Churn Question
Let's say you are a startup growing quickly and your Logo Rollforward looks like this:
BoP 2019 Customers: 6
(+) New customers: 100
(-) Churned customers: 6
= EoP 2019 Customers: 100
By classic churn definition (# churned customers / original customers) churn would be 100%. However, this isn't a particularly useful number.
How should I think about this? Thanks!
100% is right. think about churn rate as 1-renewal rate. if all 6 customers from bop churned, that means 0% renewed. that's the most relevant number (of any given set of contracts, what % can i expect to stick around after 1 year). the implication is that you can then use that number to project customers at end of year 2. if they behaved the same as the initial 6, then you'd expect none to renew and to have zero customers again (assuming no new adds)
Thanks. Makes sense. Does it add complication that, of those 100 new customers, the 6 that churned might have been within those 6?
In other words, do you need to specifically find out whether or not the 6 that churned were among the initial cohort of 6?
Yes this difference is critical. Typically when you think about churn it's based on annual contracts, so a new customer you signed up in Jan 2020 can't churn until Jan 2021 when their renewal would be up even if you know in Oct 2020 that they're churning.
In this way your churn numbers for 2020 should only include customers who you signed up in 2019 or earlier.
Agreed on this point; however, some companies do allow for contracts on a quarterly / monthly basis, which in turn could lead to some noise in the churn figures unless adjusted.
Another avenue to run through may be more analyzing monthly cohort revenue retention going forward to try and pin down a churn pattern (i.e. cohort churn stabilizes around month 12 and the company sees 90%+ retention at this point, etc.)
I think this makes sense because the company that I'm looking at does both monthly and quarterly subscriptions, as well as usage based pricing.
Few comments:
(i) This situation is rare (company must be in hyper hyper growth to go from 6 customers to 106 customers in a single period). With that said, your math is correct, albeit just unlikely to encounter much in real life.
(ii) Per the above, you'd probably want to look at a few other analyses, namely retention by cohort (to identify the potential issue that you flagged) as well as a 'renewal' analysis to identify the renewal rate for customers on multi-year contracts who have chosen to renew (vs. depart) when encountering a contractual decision point.
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