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Introduction to the concept of churn.
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Churn in a broad sense is a metric
that measures the amount of customers
0:00
who are paying us at
the start of a time period
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who stopped paying us over
the course of said period.
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Usually this is talked about in
the context of months or years.
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We were on a phone plan in
January that we cancelled, so
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we were no longer paying in February.
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In general, we would be considered part of
the churn for that business in February.
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Note that churn doesn't have
to be specifically about
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the number of customers or subscribers.
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It could be based on the cash
you are collecting, revenue or
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some other variable.
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It is most common to see churn
calculations based on your number of
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customers, or the revenue
associated with those customers.
0:42
A common metaphor with churn
is that of a leaky bucket,
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where the water is your revenue.
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You work hard to bring in business,
fill the bucket with water.
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But your churn is like
holes in the bucket.
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The more churn you have,
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the harder you have to work to fill
the bucket up with water, or new business.
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Churn makes it difficult
to keep the bucket full.
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Again, as churn is not
a metric defined by GAAP,
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there are a lot of different ways
it is calculated and reported.
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The team at KeyBanc Capital Markets put
together a fantastic piece of research
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that highlights this quite clearly.
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We've included a link below
in the teacher's notes.
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I think it's a really good place to
continue learning when you finish this
1:29
course, so
you may want to bookmark it now.
1:32
We'll walk through additional churn
calculation examples in subsequent videos.
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But before that,
a few other points to note.
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In business, we typically talk
about churn as a percentage.
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This is known as the churn rate.
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So, if we started the year
with 100 customers, and
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lost 20 customers by year end,
our churn rate would be 20%.
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20% is equal to the 20 customers
that we lost, here in cell B4.
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Divided by the 100 paying customers at
the start of the year, here in cell B3.
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In day-to-day operational situations,
people often refer to both as
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simply churn and
are usually referring to the churn rate.
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So, just wanted to make sure
you're aware of that distinction.
2:19
Another component of churn is how we
factor in the new customers we acquire
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over a time period.
2:26
If churn is a ratio of customers
we lost during the period
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to customers we had at
the beginning of the period.
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What about the new
customers that we acquire?
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Should they factor into
our churn calculations?
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The answer depends on who you ask.
2:39
And I'm sure some people will give
you very animated explanations
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one way or the other.
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I've talked to VCs who say new customers
shouldn't be factored into any churn
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calculations, and
others who say they should.
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When Netflix used to report
churn in their annual filings,
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they included new customers in the
denominator of their churn calculation.
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Some businesses include new
business in the numerator.
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Sometimes, people will refer
to churn as attrition.
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That's what we do at Treehouse
since we're an online school.
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Another way to think about churn is
that it's the opposite of retention.
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In the earlier example where we lost
20 customers after starting with 100,
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and had 20% churn as a result.
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Another way to think about that is that
we ended the year with 80 customers.
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So we had a retention rate of 80%.
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Reporting based on
retention is very common.
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As we've discussed, there is no set
definition of how you calculate churn.
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Ultimately, the main goal of how we
calculate churn is to arrive at a number
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that helps us understand, monitor and make
decisions about the underlying business.
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It is an utter waste of time to
calculate a number that is misleading.
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So think about how you
are calculating churn.
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If you have time, play around with
some different calculations and
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see what the implications of this are.
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That said, in the next video, we'll walk
through a couple different examples of how
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I think it makes sense to calculate churn.
4:14
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