What Is Customer Churn, and Why Does it Matter to Your Business?
Churn is the single most important metric for any subscription business. Whether you run a SaaS platform, an eCommerce subscription business or a Patreon page, not understanding customer churn could kill your business.
Even worse, it could kill your business despite all of the amazing stuff you’re doing to build your growth engine and acquire new users, buyers, signups or fans.
In this article you will find a definition of churn, hear why it matters so much, and learn how to measure its impact on your own business. In later articles we will give you tips on how to reduce churn, and share specific actions we took here at Bonjoro to tackle our own churn headaches.
But before we can understand why churn matters to business growth, we need to know what it is. Here's a clear definition of customer churn rate:
Customer churn rate refers to the proportion of your customer base who leave your business over a given time period.
So a 5% monthly churn rate means that 5% of your entire customer base leaves your business within that given period. A 25% annual churn rate means that 25% of your entire customer base leaves your business within that given period.
Calculating your Own Customer Churn
To calculate your own customer churn, take your customers lost during a given month and divide that figure by the number of customers at the beginning of that month. Do not take into account any customers you gain during that month.
Customers lost during Month / Customers at start of Month = % monthly churn
There’s a really useful calculator here that pumps out your churn rate and lost revenue due to churn.
All of this leads to one very important question for every business: what is a good churn rate, and what is a bad churn rate? Let’s take a look.
What is an acceptable churn rate?
A publicly listed SaaS business with revenues beyond $1,000,000 MRR, targeting enterprise customers on annual contracts (i.e. high-touch, deeply researched decisions), will have a very different “acceptable” rate of churn to an early stage startup targeting small businesses on monthly contracts, and lower average contract values (i.e. low touch, instinctive decisions).
“Acceptable” churn can also differ greatly depending on the industry you operate in, as some industries are much more price sensitive than others - imagine changing part of your back-end technology stack vs. simply changing your social media sharing tool, and it’s clear that tech SaaS tends to be much stickier than marketing SaaS.
As a rule of thumb, the more effort required to change from one tool to another in terms of resources, expertise and money, the lower the expected churn for that tool (or category) should be.
So, what about your business?
Before you can determine a good, or a bad churn rate for your business, you need to understand how churn affects business growth. In the definition of churn above, you might think that losing 5% of your monthly customers sounds OK, that you could live with it.
It’s not quite this simple, and it completely depends on your own unique circumstances.
Imagine a new company with 500 customers, and an average revenue per customer (ARPU) of $20. If this company loses 25 customers the following month, we can say that it has a monthly churn rate of 5% for that given period. On its own, that 5% churn rate tells us very little about the health and prospects of this company. We need more information.
Why churn matters - your growth ceiling
Let’s add some context and imagine this company grows on average at 50 new customers per month, and see the impact our 5% churn rate has on the businesses prospects.
Here, we will introduce two related concepts: your growth wall and growth ceiling.
The growth wall is a point at which you have achieved 75% of all possible company growth. Pretty horrible. The growth ceiling is a phase in your company lifecycle where the number of customers churned in any given period is equal to the number of new customers you acquire in that same period. Very horrible. We want to avoid this at all costs. Check out this growth ceiling calculator to calculate it for your own business.
Back to our example business. Based on an existing customer base of 500 customers, an acquisition rate of 50 new customers per month, and a churn rate of 5%, our example company will hit its growth wall in July 2019.
Think about this for a minute. We took what felt like a modest monthly churn rate of 5%, and applied it to a steadily growing business, with metrics that wouldn’t look unfamiliar to many early stage companies:
- 50 new customers a month - great
- $20 recurring revenue per month - awesome
- 500 customers already in the bag - fantastic!
But apply that seemingly innocuous churn rate of 5% to this happy picture, and the result is stomach “churning” (sorry).
This hypothetical business, acquiring 50 new customers per month, and pulling in $10,000 from 500 customers as of March 2018, will hit a growth wall in July 2019 (just 16 months from this presumably happy moment), a point at which it will have achieved 75% of all possible growth.
What’s worse, this business will NEVER grow past $20,000 monthly recurring revenue (MRR). From having 500 customers, a churn rate of 5%, means it will never get more than 1000 total customers. It will hit a growth ceiling and cease growing in May 2024.
Let’s think about this from a human perspective. Each and every employee will bust a gut from July 2019 to May 2024, and see next to no reward in that period.
- Investment will dry up
- Salaries will remain stagnant
- Customer turnover will dent morale
- The business will come under cash-flow pressure
This is why it is so important to understand and begin to control churn. Why controlling churn is the #1 thing you MUST do
Now let’s look at what churn (and controlling it) can do to your business. To do this we will take our example business, apply three different churn scenarios, and see how it affects their growth ceiling.
Scenario 1: Churn Rate 4%
Just by reducing churn by 1% this same business hits the growth wall in April 2020, a full 9 months later than they did with 5% churn. They hit a growth ceiling in May 2026, a full 2 years later than the original scenario. The business will reach 1250 customers, and $25,000 MRR.
Not too bad, but not too great. A middling result that buys the company a little more time.
Scenario 2: Churn Rate 1%
Now this is where we see the incredible impact of churn. The same business will now hit the growth wall in February 2029, some 10 years and 8 months after our original example. They hit their growth ceiling in March 2043, almost a fifth of a century later than the original. At that point they will have 5000 customers, and MRR will be running at $100,000, making it a $1.2m ARR (annual recurring revenue) business. Remember, this is all assuming the exact same acquisition rate of just 50 new customers per month, and $20 revenue per user.
This. Is. Crazy.
The same business, with a much stickier product and customer experience, has the capacity to be 5x more successful than our original business.
It didn’t acquire more customers. It didn’t increase prices. It simply focused on giving existing customers a better experience. That’s all
Let’s take a final look at Scenario #3, the business with 10% churn, double the problems of our existing business.
Scenario 3: churn rate 10%
This example is the scariest, and it shows why investors are so laser focused on churn when they vet prospective companies.
The very same business we looked at before, bringing home 50 customers a month, with existing monthly revenues of $10,000, will hit its growth wall in April 2018, just 1 month from the date of our calculations. 1 month later, in May 2018 it will hit its growth ceiling, meaning it simply will not grow any more. At this point, it will begin to lose more money than it adds each month, and it will very likely start burning through cash reserves.
This is an unacceptable churn rate for this business, and the human pain pulsing through this business will be tangible - it will impact morale, cash flow, everything.
If you have a business like this, fix churn NOW. Do nothing else until you do. Don’t increase your acquisition efforts. Don’t increase your prices
Do one thing, and do it quickly: Speak to your users! They are the only ones who can really tell you why people are leaving your business.
So how do I actually reduce churn?
In future articles we will go deeper on churn, and share actionable ways you can reduce churn quickly. And please, if you have used the growth ceiling calculator and are feeling downbeat and disheartened, don’t worry. You can turn this around. Churn is defeatable.
Subscribe to our blog to receive our first installment of churn busting tips next week. We promise, we won’t let you down.
And in the meantime, hear how one of our very own awesome customers, Matt Ragland from ConvertKit, reduced churn by 17% in just 6 weeks using Bonjoro.
Got any tips on how to tackle churn? Share them with us on Twitter - we’re @bonjoroapp - and we will retweet the best ones!