The principle of double negatives has been used to demonstrate the problem with this term. The expression “negative churn” is redundant and can cause confusion, so we should stop using it for good.
There are a lot of great posts by SaaS experts that have adopted the idea of negative churn. This includes David Skok, OpenView Partners, and Lincoln Murphy who all attribute it to Daniel Drucker from Bessemer Venture Partners. It seems like an interesting concept because they are prestigious in this field.
SaaS Growth vs. SaaS Churn
Net negative churn rate (don’t confuse this with SaaS growth) is the process that drives negative churn. One example is customers who are still using a product but have stopped paying, which is very different from users driving customer retention and revenue. Negative churn metrics should be measured separately because they provide insights into processes like sales or marketing which would otherwise go unnoticed.
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I think the idea of negative churn is attractive because, on paper at least, it looks like you can grow your customer base without any losses.
The number of old customers churned is the ΔCold, and the number of new customers acquired are called ΔCnew. Or in other words, it’s how many people downgraded or upgraded their service.
In this article, I argue that churn should be a metric of its own and not grouped with growth. This is because they are calculated by different business processes.
The difference between churn and growth is that while they are mirror images in theory, the differences show up when you practice them. Click To Tweet
There’s a trick in physics where if you substitute -t for t on paper, then reverse time theoretically it works out just fine but this doesn’t work so well with negative churn.
In practice, acquiring a new SaaS customer is much more difficult and expensive than keeping one. Moreover, losing an existing client can be free because of the viral nature of churn in this industry – it scales with your size! Achieving organic growth requires network effects that come from sound business strategy combined with flawless execution.
Upsell is also Not Negative Churn
The idea of negative churn is based on the theory that a SaaS business can offset customer attrition with upsells, so their net change in recurring revenue would be positive. But there’s an issue: when customers are sold to again, they’ll often quit too and take all those dollars with them.
Upselling can increase the average recurring revenue per customer over time. It is an increase in price, not volume. SaaS churn cannot be fixed by increasing sales or marketing spend because it has a negative effect on virality – if people are unhappy with your product they will tell their friends to avoid it.
Upselling is better viewed as a transition from one average price scenario to another. It can soften the impact of churn, but it cannot reverse it. The chart shows how the SaaS growth trajectory when half of your users upsell, is really a transition from the base price SaaS growth.
In order to offset SaaS churn, upselling has to be significant. In this particular example, it assumes that 50% of customers will buy an average 2X the initial purchase if they are convinced by a salesperson or otherwise made aware of the opportunity. That means you must double and triple your value in order for customer retention rates over time.
Needless Negativity
It turns out that just relying on the economic factors of negative churn doesn’t work for me.
I think it’s because negativity is all around you and even if people are happy, they’re still not satisfied with what they have. Click To Tweet
