What is Churn? Easy explanation & how to calculate this SaaS metric - YouTube

All right, friends in this chapter, we're going to look at the Churn Rate. The Churn Rate is the

percentage of your customers that are terminating their subscription over a certain time period.

Let's take Netflix as an example.

If Netflix has 10 million monthly subscribers, but 2 million of them are canceling their subscription

every month, then Netflix would have a churn rate of 20%.

Now, 20% is a really, really terrible turn rate, but actually not unheard of.

Salesforce, as an example, had a churn rate of 8% back in 2008 - per month.

That means they were losing 25% of all their clients every quarter.

Meanwhile, client acquisition was looking great, sales was crushing it, and they were adding tons

of new clients.

But it was not until they solved their Churn issues that Salesforce became the giant software company,

we know a Salesforce today.

See, the problem with having a high Churn Rate is that Churn behaves much like trying to fill water

into a leaky bucket.

If you add 20 customers in a month, but you also lose 20 customers in the month - 'churn' 20 customers

in the same month, you are back to where you started.

It is not until you fix the holes in your leaky customer bucket that you start to make money.

In other words, your growth rate needs to exceed your churn rate.

That's why Churn Rate has a negative effect on so many other KPIs that we will look at in this course.

And with a high churn, you can't focus on growing value of your existing customers, which is where the

real money lays.

This is also the reason why it doesn't help to bias these numbers.

Or in Steli Efti's words, the founder of Close.io: "Don't approach churn but trying to put lipstick on

a pig."

He says that because a lot of people have the tendency to calculate churn in a way that makes their

company or department look better than it actually is.

And there are a lot of ways to bias these numbers, but no one will be able to trick you, not after

this chapter.

Ok, so back to our Netflix example, the first important thing we need to learn is that the time period

we measure plays a big role.

It's because customers can't churn unless their contracts are up

right?

Typically, we would pick the same time period of our subscription plans here.

In the Netflix example it would be a monthly plan

right?

Some other companies might offer annual packages.

If you have a mixture of monthly, quarterly, annually - I generally recommend to take the average contract

length.

By the way, a neat side product of the Churn Rate is that you can calculate the average time someone is

a customer.

All you need to do is divide one by your churn rate.

In our Netflix example, we divide one by 20 percent and see that the average time someone is a Netflix

customer would be five months.

Like I said, 20 percent is a really terrible churn rate and for sure not true for Netflix.

Here's a graph for Churn Rate over time and it shows why we can calculate the average time someone is

a customer this way.

As you can see, our average lifetime is five month and if we don't sign up any new customers,

we would be totally out of business within 20.

Pretty straightforward.

Let's have a look at a typical churn graph and I'm going to highlight a few hat tricks that you should

be aware of.

Ok, so what we are looking at here is a Churn chart

over the time span of a year. We can see that the Churn Rate is going down over time, meaning less

customers are terminating their subscription.

Happy campers.

I typically like to include a trend line to make this extra clear.

This grass works really well unless you are looking at the Churn Rate of a company which is in a state of

hypergrowth.

See, when you have a lot of growth, both your churning customers and your total customers will go

up. By comparing both numbers to the prior month,

your churn rate will go down even if you have more customers churning out of your subscription than

in the previous month.

In this example we see here, twice as many customers are churning out of your product, 4 million

instead of 2 million.

Yet our churn rate is going down from 20% to 10%.

For more or less stable companies, this is not an issue. Also,

sometimes it makes a lot of sense to segment the products.

Let's say you have a basic and ultra premium enterprise plan.

Typically, the lower tiers have a higher Churn Rate than the enterprise tiers. If you have a similar pricing

in your company

I would probably separate them out. And be careful if you have a highly seasonal business:

Let's say you have an app that recommends summer adventures, then I recommend to compare year over

year in year chart instead of comparing this month's Churn Rate to the previous month's Churn Rate.

This will give you a much more accurate picture.

Churn is an important metric, and inevitably we will come back to it and look at the impact it has

to other metrics. For now, the last thing I would like to explain is the difference between - Customer Churn

and Revenue Churn.

So far, we've only looked at examples of Customer Churn, but usually speaking, we're way more interested

to learn about our Revenue Churn.

Why is that?

Well, what if your Customer Churn goes down but your Revenue Churn goes up?

Say what?

Yes, both Churn Rates can go opposite ways.

This is what we're looking at right now in blue.

We have our Customer Churn going down.

All os looking good, but our Revenue Churn in red is going up.

Bad news.

This is definitely not what we want.

I'm sure we can handle less customers as long as we're making more money, but definitely not the other

way around.

Let's have a look at my KPI calculator. In blue on top

you can plug in your numbers to calculate the Customer Churn rate and right below and red - the revenue

based Churn.

As you can see, both Churn Rates are calculated exactly the same way. We are taking the revenue we lost

in a certain time period and divide it by our total revenue made during the same time period. In green

I also included the inverted Churn Rate - the neat side product of your Churn Rate to see the Average

Customer Lifetime.

And if you want to copy charts I used in this chapter, please scroll further down -

simply make yourself a copy or download it in Excel format.

So to sum up: The Churn Rate as the ratio between customers that are terminating your service to your

existing customers. Having Churn is like filling a leaky bucket.

The bucket will never hold your stream of revenue,

if you don't fix the leaky churning revenue wholes. With the Inverted Churn Rate, you can calculate the

average time someone remains your customer and don't approach churn by putting lipstick on a pig.

Choose a meaningful time span, such as monthly or annually, separate out different product categories,

such as expensive enterprise plans and be careful in times of hyper growth.

And lastly, know the difference between customer and revenue based Churn Rate.

All right.

Thank you, friends, and see you in the next chapter.