Churn: the customers you lose before you grow

This is a fundamental metric for any business based on retaining customers.

For these businesses, it is usually one of the first metrics to optimize, because:

What we use churn for

Indicator of customer-product fit: improving marketing and product

To make sure a business is gaining traction as it should, what the customer is looking for and the value the business offers need to fit together. In startups where recurrence matters, churn tells us how many customers leave because the product does not provide enough value. Therefore, the more users we retain and the lower the churn rate, the better the fit between product and customer.

Through cohort analysis, we can identify which group of customers has the lowest churn rate, meaning the customers who gain the most traction with the product. This helps us understand why that cohort works better, and then apply what we learn to improve features or refine the target audience for marketing investment.

Indicator of growth capacity

In businesses that aim to increase the number of recurring customers, every time one customer leaves, another one needs to be acquired just to maintain a similar position. This means a significant investment of money and resources.

So, out of all the new customers acquired at a cost (CAC), only some will actually contribute to growth.

For example, if we have 1,000 customers and want to grow by 20% monthly, but we have a churn rate of 15%, our data would be:

Or, in other words, viewed from the perspective of marketing investment:

Deducing customer lifetime (LifeTime - LT)

One of the biggest difficulties for a startup is identifying how long a customer will last, meaning the LifeTime (LT). However, there is an easy, although not exact, way to determine churn approximately. It is done with the following formula:

How to calculate churn

There are many ways to calculate churn, some of them quite complex because the calculations may be affected by factors such as:

• A customer leaving at the beginning of the month is not the same as a customer leaving at the end of the month.
• If you cannot identify each customer, you will not always know who has left and who is new.
• Some new customers acquired during the month may also end up leaving during that same month.
• Other situations, such as technical limitations when trying to obtain suitable or precise data.

That said, a basic way to calculate churn is:

For example, if we have 1,000 customers at the beginning of the month and 875 customers at the end, the churn rate would be 12.5%.

It is worth remembering that churn is the opposite side of retention. In other words, if our business has a retention rate of 72%, the remaining 28% corresponds to churn.

When looking at churn, it is essential to be clear about whether we are referring to monthly churn, annual churn, or another period. The reason is that the value changes substantially depending on the period being analyzed.

To convert monthly churn into annual churn, the following formula can be used:

How to improve retention and reduce churn

Churn may be caused by multiple factors, although they can generally be grouped into:

• The product does not provide enough value to the customer.
• When the perfect moment to use the product arrives, the customer does not remember it.
• The customer does not have enough ties to the product and looks for an alternative.

The first thing to do is identify the reasons for churn, using tools for detecting and analyzing the use and abandonment of digital products.

Once the reasons have been identified, it is a good moment to launch the actions needed to prevent churn by activating retention levers.

Calculate whether your business is really growing

Series: Fundamental Metrics for Startups and SMEs

Your business is already speaking through its data: learn how to interpret the key metrics that reveal whether you are growing with direction, building a profitable model, or simply moving forward blindly.