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Introduction to the concept of churn.
Additional Resources

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Churn in a broad sense is a metric that measures the amount of customers

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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.

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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 gap,

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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

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course, so you may want to bookmark it now.

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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 daytoday 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.

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Another component of churn is how we factor in the new customers we acquire

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over a time period.

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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.

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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.
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