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Introduction to Churn and Lifetime Value (LTV) Analysis

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Gross Churn vs Net Churn

3:25 with Michael Watson

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