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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 0:05 who stopped paying us over the course of said period. 0:07 Usually this is talked about in the context of months or years. 0:11 We were on a phone plan in January that we cancelled, so 0:15 we were no longer paying in February. 0:18 In general, we would be considered part of the churn for that business in February. 0:21 Note that churn doesn't have to be specifically about 0:26 the number of customers or subscribers. 0:29 It could be based on the cash you are collecting, revenue or 0:32 some other variable. 0:36 It is most common to see churn calculations based on your number of 0:38 customers, or the revenue associated with those customers. 0:42 A common metaphor with churn is that of a leaky bucket, 0:47 where the water is your revenue. 0:51 You work hard to bring in business, fill the bucket with water. 0:53 But your churn is like holes in the bucket. 0:57 The more churn you have, 1:00 the harder you have to work to fill the bucket up with water, or new business. 1:01 Churn makes it difficult to keep the bucket full. 1:06 Again, as churn is not a metric defined by gap, 1:10 there are a lot of different ways it is calculated and reported. 1:14 The team at KeyBanc Capital Markets put together a fantastic piece of research 1:19 that highlights this quite clearly. 1:23 We've included a link below in the teacher's notes. 1:26 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. 1:35 But before that, a few other points to note. 1:40 In business, we typically talk about churn as a percentage. 1:43 This is known as the churn rate. 1:47 So, if we started the year with 100 customers, and 1:50 lost 20 customers by year end, our churn rate would be 20%. 1:54 20% is equal to the 20 customers that we lost, here in cell B4. 1:59 Divided by the 100 paying customers at the start of the year, here in cell B3. 2:06 In day-to-day operational situations, people often refer to both as 2:10 simply churn and are usually referring to the churn rate. 2:15 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 2:22 over a time period. 2:26 If churn is a ratio of customers we lost during the period 2:28 to customers we had at the beginning of the period. 2:32 What about the new customers that we acquire? 2:34 Should they factor into our churn calculations? 2:37 The answer depends on who you ask. 2:39 And I'm sure some people will give you very animated explanations 2:42 one way or the other. 2:45 I've talked to VCs who say new customers shouldn't be factored into any churn 2:47 calculations, and others who say they should. 2:51 When Netflix used to report churn in their annual filings, 2:54 they included new customers in the denominator of their churn calculation. 2:58 Some businesses include new business in the numerator. 3:02 Sometimes, people will refer to churn as attrition. 3:07 That's what we do at Treehouse since we're an online school. 3:11 Another way to think about churn is that it's the opposite of retention. 3:15 In the earlier example where we lost 20 customers after starting with 100, 3:20 and had 20% churn as a result. 3:24 Another way to think about that is that we ended the year with 80 customers. 3:27 So we had a retention rate of 80%. 3:32 Reporting based on retention is very common. 3:35 As we've discussed, there is no set definition of how you calculate churn. 3:40 Ultimately, the main goal of how we calculate churn is to arrive at a number 3:45 that helps us understand, monitor and make decisions about the underlying business. 3:50 It is an utter waste of time to calculate a number that is misleading. 3:56 So think about how you are calculating churn. 3:59 If you have time, play around with some different calculations and 4:03 see what the implications of this are. 4:07 That said, in the next video, we'll walk through a couple different examples of how 4:10 I think it makes sense to calculate churn. 4:14

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