Dave Kellogg just published an excellent new post titled Churn is Dead, Long Live Net Dollar Retention! Slides from my SaaStr 2020 Presentation. In the post, Dave argues that churn is too easily manipulated and that Net Dollar Retention is the better metric, to which I agree and have argued in the past (see Churn, Churn, Churn and Compounding Revenue’s Value in the Future).
One of the most important items of the presentation, which isn’t as well understood in the market, is that churn calculations can be done a variety of ways, and therefore manipulated.
From the presentation, here are four ways to calculate churn rates:
Let’s break out those four ways to calculate churn:
- Gross ARR – Take the annual recurring revenue (ARR) lost at the end of a period (e.g. the end of last year) and divide that by the ARR at the start of the period (e.g. the beginning of last year). So, assuming $1 million of ARR lost last year, and $10 million of ARR at the beginning of last year, the churn would be 1/10 = 10%.
- Gross ATR – Available to renew (ATR) is similar to the ARR calculation with one major difference: you don’t get credit for any multi-year contracts that transcend a calculation period. If a customer signs a three year contract, under the Gross ARR model, you assume they renew in year one and two for calculation purposes. Under Gross ATR, multi-year contract customers are removed and only customers that are available to renew are counted.
- Net ARR – Similar to Gross ARR, but you add any expansion or up-sell revenue and deduct any contractions or downgrades within the cohort.
- Net ATR – Just like Net ARR, but within the available to renew cohort.
- Bonus – Churn can be calculated against logos (customers) instead of revenue, making for even more ways to calculate churn. And, there’s additional funny business that can be done in calculating upgrades and downgrades to determine Net ARR and Net ATR.
Churn is one of the most important things for SaaS entrepreneurs to know cold. Go watch Dave’s presentation and get a deep dive on churn and net dollar retention.