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Okay, let's recap our information.
0:00

We had ten customers that paid us
a total of $34,500 MMR last month.
0:03

One is relatively huge and pays us
10,000 a month, that's customer 10.
0:10

8 are medium sized and
pay us $3,000 a month each.
0:16

And 1 is relatively small, customer 1,
and they pay us $500 a month.
0:20

The 4 questions we have are, 1,
0:25

what is the Gross MRR churn is we
lose 2 medium sized customers?
0:28

2, what about just the Gross Churn
if we lose 2 medium sized customers?
0:33

3, what is the Gross MRR churn
if we lose our 1 big customer?
0:38

And finally, 4, what is gross churn,
if we lose our 1 big customer?
0:44

So if we lose medium size customers
that cancelled MRR as worth
0:49

6,000 to a medium size, so
we'll write 6,000 here.
0:55

6,000 divided by our beginning month
1:00

MRR of 34,500 gets us a gross
MRR churn of not 0.17,
1:05

it's 17.39%, that's really high.
1:12

Let's look at just our
gross churn calculation.
1:18

In this case, we would lose 2 customers
1:21

divided by the 10 at the beginning of
the month, and we don't have 20 cents.
1:24

Again, it should be a percentage 20%,
that's also high.
1:28

Now let's walk through
the big customer example.
1:34

We lose $10,000 of MRR,
and we divide that 10,000
1:37

by our beginning of month balance, 34,500.
1:43

And we just gotta format this correctly,
28.99%, sound the alarm bells.
1:48

Let's look at gross churn here.
1:54

Gross churn would be 1 divided by 10,
and you got 0.1 is 10%.
1:56

This example illustrates
how the calculation
2:02

you use can have a large impact on
your understanding of the business.
2:05

Let's introduce a few other
dynamics to these calculations,
2:09

specifically contraction and
expansion of our customer accounts.
2:13

Remember, we charge our
customers based on activity, and
2:18

that can fluctuate month to month.
2:21

So, let's start over and pretend we
still have our 10 customers, and
2:23

34,500 in previous month's revenue.
2:27

In this period,
2:30

our large customer with 10,000 in
MRR is still sadly going to cancel.
2:31

So we have cancelled MRR of 10,000,
and I'm gonna label it just so
2:36

it's a little bit more clear and
get these formats sorted.
2:44

Okay, so the large account is still
gonna churn 10,000 of cancelled MRR.
2:50

However, we also have one medium customer
shrink their account from 3,000 to 2,000.
2:56

This will be known as Contraction MRR, and
3:02

would mean we have a Contraction MRR
of $1,000 in this period.
3:05

So I will, do that knock one zero off,
3:10

and type in the Contraction MRR.
3:15

Finally, in addition we have three of
our medium accounts increased their
3:20

activity on the software.
3:25

Translating to an increase
in what we charge them for
3:27

6K each, going from 3K to 9K.
3:31

That's called Expansion MRR.
3:34

Let's write it in Expansion and
it's three accounts,
3:37

increasing the account size from 3 to 9k,
so that would be $18,000 in Expansion MRR.
3:42

It's not a percentage, and it's not 180,
3:50

there we go, 18,000 Expansion MRR.
3:55

So to recap, you're starting with
the beginning month MRR of $34,500.
3:59

We had Cancellation MRR of 10K,
we had Contraction MRR of 1K,
4:06

and we had Expansion MRR of 18K.
4:12

Cancellation and contraction are bad,
expansion is good.
4:16

So our calculation of
Net MRR Churn would be,
4:20

Net MRR Churn = (Cancellation MRR +
4:26

Contraction MRR- Expansion MRR) / BOM MRR.
4:30

So in this situation Net MRR Churn
4:36

is going to be equal to cancellation
4:41

+ contraction - expansion
4:47

divided by beginning month.
4:52

And I missed a parenthetical in
the formula up here,
4:57

so I'm gonna go head and add that in.
4:58

So in this example, our Net MRR Churn is
5:04

a very superb number of -20.29%.
5:08

When you have negative MRR churn it means
the amount of money you're charging your
5:13

existing customer base is growing.
5:18

I have seen people I respect,
split up Net MRR Churn in two components.
5:21

A combination of Gross MRR Churn and
Net Expansion MRR.
5:26

Where Net Expansion MRR is just
the calculation of the Delta between your
5:31

Expansion and Contraction MRR.
5:35

Let's walk through that in this example.
5:39

So we have our Gross MRR Churn,
5:42

our Net Expansion MRR, and
then our Net MRR Churn.
5:47

Our Gross MRR Churn in this
example is 10,000 divided by
5:57

the 34,500 our Canceled MRR, so
there's our Gross MRR Churn.
6:02

Then our Net Expansion MRR
would be a Contraction MRR-
6:08

the Expansion MRR divided by
our beginning of month MRR.
6:17

And our Net MRR would be the Gross
MRR Churn + the Net Expansion MRR.
6:24

And you can see you get
the same Net MRR number.
6:32

It can be helpful to split out these
two churn calculations if, for
6:38

example, you have different teams working
on preventing customers from canceling
6:43

versus upselling existing customers.
6:47

It just depends on the situation.
6:50

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