MRR Churn Example Pt. 26:52 with Michael Watson
We walk through the solutions to the previous video.
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 Extension 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 parent that are, a formula up here. 4:57 So I'm gonna head, and had 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 Cchurn 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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