaaS Financial Model
Now, let’s talk about the calculations. You will find these to be pretty simple as you look at them. However, the application part is where things get a little hazy. But don’t you worry, you can make this step easy for yourself with a special purpose CFO on hand.
So, what’s the formula used for the MRR churn rate? Let’s take a look:
Monthly MRR Churn Rate =
The numerator takes in the contracts canceled in a month, whereas the denominator also accounts for contracts up for renewal. It is easy to follow once you have all the relevant details for the calculation of this rate. However, there is one slight issue to take care of- the upgrades and the downgrades.
Calculating the Upgrades and Downgrades
The calculation overlooks these two aspects, so you will have to do these calculations separately to make it work. Your churn rate should be free of these aspects, so you want to ensure that you remove these two. So, how do you get rid of these two from your calculations?
Well, you will have to calculate the upgrades and downgrades separately and then reduce your revenue with that amount. Does it seem a bit too confusing? Let us make it easier for you. Learn how our CFO services can help you with this highly technical and critical success factor!
Analyzing the SaaS Financial Model MRR Churn
When it comes to the analysis of the churn rate, what’s better than having the right service to guide you through it? If you’re unaware of what your MRR churn rate explains to you, then look no further. Our CFO services are here to guide you with an in-depth analysis of all SaaS financial model template-related matters.
We, at Oak Business Consultant, are specialized in providing consultation on these matters. Get the know-how about your business’s financial needs and learn how to make the most of them with our help. Visit our website Oak Business Consultant and get a free consultation.