Churn is one of the most widely discussed metrics used in the subscription industry, but it may surprise you that churn has no universal definition. Businesses define churn based on what is most relevant to their organization and on data that is supportable for potential investors.
While there are many variations of churn, churn is always a measure of attrition or loss. It can measure lost customers, contracts, MRR, GAAP revenue, contract value or bookings.
Churn is typically expressed as a rate or a ratio (churn rate of 12 percent) but can also be expressed as a whole number (churned 10K of MRR or churned two customers). When discussed as a rate, churn is the inverse of your renewal rate. An 80 percent renewal rate is the equivalent of a 20 percent churn rate.
In the finance function, churn is used:
A single churn number is suitable for discussions with analysts, reporters, peers and other interested, non-operational audiences. However, to better inform key business decision-makers in product or service pricing, planning, packaging and marketing (among others), users employ a variety of more sophisticated churn metrics to help them understand the true performance of their organization and relative to their peers.
Users should define clear terms for each relevant churn metric and measure them consistently from period to period. Again, this requires well-defined and agreed upon definitions and metrics for churn measurement. Product management should look for potentially dramatic different churn numbers by cohorts and dimensions such as these:
“Churn is the scourge of subscription companies. It has two large effects. Losing a customer is a punch to the stomach and takes its toll on the morale and mojo of the company. No one wants their product or service to not bring value to a customer. The second effect is on growth and profitability, which affects a company’s value. A one-percent decrease in churn will add 12% to a company’s valuation in 5 years. Most companies worship entirely at the altar of new sales; ignoring churn comes at great risk to morale, profitability and value,” said You Mon Tsang, CEO of ChurnZero.
|MRR Churn||Revenue Churn|