The appendix slides are not part of your core pitch deck. It’s hugely beneficial to prepare them as it allows the founder (or presenter) to have clarity while answering questions. Also, investors like founders who come ready to answer the questions. We work with every client through the appendix slides just like how we work with the core slides. Note: You can have unlimited number of appendix slides. What goes inside your appendix section depends heavily on your startup and your business modal.
Churn rate is a metric that tracks the percentage of customers who deactivate or cancel to the subscription of your product or stop your service within a given time period.
A high churn rate is a bad indicator because it means that your users are not enjoying your product and leaving it. A high churn means that something is definitely broken and it could be any number of these problems:
- Your pricing model is wrong: If your price is too high, your customer might simply run out of budget to afford your service. This happens all the time to early stage startups, as they tend to increase price over time.
- You have lost your unique value proposition: As a startup, you are always at the risk of losing your unique value if a bigger startup (say Google, Facebook, or Amazon) end up copying your main feature and bundle it with their own service. This happened to lots of small startups in cloud services when Google, Alibaba and Amazon Web Services came into the cloud industry.
- Your product doesn’t meet expectations of the user: If you have overpromised in your sales page, or your sales team have done that with a client, it’s normal as you will have a huge churn after a few weeks or months as customers realise that you are missing the features promised.
- Bad customer experience: It could be your website or app UX or even your face to face customer experience, if it’s bad, you will lose users over time.
- High competition: If you are in a price sensitive market with lots of competition, you tend to have a shifts and random loss of customers as they might have gone to your competition who is pricing the product cheaper.
Note: It’s almost impossible to have zero churn, especially if you are a SaaS startup. It’s okay to have some churn, and investors understand it. So, don’t worry about the churn, especially if you are an early stage startup. Instead, work hard to reduce it over time through better product and customer experience. Investors are more interested in how you lowered your churn to a desirable numbers instead of how you have NO churn (as it shows that you are a good executer with high understanding of your startup metrics and customers).
Simple Churn Rate
Churn as a topic can get really complicated as we get deeper into it as there are many ways to examine it. In order to make sure that this guide remains easy to understand, I will take the simplified look at churn rates.
The simple method to calculate your churn rate:
Calculate churn rate by dividing the total customers churned over a time period you specify (e.g. month, 90 days, etc.) by the total customers at the start of the time period and then multiply that by 100 to generate a percentage.
(Total customers churned this time period / total customers at the start of this period) x 100 = Churn rate, %
For example, if the total customers lost this month was 200 and the total customers at the start of the month is 10,000, then the Customer Churn Rate would be 2%.
200 (total customers churned this month) / 10,000 (total customers as at the beginning of the month) X 100 = 2%
There are many ways to get precise with your churn rate calculation. So, let’s look at some options you have to do that:
Voluntary and Involuntary Churn Rates
Voluntary churn is when a customer choose to leave your service (deactivates or deletes their profile off your platform or cancels the contract for service). Involuntary churn is when a customer run out of money to pay or switches to a device or console that no longer supports your product (e.g. your customer just went to xbox from ps4 as a gaming device).
I like to break the customers to these two categories when I look at churn rate as the involuntary churn rate is easier to reactivate compared to the voluntary churn. If you have a huge voluntary churn, you are definitely doing something wrong. It’s a big concern if you are not sure what it is when you are presenting to your investors.
Customer Churn vs MRR Churn
If you are running a SaaS company, it’s important to recognise the difference between customer churn rates and MRR churn rates.
Customer churn rate is what we have been talking about till now in the guide. it refers to the number of customers that have discontinued their subscription on a given period.
Revenue (MRR) churn is how much those lost customers represent in revenue (in dollars and cents). It’s the same formula as above but the number of customers is replaced with your MRR.
For example, your SaaS has two products: one is $10 a month (starter package) , and the other is $500 a month (enterprise package). If you were to lose 10 customers who were paying $10 a month, it would still be preferable than if you lost a single customer at $500 a month.
Once you see the difference of what these two metrics tell you, it’s easy to recognise that you have lost some small fishes but have been able to keep the big fishes. Investors will be able to comprehend MRR churn better than simple churn rate in this case.
When you have lots of customers signing up on a monthly basis with lots of campaigns running simultaneously, it’s important to introduce cohorts to your churn analysis. With cohort analysis, instead of measuring just the number of churns each month, you’re measuring churns in relation to when a customer signed up.
With cohort analysis, you ‘bucket’ the users based on the time period they started using your product. You divide them into smaller groups and examine how they act and churn. You can do the buckets on a daily basis, weekly bases or even monthly basis. It shows your more than what a simple churn rate can show you as you get to see which marketing and sales efforts bring you the users with the highest LTV.
Further resources on cohort analysis:
- Andrew Chen’s blog on cohort analysis with a template excel sheet that tracks it (link)
- An in-depth guide on cohort analysis (link)
Retention rate is just the other side of churn rate. If you churn more, you have less retention.
Retention Rate = 1 – Churn Rate
Annual churn rate vs monthly churn rate
While most of the time you be using monthly churn rate (MRR churn), it’s important to look at your annual churn as well to get the macro view of your startup churn as well. You can do that through annual churn rate.
Annual Churn Rate = 1 – (Monthly Retention Rate)^12
Lets say you retention rate is monthly retention rate is 95% (or 5% MRR Churn). So, the annual churn rate will be 1 – (0.95)^12 or 48%. See how your 5% became 48%? This is because you are steadily losing 5% every month and it compound over 12 months.
Benchmarks for churn rates
“The maximum viable churn for a company depends on the company’s runway and the rate at which the startup can grow accounts through up-sell and cross-sell. It goes without saying that less churn is always better, but estimating an upper-bound for churn can be helpful for financial modeling and internal prioritization of customer success efforts.” Tom Tunguz, Partner at Redpoint Ventures
When I work with my clients, I have benchmarks in my mind about what is a healthy churn rate for their startup. This helps me to either prepare them to answer the questions on why is it higher or to show off the charts if they have a high retention. Based on my experience, the benchmarks depends largely on these two factors:
- What’s the biggest group of your customers (individuals, freelancers, small businesses, startups, enterprises, etc)
- How long have you been doing this, and when was your last pivot (new version of your product)
Based on the two factors above, it’s easy to determine what are your churn rates should be.
If you are a one to two year old startup, it’s acceptable to have a fluctuating churn rate. You are still experimenting and finding your best target market.
Other than that, across the board, you should have an annual churn of less than 10%. It’s considered acceptable if it’s less than 10%. If you are around 5% annual churn rate, then you are doing well.
According to Recurly, across industries and startups, the annual churn rate is 6.12%.
Across different industries and sectors, churn rates very drastically too.
Further reading on benchmarks: