Once upon a time, in a faraway land, there was a Startup full of hopes and dreams. They had searched far and wide and assembled, at great cost, a castle full of Customers. But then the Startup kingdom fell victim to a seemingly harmless looking little monster called Churn and the business died a very, very slow death as all its Customers left… one by one.
In this post - we are going cover Churn; what it is, what causes it, and walk through a case study - Castle Software Solutions - to better understand how Customer Churn can undermine the long-term success of a business.
Customer churn is the term used to describe when customers or subscribers leave a business or service. This loss is often expressed as a percentage of the total number of customers over a specific time period.
B2B (business-to-business) companies typically have an average churn rate of 5%, while B2C (business-to-consumer) companies have an average churn rate of 7%. Churn is typically measured and tracked monthly, and the results are reported at the end of the month.
There are two types of churn: voluntary churn, which occurs when a customer decides to leave the service due to a poor experience or a better alternative, and involuntary churn, which occurs when a customer is unable to continue using the service without actively choosing to do so.
Reasons for customer churn:
Castle Software Solutions is a subscription-based cyber-security company that markets to the SMB space. Through social media, partnerships, and an expensive cost-per-click campaign, they currently boast a total of 1000 active customers who each pay a monthly subscription fee of $120.
We will be modelling several different scenarios to show how churn progressively affects Castle Software.
Castle's onboarding and customer support has been lacking. As a result, they have been experiencing 7% monthly customer churn.
To better illustrate the effect of churn, for now we will assume no new Customer Growth.
By year's end, after starting with 1000 Customers, and with a monthly churn of 7%, Castle Software will have lost all but 389 of those initial Customers. The MRR now drops from $120,000 to a measly $46,715. The Churn Monster strikes.
With 7% churn, the resulting LTV (Lifetime Value) for each Customer is $1,714.29.
Act 2 - it could be worse. Now let's take a look at two even scarier Churn rates; 10% and 13%.
At 10% - those 1000 Customers become 254 by the end of the year. The LTV drops from $1,714.29 @ 7% to $1,200 @ 10%.
At 13% - all that remains are 164 Customers and a staggering 836 users have abandoned Castle Software. 83.6% of their customers have left. MRR is now $19,680 and the new LTV is $923.08; nearly half of what the LTV for a Customer is at a churn rate of 7%
Factors that influence a SaaS company's ability to secure funding from venture capital firms:
To sustain growth, a company must have a higher number of new subscriptions than lost subscriptions within a certain time frame.
Key considerations for subscription businesses:
This is the big one where we bring it all together. The dramatic conclusion where the hero saves the day, tames the Churn Monster and the Kingdom is saved.
In this model - we'll test three different Growth rates to counteract the negative effects of Churn. But Growth isn't cheap. Historically, it has cost Castle Solution $350 to acquire each of their Customers - better known as CAC (Customer Acquisition Cost).
Using whatifi, we'll also test a Dynamic Growth and Dynamic Churn example where Castle Software Solutions not only edges their Churn rate down over time, but also amps up their sales, marketing and positioning to increase their monthly growth rate.
This Scenario contains 16 different financial models
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