All Startups Have Churn and Will Benefit From Modeling It Well
This write-up was originally sent to subscribers as a part of our Mission Control weekly insights, a series where we share wisdom and quick breakdowns on topics from our entrepreneur support network.
This week, we’re tackling a concept that every founder needs to grapple with, regardless of your business model: churn.
Understanding Churn: It’s Not Just for Subscription Models
Churn is how a company loses customers and their revenue. It isn’t exclusive to subscription services; it’s a reality for all startups. Ignoring churn in your financial model or burying it within ‘net new’ customer growth can obscure your true business performance and growth potential. Appropriately modeling churn helps you make smarter decisions on pricing, customer acquisition, and retention.
Why Modeling Churn Matters
Many founders don’t think churn applies to their business if they aren’t a subscription based business like Netflix or Spotify but it is still there, just in other forms. If you sell physical products transactionally it can be counted by repeat purchases. If you sell big multi-year B2B contracts it can be counted as renewal rates. If you’re a usage based service like AWS it can change in usage. Whatever the case, getting a handle on how many of your customers continue to provide you revenue and what percentage of them churn off is important.
Some founders are tempted to simplify their churn modeling by just factoring in ‘net new customers’ month over month for their revenue lines. E.g., we get 20 new customers, lose 5, so we’ll just grow by 15 each month. While simplified modeling like this can help quickly gut check certain opportunities, there’s a lot of value in modeling churn out separately per revenue line with its own levers to tweak.
Gust's Mission Control can guide early founders through all sorts of complex startup hurdles, like modeling churn.
Modeling churn separately allows you to explore more scenarios and maximize things like Customer Lifetime Value (LTV) and Average Revenue Per Account (ARPA). If you want to see how future revenue is impacted by doubling your price, you’ll also want to see what the impact would be if that doubled or even tripled your churn. It’s far easier to run these scenarios when you have them separately available to tweak and adjust rather than lumped together.
You can also hone in on important thresholds that lead to expansive growth or the reverse, a shrinking revenue base. These are useful to inform company goals and motivate teams with clear execution criteria. It’s far more clear to set a goal for the Customer Success team as “keep churn under 5% per month” than vague “retain everyone possible” directions. If everything is a priority, nothing is a priority and clear numbers allow teams to focus on maximum impact.
So, figure out how churn effects your business and model it in your financial model. Some businesses might have to look months, even years into the future to start accounting for it, but it should be accounted for to avoid any nasty surprises.
Need More Help? That’s why we created Mission Control.
We recently did a “Financial Model Makeover” session in Mission Control where we took a founder’s financial model and rebuilt the revenue and churn considerations from the ground up. It turned out the month-over-month growth calculations being used started to get unrealistically expansive in later years, even though they had thought churn was factored in with the growth calculation.
This resonated with some of the potential investor feedback they had been getting about revenues and expenses not making sense after the first few years of growth. Once churn was appropriately modeled, a much more believable growth story was being told.
These kind of things happen all the time as financial models get edited and tweaked. Sometimes it isn’t immediately obvious so having a dedicated session with outside experts can spot these things right away. That’s what Mission Control provides every week, expert insight on almost all aspects of startups. From financial models to fundraising instruments, co-founder equity splits to IP management, we have exclusive content, expert sessions, and a vibrant founder community to help.
Gust's Mission Control can guide early founders through all sorts of complex startup hurdles, like modeling churn.
This article is intended for informational purposes only, and doesn't constitute tax, accounting, or legal advice. Everyone's situation is different! For advice in light of your unique circumstances, consult a tax advisor, accountant, or lawyer.