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We introduce the concepts of Gross Churn and Net Churn.

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