Gross, net and negative revenue churn explained
Why revenue churn can differ from customer churn in a SaaS business, what gross, net and negative churn show, and where the figures sit in the books.
By Achekam · · 4 min read · For Software (SaaS) businesses in South Africa, Nigeria, Kenya
Two software companies report the same customer churn for the quarter. In the first, the customers who left were small accounts on the cheapest plan. In the second, one of the departures was its biggest customer. The headline churn figure is identical; the damage to each business is completely different.
That is why a SaaS business needs to measure churn in revenue as well as in customers, and why investors ask about gross, net and sometimes negative churn. Each variation answers a different question. This article explains them in plain terms and shows where the underlying figures come from in the books.
Customers lost and revenue lost are different losses
David Skok explains that customer churn and revenue churn can differ greatly. In his example, losing 10 of 100 customers is 10% customer churn, but if 9 of those were small accounts, it may be only 3.4% revenue churn.
The reverse is just as possible. Lose one large customer and a handful of small ones, and customer churn looks mild while revenue churn is painful. Customer churn, covered in the monthly customer churn rate, tells you how many relationships ended. Revenue churn tells you how much income went with them.
Gross churn and net churn
Andreessen Horowitz distinguishes the two main ways of measuring revenue churn:
- Gross churn is the monthly recurring revenue lost in a month, divided by the monthly recurring revenue at the start of the month.
- Net churn is the revenue lost minus the revenue gained from upsells, divided by the starting monthly recurring revenue.
It notes that net churn understates the actual losses. That is the key point. A business can lose a worrying amount of revenue from cancellations and downgrades and still report low net churn, because a few existing customers bought more seats. Both numbers are useful, but they must be read together: gross churn shows how leaky the bucket is, net churn shows whether upsells are refilling it.
Because these are recurring revenue measures, one-off fees do not belong in them. Andreessen Horowitz states that annual recurring revenue should exclude one-time, non-recurring fees and professional service fees. A month with a large set-up fee from an existing customer is not an upsell; counting it would flatter net churn.
Negative churn
David Skok describes negative churn, where expansion revenue from remaining customers more than makes up for revenue lost from customers who leave, as the ultimate solution to the churn problem. In net churn terms, the figure turns negative: the existing customer base grows in value every month even before any new customer signs.
Negative churn tends to come from pricing that grows with the customer, such as more seats, more usage or a higher tier, combined with customers who succeed enough to need more. It is a goal to design towards, not something that happens by accident.
When churn is too high
David Skok states that net revenue churn above 2% per month indicates something is wrong in a SaaS business, because at 2% monthly churn the business loses about 22% of its revenue every year. That is one expert's threshold, not a rule; treat it as a warning level to watch. His guide to SaaS metrics covers monthly and annual recurring revenue, churn and negative churn, customer acquisition cost, lifetime value and the payback period in detail.
Finding the figures in the books
The churn calculation needs three amounts for each month: recurring revenue lost to cancellations, recurring revenue lost to downgrades, and recurring revenue gained from expansion. Most of the evidence is already in the ledger.
Downgrades in credit notes. A credit note is issued from the invoice it corrects, in full or for chosen lines, and posted to the ledger. There is no credit note without an invoice. A downgrade handled by credit note, as described in credit notes for seat downgrades, leaves a clear record of revenue reduced and which customer it came from.
Cancellations and expansions in invoices. Compare each customer's recurring invoice lines this month with last month. A customer with no invoice this month has churned; a customer whose seat count rose has expanded.
Totals in the ledger. The general ledger lists every posted line, and the trial balance shows each account for all time, for a period or at a date. Management accounts show an income statement for a chosen period beside the period before, both added up from the business's own journals and exportable as PDF or CSV. Note that the year-to-date preset starts on 1 January, not on the business's own year start.
There is one limitation that matters for churn work. Today, all invoice revenue posts to one account, Professional Services Revenue (4100), and an invoice line cannot name another sales account. So the revenue total includes set-up fees and other one-off charges alongside subscriptions. Work out recurring revenue from the invoice lines themselves, not from the account total, or one-off fees will distort the figures.
A simple monthly worksheet:
| Customer | Recurring last month | Recurring this month | Movement |
|---|---|---|---|
| Each customer | From last month's invoice lines | From this month's invoice lines | Lost, downgraded, expanded or unchanged |
Add up the movements, and gross churn, net churn and expansion all fall out of the same sheet.
Build the worksheet for last month from your invoices and credit notes, calculate gross and net churn side by side, and repeat it each month so the trend is visible before an investor asks.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
