Churn's True Cost
In our previous post, we described churn as an all-too-neutral term for what it really describes - losing customers, often quite quickly. Now, we take a look at what churn can do to your business.
Your customers are your most important brand ambassadors. Think for a minute about the negative branding that can happen if a SaaS startup is losing nearly half its hard-won existing customers every year. Well, that’s the situation at 5% churn per month. In addition to the direct cost of losing customers, there’s a commonly cited multiplier effect: unhappy customers tell twice as many people about their experiences as happy customers do. So, at 5% churn, your disgruntled former customers, sharing their tales of woe, quickly swamp the impact of your remaining happy customers. There's another effect related to churn. Many startup businesses are able to use an initial surge of interest, enthusiasm, and good press to get an early wave of new customers who are mostly “free”, from a marketing standpoint. But churn can totally spoil this effect. For instance, let’s say you start a Butter of the Month service. (There's going to be some churn involved in this one, even if you keep all your subscribers!)
You launch the service June 1st, at the beginning of National Dairy Month. (Tagline: “30 Days of Dairy!”). Butter connoisseurs love your club. Butter lovers tell their friends, their friends all buy it, and your service goes viral. After a couple of years, you might have 100,000 subscribers around the world enjoying their monthly allotment of butter - all without your spending a dime on marketing. But maybe that’s all the “easy” customers you’re going to get. To grow, you’ll have to get the word out to people who like butter rather than love it. No problem; you’re already a butter millionaire, and you have hundreds of thousands of dollars a month to spread around on marketing. However, you won’t have nearly the same marketing headroom if your business has experienced a monthly churn rate of, say, 5%. If you are adding the same number of customers every month - about 4,200 - but suffering a monthly churn rate of 5%, instead of 100,000 customers after two years, you would have fewer than 60,000. At the same time, more than 40,000 people will have been your customers at one time or another, but gave it up, and they’ll tend to tell their friends that they did so. How much product development, customer service, advertising, and marketing money will you have to spend just to try to turn things around? We can look at the same calculations in terms of monthly recurring revenue (MRR). If the price of your butter of the month service is $10 a month, a no-churn scenario gets you $1 million a month in gross revenue per month, or $12 million a year. At 5% churn per month, offsetting your otherwise steady growth, your revenue is only about $570,000 per month, or $6.8 million per year - a reduction of nearly 50% in what you could have otherwise achieved.
In addition to revenue from the core offering, a healthy, growing business, as in our no-churn scenario, can add premium options, related products, advertising, and other sources of additional revenue. Such a business should be able to attract investment as needed. Whereas a business that’s losing customers hand over fist, as in the 5% churn situation, will just be trying to lock the barn door to keep even more of the horses from escaping.
These calculations are simply a way to bring home a key point: Every customer is valuable. High churn rates tell the world that you aren’t valuing your customers.Control your churn – before it controls you. To get started, see CEO Dan Burkhart’s blog post and Recurly’s guide (registration required) for tips on reducing churn.
Note: To calculate what percentage gains or losses mean over time, use the Rule of 72; it works for both growth and loss. If you have a monthly growth rate of 6% a month, your revenues will double in about 12 months (because 72 / 6 = 12). But if you have a monthly churn, or customer loss, rate of, for example, 4%, your business will drop by half in about 18 months (because 72 / 4 = 18). And, to better calculate your churn rate, see analyst Devin Brady’s post on the topic.
Do you have your own churn-related resources? Questions? Concerns? Share them in the Comments below - or send directly to the author at firstname.lastname@example.org.