Before we answer the question of “how do you model churn rates,” let’s clarify a few assumptions about our task.
The very first thing you have to decide is what you’re modeling, because churn is multi-faceted. You can ask yourself a number of questions when it comes to that old chestnut, “what is churn in business?” For example, companies want to model employee churn rate as well as customer churn rate. We’re focused here on your company’s customer churn rate.
Next, you need to understand WHY it’s valuable to model churn rates.
It’s important to understand the reality you’re facing when it comes to customer retention and, by extension, customer churn. A model for customer churn enables companies to calculate the cost of churn, customer acquisition costs, and how customer lifetime value impacts your path to growth and eventual valuation.
Most of all, once you have a model for customer churn your company can make effective decisions about investment in customer experience.
When companies discover the cost of churn, they realize it’s important to extend customer lifetime value. That means building a customer experience that inspires customers to stay longer, spend more, and refer their friends and colleagues.
What Is A Churn Model?
A churn model is a calculator that evaluates the cost your company incurs when a customer churns. Your churn rate calculator looks at the financial cost of customer churn. However, the negative impacts of churn go beyond the monetary hit. Non-financial costs of churn, such as negative word of mouth should also be taken into account. For the sake of this article, we’ll focus primarily on the financial impact of churn.
Your Churn Rate Calculator
A churn rate calculator (also known as a turnover rate calculator) should evaluate churn over a given period of time. Most companies look at monthly, quarterly or annual churn rate. We walk through the specifics of how to calculate churn rate in other blog posts, in case you want to know the churn rate formula.
While a short-term evaluation of churn has merit, it’s also important that your calculator look at the long-term impact of churn. After all, your company is probably trying to hit a financial goal within a given period of time. You need to know how churn is blocking your ability to hit that goal. This is particularly important if your company is looking to exit or IPO.
At Alignmint, we often see companies that have never looked at the impact of churn over the long-haul. They are shocked to see just how much a leaky bucket hurts a company’s path to growth (and exit.)
Let’s walk through an example so you can see the numbers, what we call the churn virus, and then we’ll talk about what you can do to cure that virus.
Churn Model Example
This churn model example is based on a SaaS company(Software-as-a-Service). Since this company has an annual renewal cycle, the SaaS churn model resembles many other companies that are structured on a subscription model.
In this example, the company is a venture capital-backed start-up with $200,000 in annual revenue. They want to grow to $100 Million in revenue within 9 years so they can exit. They have a revenue churn rate of 12%, which is equivalent to an 88% dollar-for-dollar retention rate. In other words, they may be growing, but they’re seeing churn within their existing customer base. Again, this is revenue churn, not logo churn. In financial terms, we’re looking at Net Retention Rate, commonly known as NRR.
In SaaS, an 88% retention rate falls below the industry benchmark of 90%, so the company has a churn problem they need to solve. This is fairly common – when we begin working with companies, they often have a churn rate somewhere between 75% and their ideal range north of 90%. They may not like those numbers, but they can only fix problems they’re willing to acknowledge.
NOTE: Churn rates vary from industry to industry. Here are benchmarks from a variety of industries.
Going back to our example, with the 12% churn rate the company is experiencing, they will not hit their financial goal of $100 Million in 9 years – even though they’re growing revenue at a compound annual growth rate of 99%. In fact, at the end of 9 years, that company will only hit $54 Million in revenue, substantially less than their stated goal.
You and your team work hard. You deserve to hit your goals, whether you hope to exit, IPO, or simply grow your company. Your customer churn rate can be a huge barrier to your ability to successfully achieve those goals.
While this churn rate example is illuminating, you probably want to know the story for your company, using your real numbers. Here’s the great news – you can! In fact, you can discover the impact of churn for your company right now.
Knowing your company’s current reality is imperative, so get our Churn Virus white paper, which will link you to the calculator. Just input your company’s numbers, and discover how churn is impacting your company and its path to growth.
Design Your Company’s Path to Next-Level Growth, with Alignmint Growth Strategies
Your company may have great product-market fit, a well-designed product, and sales/marketing teams that bring in new customers. But when those wins are met with a churn problem, it becomes impossible to grow and meet revenue targets.
Successful churn reduction strategies align your company to boost customer lifetime value…aka retention.
At Alignmint Growth Strategies, we deploy churn reduction strategies so that you hit your revenue targets and maintain momentum.
Customers spend more, stay longer, and refer like crazy. Employees feel connected to your vision and confident they can be successful in their work. And leaders focus on progress and growth.
Discover the churn rate reduction strategies that work best for your company by making an appointment with Alignmint Growth Strategies. Connect with us today.