Churn refers to the rate of attrition of a business model. The most common metric to measure churn is known as “churn rate.” This is expressed as the percentage of subscribers who discontinue their subscription within a given time period. Every industry has an acceptable norm for churn rate, given that some people – regardless of how excellent service is, or how much value it delivers – are always going to leave each month.
The best way to think about churn is as a negative drag on momentum. If the churn rate is too high, then a business can not move forward at a fast enough pace. You are spinning your wheels and not moving anywhere. Even worse, the churn rate also impacts your customer acquisition cost. After all, if you are losing subscribers each month, you need to replace them. And if you are churning these customers too fast, it becomes harder and harder to find the proverbial “low-hanging fruit.” That forces companies to embrace more and more expensive sources of customers, which drives down the overall level of profitability.
Based on this, you can see why venture capitalists are no fans of churn. What venture capitalists value above all else is stable, predictable, recurring cash flows that they can count on every month. If churn is too high, it starts to introduce even more uncertainty into the world of startup investing. Moreover, it starts to raise some red flags about your underlying business model. Why are customers leaving? Is it a function of the pricing? Or the quality of the product? Or the fact that there is just too much competition out there, and your biggest rivals are simply poaching away all of your best customers?
Thus, churn is also related to concepts like momentum and traction. It’s hard to establish any momentum or traction in the marketplace if you are constantly forced to replace customers every month. For that reason, startup founders should always be looking for ways to make their business as “sticky” as possible. While it’s no fun to have a paid subscriber suddenly downgrade their service level to a lower tier (or perhaps even to the free, unpaid tier), that’s still preferable to losing a customer forever. For that reason, startups (especially those offering apps and online services) spend a lot of time trying to get customers to commit for the long haul. They might provide a tremendously appealing annual subscription rate, for example, that will keep people around for at least 12 months. Or they might encourage people to download their address books or link up other services – that’s a surefire way to make it hard for people to leave later.
Within the venture capital world, a key metric to watch is called “Churn MRR.” (MRR is Monthly Recurring Revenue). This churn MRR is the drop in monthly recurring revenue from customers either canceling or downgrading their subscription and is even more closely tracked by VC firms than simple churn rate because it offers an obvious view into how lost customers translated into lost revenue. In short, churn MRR is a drag on future growth and needs to be minimized as much as possible.