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Glossary: “Churn Rate”

by Paul Creech on Monday, May 5, 2014

I downloaded an app, I played around with it, and then it languished. Over time I sorted to the last page of my iPhone apps, or stored it in a folder and forgot about it. Later I deleted it and all of its data. The company that makes the app happily reported to its investors my download, my profile creation, my usage data, and later I became a negative part of its churn rate. It had churned through me, or I had churned through it, either way, I had passed through my lifecycle as a user. The company tracks the rate at which users become former users as its churn rate.[pullquote_right]Growth is new users + current users, the churn rate is rate at which current users become former users. [/pullquote_right]

Churn rates are important to investors for many reasons–regardless of the business model of the company. Great that you got someone to download the app, but if you can’t hold the user then your app is not very good, and it will be difficult to sustain revenue from subscriptions, ads, add-ons, upgrades, side-products, commissions, data sales, or whatever, because you have to have new users constantly downloading the product to make up for those that you lost. To have growth, you have to new users downloading the product at a rate greater than then your churn rate. Even pay per download apps usually have add-ons and upgrades to pull greater revenue from users. The money invested to create those are lost if the users don’t use the product after the initial purchase. Also, they rely on user feedback to encourage others to purchase their app. If current customers aren’t using the app they paid for, the review is not likely to be glowing.

I once worked for a small, industry specific magazine catering to insiders, investors and executives, whose publisher was focused on creating exciting and unique content, increasing subscription sales, and creating an online presence. I would routinely get calls from subscribers who had not received their copy of the magazine because their subscription had run out, and they gladly handed over the hefty annual subscription dues over the phone. The publishers had no (nada, zip, zero) plans for retaining subscribers. We had wealthy, educated, and engaged readers and we were churning through them because we made no effort to retain them. They did not receive one of those little cards letting them know their subscription was almost up. Instead, one day the magazine stopped coming and they lost their online access to most of the content. As resources were invested to target potential subscribers, on cold calls, on the gambit of marketing strategies–half the staff of the magazine was devoted to creating sales–there was not plan to keep customers. The discovery exposed massive flaws in how customers were tracked (manually, on a excel spreadsheet, by the publisher, personally).

The churn rate ate away at the subscriber base, not because there was any failing in the product (subscribers loved the product), but because there were not plans to retain to them. I quickly discovered our churn rate was equal to our new sales and informed the publisher and head of marketing–then in the mist of discussing a dramatic price reduction to try and drive new subscribers. We could not believe that we were bleeding subscribers because of our own incompetence. The discovery of our churn rate lead to the creation of a plan and a reallocation of resources.

Like many startups, the company’s founders were so focused on creating a great product and getting that product into potential customer’s hands and thus driving new sales that the idea of the need for a strategy, system or path for retaining those customers had not occurred to them. In some ways it was a sign of maturity, they had survived the subscription cycle, the hodgepoge of manual systems created on the fly had been outgrown and needed to be seriously addressed before the company could move forward. Once the problem had been identified, we realized that this growing snowball was a major reason that the company seemed to be suddenly stalling. The churn rate was killing the efforts to grow passed that initial base, murdering their ability to land and retain advertisers, and preventing the distribution onto magazine racks. Eventually, there isn’t enough money to burn, and a bad churn rate can doom a company initially elated by great reviews and initial product adoption.

Resources dedicated to new users are wasted if the new user becomes the former user in a less than a week. I have downloaded and erased new apps in minutes. The founders were likely excited that their Twitter ad, TechCrunch push article, etc. caused me to checkout and download their app. But when their investors saw their churn rate they didn’t give them the next cash infusion without a plan to keep customers. Churn rates are good feedback. They can tell you that people liked the idea of your app but didn’t continue to use it based on some failing. Maybe because the app didn’t really have a place in the user’s real life, or because another app did the same thing, better, or whatever. Either the app must change, or the business model must change.

The churn rate killed Myspace, the churn rate should change the product of Google+, the churn rate can be a bad sign for Twitter, Box, Evernote, Rovio, King… Adoption of a new product is great, especially if people pay for that product. But most apps are not pay per download or rely on in-app purchases to cover the margins. To app companies and their investors, the churn rate is an important metric by which to gauge success. Many companies’ sole perceived value is in the number of current customers, with revenue to hopefully follow, someday.  For those companies, the churn rate may be the most important metric.

 

Paul Creech
Paul Creech is an attorney living in Houston, Texas. Paul has baccalaureate degrees in philosophy and political science from Utah State University, and a juris doctorate degree from Houston College of Law. He is a former U.S. Marine. Besides the law, Paul's interests include sports, art, and food.