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Introduction to the concept of churn.

#### Additional Resources

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.
0:11

We were on a phone plan in
January that we cancelled, so
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we were no longer paying in February.
0:18

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.
0:29

It could be based on the cash
you are collecting, revenue or
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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
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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.
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
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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.
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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
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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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