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We introduce the concepts of Gross Churn and Net Churn.

As we discussed in the last video, 0:00 depending on who you talk to churn calculations should either include or 0:02 exclude new customers you acquire over the timeframe you're analyzing. 0:07 Some people refer to this distinction as gross churn versus net churn. 0:12 I like that way of thinking about it because it's clear 0:16 what the distinction is. 0:19 Gross churn doesn't include new customers, net churn does. 0:21 Let's walk through a few examples together. 0:25 If we started the year with 100 customers and 20 customers churn out, and 0:27 we added 30 new customers over the year, our gross customer churn rate would be 0:33 20%, the 20 divided by the 100 beginning of year customers number. 0:38 But if we take into consideration adding 30 new customers, 0:43 our net churn rate will be lower. 0:48 Let's look at how different our churn number will be 0:50 if we added our acquired customers to the numerator or denominator. 0:53 It's a significant difference. 0:57 One is still positive, and the other is actually a negative percentage. 1:00 So here we have the new customers 1:04 adding to the denominator of our churn calculation and 1:07 below we have the new customers added into the numerator of our churn calculation. 1:10 When calculating the number in the numerator, this metric is more useful for 1:16 signaling whether or not our customer base grew or shrank over the timeframe. 1:20 If it's a negative church, our customer base expanded, if positive churn, 1:26 it declined. 1:30 When we are looking at our customer base overall at Treehouse, 1:31 we include new students in the denominator. 1:34 However, and apologize for complicating things a little bit, we look at 1:37 different calculations for churn depending on the question we are trying to answer or 1:41 decision we are trying to make. 1:45 I hope by now you are starting to appreciate 1:47 how the way we calculate churn can have some large implications. 1:50 Indeed this metric is not without controversy. 1:55 Netflix used to report subscriber churn in their financial statements and 1:59 stopped several years ago as they asserted that 2:03 the churn metric is a less reliable measure of business performance. 2:06 Years before that, they were reportedly sued by some shareholders for 2:10 calculating churn incorrectly. 2:14 Again, as there is no standardized formula, 2:16 make sure you are calculating something that is useful for managing the business. 2:19 I personally prefer to exclude new customers from churn calculations because 2:25 I am of the view that churn is most valuable as a reflection 2:29 of our existing customers' behavior, but this is far from a universal practice. 2:33 Again, as is often the case in the world of data analysis, we need to exercise 2:38 our analytical skills to decide what makes the most sense for the situation at hand. 2:43 It's good to explore if there are norms for the industry you're in. 2:49 Also note that as your business changes so 2:53 might the way you think about churn and or retention. 2:56 Perhaps a calculation that is appropriate when you are in exponential growth mode 3:00 doesn't make sense anymore when your revenue growth slows down. 3:04 There is nuance. 3:08 My favorite way to look at churn is based on revenue. 3:10 In many situations, not all customers pay the same amount each month. 3:14 So we'll bring back the concept of MRR and 3:18 walk through a dollar-based example in the next video. 3:22

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