If you are a business that generates any meaningful portion of your income from recurring revenue, you most likely talk about, think about, and maybe even lose some sleep over, churn.
What gets measured, gets better.
As we’ve evolved as a business over the years, we’ve measured many, many things. Some have proven insightful, some just the basics of knowing your business and some have been useless and fallen by the wayside. Of all the things we’ve ever measured, churn was the most complex and took the longest to get “right.” This is not about prescribing our method of measurement but rather encouraging you to measure churn. Be OK with experimenting using different methods even run several at a time until you find the right one.
Methods of Churn Measurement
Churn rate is expressed as a percentage or rate. There are several ways to go about this calculation, but the fundamentals of most methods look like this:
- What is lost: This forms the numerator of the calculation and can be either based on the number of customers lost or revenue lost.
- The starting point: This is the denominator of the calculation and is also expressed # of customers or revenue before taking into account losses.
- Time period: This is based on the period of time you measure and is a big factor in finding the right answer for your business. Monthly measurement will naturally be more volatile and is more appropriate when you have a large number of customers. Trailing 3/6/12 month averages are good when you have fewer customers and want a sense of how your churn rate is trending.
Numerator, denominator, time period….not exactly rocket science, right? Most managers will be able to put something in place and iterate towards the right combination of those factors in a short term. But that’s just the calculation. The issue here is interpreting what the number is telling you and how to use that insight to get better. To do that, you need to consider several factors:
- Wanted/Unwanted Churn – Sometimes you choose not to renew your agreements with customers. Is this accounted for?
- Expansion/Contraction – How do you account for a customer increasing or decreasing the value of their agreement with you? How do you do so when changes occur mid-term v. at renewal?
- Causation – Do you distinguish between churn that you caused v. loss to market competition v. act of God? Really digging in here will cause you to consider the methods used and what you really care about in this measurement and how you’re going to use the insights.
- Variance in Agreements – This could include pricing, number of licenses, length of agreement, etc. Any meaningful factor that causes your customers’ agreements to vary from each other. This one can be surprisingly insightful.
There are more things that could be listed here, but the point is, the artform of interpreting churn accurately is critical for you to get better. To just look at the headline number without digging in is not going to do it. The goal is obviously to drive down churn rate, but it’s equally important to know why it’s moving the way it is if you’re going to truly get a handle on it.
Complex to measure, much more complex to interpret.