I have often said that churn (the rate at which customers cancel their subscriptions or otherwise stop buying from you) is the most important metric for a recurring revenue business. Why?
- The longer a customer stays, the more they are worth.
- The more they are worth, the more you can pay to acquire them.
- The more you can pay to acquire your customers, the faster you can grow.
- The faster you grow, the more capital you can raise to further accelerate everything. It’s a virtuous cycle.
The question I often get then is how much churn is too much?
If you sell to small business (i.e. your business has LOTs of customers each of whom is worth a small amount of revenue per month), then ideally your churn should not exceed 3% per month. This means that if you had 100 customers at the beginning of the year, you will lose 3 of them by the end of the month and will lose 36 of them by the end of the year.
If you sell to enterprise (i.e. you have fewer, larger customers), then having churn in excess of 7% per year (0.58% per month) can start to drag you down.
If you lose more than that every year it just becomes too hard to grow. That churn acts like gravity on your business. The bigger your revenues the bigger the hole that comes from churn.
Now, all of this discussion centres around ‘logo churn’. That is the number of customers that churn. Revenue churn (the actual revenue that is lost) is a whole different story. I’ll tackle that on the next post.