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The Churn Doctor's Ultimate Guide
to Customer Churn

Nearly everything you've heard about churn is wrong. This guide is your secret weapon to the truth about churn, and what to do about it.

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Greg Daines

It Ain’t What You Don’t Know That Gets You Into Trouble.

It’s What You Know for Sure That Just Ain’t So.

Mark Twain

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Is this you? ↓ 

You've read the "definitive" churn blog posts, and listened to the "expert" webinars, and you've gone to the customer success events. And what you've heard are the same ideas repeated over and over again.


If everybody's saying the same thing, then these must be the right ideas for solving customer churn! Right?

The problem is... they don't work!

What is going on here?

THE GOOD NEWS: Customer satisfaction has been steadily improving. Our data shows customer satisfaction increased by more than 12% over the last three years.


THE BAD NEWSCustomer retention has actually gotten worse for most companies! Our data shows retention decreased overall by ↓22% over the at the same time satisfaction was going up!

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What's your experience?

  • You’ve worked hard to improve your customer experience

  • And your imperfect product is better than it used to be

→ So, then why is churn still getting worse?


It’s frustrating, but I can assure you that you are not alone.


The problem is that the conventional way of doing things simply isn't working.

It's time for a new approach.


The only way out of this trap is to START OVER. We need new ideas based on real data about what works rather than the same old conventional approaches that obviously don’t work. 

This guide dismantles all the popular churn myths, fallacies, and delusions. We use real data, and our extensive experience solving churn in many companies, to identify what is true and what works.



What Is Churn?

Churn is when customers leave.

Retention is when customers stay.


That's all. It's simple. Where we go wrong is when we make it more complicated than that.



The most popular definition of churn is actually a metric: "Churn Rate". But churn is NOT a metric, it's a thing that happens in reality. "Churn Rate" is just one way of measuring churn (and it's not a particularly good way).


Defining churn as a metric is the source of a lot of our problems because it focuses our efforts on solving the "churn rate" rather than solving actual customer churn.


These are very different because the churn rate is not just a measure of churn but also depends on the sales growth rate. The "denominator effect" means that even if customer churn goes DOWN↓, the churn rate might still go UP↑!



Another mistake is conflating churn with unhappy customers. People often use the word "churn" interchangeably with "dissatisfaction".


But customers leave for several reasons. And research shows that low customer satisfaction is NOT even one of the main reasons.


Probably the worst mistake is to use the word "churn" when customers downsize their accounts to adjust to their changing needs.


This can really mess things up because what we do to keep DOLLARS is not the same as what we do to keep CUSTOMERS. In fact, efforts to reduce "dollar churn" can actually INCREASE customer churn

The lesson is clear: Overcomplicating the definition of churn makes it much more complicated to solve churn.

What is churn


Why Churn Matters

Churn is the speed limit of growth

Churn is the most important factor in the ultimate success of any subscription business. Investors and acquirers use churn to judge what a business is worth. CEO's know churn is the key to profitability. But, above all, churn matters because the business can't grow when too many customers are leaving. It's that simple.



You can spend time breaking down how it costs more to acquire a new customer than to keep and expand an existing customer. And that's true. But it really misses the point. Nobody wants to have anything to do with a business that isn't growing. Period. And churn stops companies from being able to grow.

But there's another way to look at why churn is so important... 

Churn is the truth


No matter what you believe about your business:

  • what you think you do and how well you think you do it,

  • who you think your ideal customers are,

  • what you think is the value you provide...

Churn is always there as a loud signal that what you believe is often DEAD WRONG.


Because churn is the ultimate pain signal in any business. Like a hand on a hot stove, it's there to alert you to danger. So if churn is only the signal, then what is the danger?


The real danger is that our ideas about what we do and who we do it for never really get challenged. The failure to correctly understand what and who we are FOR is the true existential threat to a business. 

And churn is here always pointing us to the truth about these matters, if we will listen.


But in order to know what churn is telling you, it is essential to understand how churn really works.

Why churn matters


How Churn Works


Churn is nearly universally misunderstood because there has been effectively zero good data and research on churn. Until now. 

The problem starts with the fact that churn has always been represented as a simple rate (eg. Churn Rate = 10% per year), so we think of churn in a simplistic way.

But there are 2 things about churn that make it more complicated...

1. Churn is Delayed

This simply means that some time passes between when customers join and when they leave.


The problem is that when something (like churn) happens our brains are naturally wired to look for the cause close by. So when there is an increase in churn our instinct is to try to find a cause right around the time it happened.

But churn is delayed. That means the churn you are seeing today was caused by something that happened in the past. This introduces a key element of complexity for understanding churn.


For example, one reason for an increase in churn is that, in the past, there was an increase in sales. 

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The bump in new sales is followed after a some time passes by a matching increase in churn. The amount of time it took for the additional churn to arrive is the "Churn Lag".

The increase in churn does not mean that the rate of churn increased (though that is certainly possible). This increase in churn was inevitable because more customers arrived and some of them will eventually churn.

The difficulty is that we often cannot clearly connect churn to the events in the past that caused it. This is made more difficult because every customer's churn lag is not the same. This leads us to the next thing that makes churn complex...

2. Churn is Not Linear

In the real world, customers don't line up to exit to leave in an orderly fashion.

But when we use churn rates, we can't see this reality. For example: If you have a churn rate of 10% per year, this seems to indicate that you are steadily losing 10% of your customers in each period. 


If you were to look at a group (cohort) of customers, here's how 10% churn rate would be simplistically represented on a graph:

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But churn is never this simple, and often looks very different. Here are more churn lines with the same average rate:

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All of these have the same average rate, but they obviously represent very different kinds of churn.

How Churn Works


The 3 Types of Churn


In the real world, there are only 3 ways that churn happens. We have studied hundreds of churn lines (or "curves") like these, and have found that there are three consistent shapes.

1. Decelerating Churn

It is when more customers leave early and then fewer as time goes on. The shape looks like this:

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This is the most common type of churn and indicates that the primary causes of churn happen early in the customers' engagement. 

An example of an early cause of churn is selling to customers who are a bad fit. These customers can't properly use or benefit from the solution. Most of these customers will discover this and leave quickly.

Another example of an early churn driver is ineffective new customer onboarding.


2. Accelerating Churn

A different type of churn is when most customers stay for a while, but eventually start to leave at an accelerated rate. It looks like this:

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This is the least common churn type and indicates that the primary causes of churn happen later in the customers' engagement. 

An example of a late churn driver is when customers subscribe to the solution to meet a limited purpose, after which they no longer need the solution.


3. Constant Churn

The final type of churn is when customers leave at a steady pace. It looks like this:

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Constant churn indicates that churn is not impacted significantly by early or late factors, but is primarily the result of the failure to continually increase customer results over time.

How to:

Find Your Churn Type

Conducting your own churn analysis is one of the most important steps to gaining control over your churn. Here we explain how and provide a downloadable spreadsheet template to help you below.


The key to determining your churn type is to track customer churn by "cohort" which is the group of customers who started in the same month. Each month you calculate the percent of the cohort that remains. Older cohorts will have more months of data. The table looks like this:

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After that, you simply make a line graph for your cohorts, or for the average of all the cohorts as below:

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In this example, the churn shows a mild decelerating pattern. 

Note that you'll need more months of data if you have annual subscription contracts where most churn is visible only beyond the first 12 months. 

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3 Types of Churn
Cohort Template
Churn and Growth


How Churn Impacts Growth​


Churn is a problem because before you can grow you have to replace all the customers that churn. Too much churn and it becomes impossible to sustain robust growth. That's why I say that:

-- Churn is the speed limit of growth. --

Few people understand churn's true relationship to growth. For example, there are hundreds of churn articles and "Ultimate Guides" that purport to tell you what "benchmark" churn ranges are "good" or "bad" for your business. This actually makes no sense when you understand growth because the impact of churn on overall growth depends on what is happening with sales growth.


The Growth Trap

There's an iron-clad law in subscription businesses that I refer to as The Growth Trap. It refers to the fact that churn will eventually stop your growth. How can that be? It's based on this mathematical principle:

The Growth Trap Rule: Unless sales continually increase (you sell more customers each period than the previous period), any amount of churn (greater than 0%) will eventually prevent further growth.

This is simply because as your customer base grows eventually you will be churning the same number of customers as you are bringing in. It looks like this:

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But this isn't realistic, because obviously plenty of companies increase their sales. In that case, the inverse of The Law of the Growth Trap applies: as long as sales are increasing, no amount of churn (less than 100%) will prevent growth.

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But this isn't completely realistic either because it's not reasonable to expect that any business will experience increasing sales forever. Sooner or later there comes a point where it is not feasible to add more subscribers in each successive period.

The Growth "S Curve"

What happens in reality is that companies experience increasing sales for some period of time followed by slowing sales. The outcome is a combination of the dynamics above to form the classic growth "S Curve". It looks like this...

S Curve Animation.gif


One easy way to understand this chart is to notice that Growth happens when the sales and churn curves are getting further apart. When the sales and churn curves start getting closer together, growth slows.

The Death Spiral

This slowing process can lead to "flat" growth where the active subscribers don't go up or down. But that's not what usually happens. The process of slowing sales often combines with increases in real churn to lead to a point where the sales and churn curves cross. 

This happens when churn overtakes sales and active subscribers actually start to decrease. This is called the "death spiral" because it tends to happen rapidly and is notoriously difficult to reverse.

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One of the reasons it is difficult to get out of the death spiral is that attempts to reignite sales nearly always lead to MORE increases in churn. This is because the most effective methods for rapidly increasing sales are actually among the biggest causes of churn.

Because churn is delayed, few companies will understand how their own response is driving their business into the ground. 


How to create Long-Term Growth

So how can businesses grow if sales in the face of the inevitable Growth Trap?

The answer is:

You can't always sell to more customers,

but you can always sell more to your customers.

In other words, the subscription model is primarily an expansion-based growth engine.


The act of closing a new subscriber should be correctly viewed in the same way as someone entering a shopping mall. The ultimate value of a customer comes from how long they stay in the mall and how much they buy.


What that means is that the way out of the Growth Trap is to shift the burden of growth from new sales to customer expansion. You can see that means that growth is not dependent on continually finding new customers.

It looks something like this...

expansion model.001.png


The implication is simple but almost impossible to overstate: 


The subscription model is fundamentally a customer expansion business model.


Any subscription business that depends on net new sales for growth will eventually collapse. 

What does this have to do with churn? 

1. Churn is the speed limit of growth in the expansion business model because...


2. The primary driver of long-term churn is a lack of expansion. It's not as simple as: first retain your customer, and then expand your customer. The fact is that long-term retention depends on expansion.


It's just as accurate to say that you first must expand your customer, and then they will renew.

How to:

Chart Your Growth Dynamics​


Visualizing how your sales and churn combine to produce your growth is extremely valuable. Here we explain how to build a simple growth curve and offer a downloadable spreadsheet template to help you below.

There are two building blocks of a simple growth curve analysis:

  1. New subscribers (logos not dollars) by period (year or quarter)

  2. Churned subscribers (logos not dollars) by period (year or quarter)

It can look something like this, where "Active Subscribers" is calculated as the cumulative subscribers minus those that have churned...

Growth Dynamics Data

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After that, you simply make a line graph for your each series as below:

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Now you will be able to see how the relationship between your sales and churn curves is driving your subscriber growth. This is a very important insight.

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Growth Template
Measuring Churn


Measuring Churn​


Measuring churn is notoriously fraught. The main reason for this is the mistaken idea that churn is best viewed as a rate. A huge amount of problems are downstream of this fallacy. Let me explain...

Churn Rate Is A Meaningless Metric

It is extremely easy to get caught up in arcane discussions of the various ways to calculate churn rates and their pros and cons. But this is a waste of energy because churn rate is a meaningless metric, and there's actually a very simple way to see why. Think of it this way...

Q: What does a company's churn rate actually reveal about their churn? 


The answer is virtually nothing! 

For example, most people view churn rate as a measure of the severity of churn. But that's wrong.

The severity of churn only matters for how it impacts growth. And we have shown how the growth impact of churn is a function of its relationship to sales. So, if someone tells me they have 30% annual churn I simply cannot know if that is "good" or "bad" on the basis of that metric alone.

As we learned above, a very low churn rate can be associated with slow or declining growth, and a high rate of churn can exist simultaneously with rapid exponential growth. 

Churn Rate Benchmarks Are Bunk

This also reveals why there is no valid way to compare churn rates between companies, verticals, or business models. In fact, it's not valid even to compare a company's own churn rate over time! 

Nearly every "Guide to Churn" contains some set of basic churn rate range "benchmarks", usually broken out by the type of business, customer size, and/or vertical. Never mind the extremely dodgy origins of the benchmarks themselves, the entire idea of comparing rates in this way is fallacious.


You Can't Action Churn Rate

The churn rate doesn't reveal any insight into what is causing churn or what to do about it.

No matter what your churn rate is, it is impossible to glean even the tiniest insight as to what the causes of churn may be or what actions might improve it.


For example, the most common way of interpreting churn rates is as a measure of "customer satisfaction", which turns out to be completely false (see What Causes Churn).

I would argue that any business metric or KPI is worthless unless it points to the action you can take to improve it. Churn rate fails this requirement.

This means that there is ultimately no valid case for measuring and using churn rates as a key business metric. And the almost universal reliance on them is a major reason why so many companies fail to ever gain traction in solving their churn.

Calculating Churn Rate is a Mess

I'd love to leave the topic of churn rates, but unfortunately, there's more you need to know...


Because let's face it, there's no chance you are going to be able to eliminate churn rates from your life. Even if you could convince your peers, it's much more difficult to convince your leaders and basically impossible to convince your board, investors, banks, acquirers, market analysts, etc.

So if we are going to be effective, we must know what we are dealing with when it comes to churn rates. And this turns out to be very complicated. I will focus on two really big problems with commonly used churn rates.

The Denominator Problem

The churn rate is a measure of the churn as a share of something. It's an equation in which churn is the numerator, and that means there must be a denominator. The problem is that the denominator ultimately determines the outcome. The most common way of calculating churn uses all of the active subscribers as the denominator.

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But using total or active subscribers as the denominator makes the metric highly sensitive to changes in the growth of sales, and the churn delay. The result is that the churn rate is almost always distorted to look higher or lower than it really is.

Churn Rate Can Be Distorted to Appear to be too LOW


For example, if sales is growing at an increasing rate, then the delay in churn means that in every period the denominator is growing ahead of the arrival of the relevant churn. The result is that the churn rate is distorted to appear to be lower than it really is. The more rapidly sales is growing, the greater the distortion is in the churn rate metric.

Churn Rate Can Be Distorted to Appear to be too HIGH


On the other hand, if sales growth is slowing, then the churn rate can suddenly jump up to appear very high. This is the reason so many companies come to me in a panic when, after a long period of satisfyingly low churn, the situation suddenly appears to reverse with unexpectedly skyrocketing churn.

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Any attempt to act on these distorted metrics will be literally misguided. The all too common pattern is to underinvest in solving churn while the churn rate metric is distorted too low, and to panic and pursue irrelevant and unproductive churn mitigation strategies when it suddenly spikes.

Churn Rates Fluctuate Constantly

Perhaps you've also noticed that churn rates tend to fluctuate more than you would expect over time. This is also due to the denominator problem, the churn delay, and the relationship to sales growth. The oscillations that most companies experience in their churn rate do not reflect real changes in churn.

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The worst thing you can do is to attempt to react to the churn rate and its fluctuations on the mistaken notion that the fluctuations are a meaningful signal. This is a recipe for disaster as each reaction causes its own delayed effects which combine to make the oscillation even worse as time goes on.

Churn Is Nonlinear

We learned above that churn is not linear, and this is another serious flaw with churn rates because they conceal this nonlinearity. Recall that the same churn rate might represent three very different patterns of churn.