Ike Elliott had a good post *http://ikeelliott.typepad.com/telecosm/2008/05/vonage-and-the.html) on churn today, using Vonage’s 1Q08 results as a backdrop.
I started to post a comment, but began rambling. I’ve been hanging around John Scarano too long I guess. Anyway, I decided if I was going to poke away at the keyboard, I might as well drive some traffic to my blog instead of Ike’s. So I will complete comment here.
Ike’s analysis is interesting and useful. I will add one more concept to it. What is a reasonable expectation for steady-state churn?
A 1% churn rate implies a dollar of revenue will stay on the books 5 years. Think of all the reasons a customer might churn–go out of business; move; out-grow the service; benefit from repricing; or switch to another service provider. If, on average, only one of these events every five years would seem to be a a fantastic result for most recurring revenue businesses. Yet many telecom business tout 1% or lower rates and attribute it to their great service. Eventually, it becomes clear that the churn rate is really higher–this is explained usually by citing external uncontrollable macro events such as a slowdown in the economy.
What is really happening? Newer companies should have low churn. Why? –the maturity of their customer base is low. If you have been in business only three years, your average customer has been with you less than 1.5 years. Your churn better be very low! Else, you have bigger problems such as bad service or an unsticky product.
Rapidly growing companies have a similar dynamic. When Cbeyond was in its rapid geographic expansion phase, it’s average customer life was unnaturally low. Churn, it follows, should be much lower than steady state. Is this how they explained their low churn numbers in their early years? I don’t think so.
Tracking and understanding churn is very important in recurring revenue businesses. I wrote a series of posts on the topic. For those in the telecom services business, they are worthwhile to read. Look over at the categories on the left and click on Disconnect Inferno to read more.
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I am familiar with Cbeyond and they proudly tout their 1% churn as great management and customer service. Last year they climbed to 1.1%, which they claim was cleaning up non-pays and the bad economy. I doubt they will ever hit 1% again as their base matures and the growth in the denominator (customers) slows.
If you haven’t heard already touting a low churn rate can get you in trouble. The CEO of Cbeyond was hit with an insider trading lawsuit for allegedly making misleading statements about Cbeyonds chunr which in turn allowed Cbeyond executives to sell stock at an inflated rate. It will be interesting to see what happens with this lawsuit. Cbeyond says the lawsuit is meritless of course. we shall see.
I think <1% is an appropriate churn target for B2B … I wonder what an appropriate target is for B2C?