What is churn rate and why does it matter?
Short Answer
Churn rate is the percentage of customers or revenue lost to cancellation in a period, typically monthly. High churn destroys growth momentum and requires constant acquisition to maintain revenue.
Full Explanation
Customer churn is calculated as (Customers Lost / Starting Customers) per period. Revenue churn is (Revenue Lost / Starting Revenue). A company with 100 customers at month start and 5 cancellations has 5% monthly customer churn; if those 5 customers represented £5K of £100K revenue, revenue churn is 5%. Monthly churn of 2-3% is typical for B2B SaaS; below 1% is exceptional and suggests very sticky, strategic customer relationships. High churn (5%+) is unsustainable — it requires growth rate above churn to expand, which becomes increasingly difficult at scale. The lifetime value of a customer is inversely proportional to churn: LTV = (ARPU / Monthly Churn) × Contribution Margin. A £1,000 ARPU customer with 2% monthly churn has an LTV of about £50,000 (before CAC); the same customer with 5% churn has LTV of only £20,000. Reducing churn from 4% to 2% can double LTV and is often more valuable than acquiring 20% more customers. For founders and investors, obsessing over churn reduction — through better onboarding, customer success, product fit, and support — is more impactful than aggressive sales.
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