Churn rate is one of the most relevant metric when it comes to growth. It is also well cover and explain across entrepreneurial literature. However, it will be difficult to reinvent the wheel, there are a few aspects concerning churn ratio that better to have them on your mind while analyzing it and coming to conclusions. Before going to a business definition let’s just consider Churn Rate as one more strategy to make the business grow exponentially.
In the graph below, you can see a company with
- MRR1.500 Eur
- Monthly Growth 5%
- Monthly Churn Rate (Blue Line)3%
- Monthly Churn Rate’’ (RedLine)0%
- Time frame100 interactions
Over the period of 100 interactions, in this case in month basis, growth is been eroded by 13.73K Eur, meaning losing a potential of 128,88%. In other words, the sooner you address, understand and act against your churn rate the healthier your growth will be.
Even when churn effects on revenue are well known, let’s take a look at it on the other way around, and this would be the growth catalyst. When Churn contributes to grow is called negative churn. Any initiative aiming to reduce a company’s churn rate will impact directly the P&L if succeed. (Play around with the sheet and you will see the potential of allocate money in customer success )
Negative churn becomes more relevant as companies grow and reach mature stages, where achieving growth not only depend on sales. Actually, Customer Success becomes crucial due to its ability to create long term relationships as well as having lower cost than other strategies such as acquiring new customers. Any revenue retention or up-selling run by customer success immediately generates higher contribution margin than any sales. (CAC > CS) → (CS Contribution margin > Sales Contribution margin).
A key factor to take into consideration and mostly forgotten, from my point of view, is when actually churn happens, or what is called Churn Momentum. Churn, unfortunately, is a lagging indicator yet it is really useful to get conclusions. Let’s take and step back and come back to the basis again:
Total Customers = Current Customers + Acquisitions – Cancellation
But here it comes another relevant layer of analysis, when does the cancellation happen? Let’s keep it simple and assume, that once the client cancels the service no refund takes places as well as subscription took place in a year basis.
Accordingly, there would be to hypothesis to analyze:
- Subscription ends and renewal doesn’t happen
- Subscription gets cancelled
In the first case nothing can be done, company loses the customer, and if the company wants to bring it back will have to spend part of the sales budget, incurring in Customer Acquisition Cost (CAC). However, regarding the second case, from the time where the customer cancels the subscription to the point where this one actually finishes, there is a time window suitable to win this customer again. Re-winning the customer again will prevent the churn to happen helping revenue to grow.
Last but not least, while speaking about churn, it is usually confusing revenue churn and customer churn, and despite their are correlated they are not the same, therefore can’t be used as synonymous.
The following Churn Rate Sheet has been attached during the whole post for the purpose of letting you play and discover by yourself, how powerful tool churn rate could be.