From $0 to $1M: A Common Mistake with Churn Metrics

Here's a look at one common mistake getting the Churn calculation to accurately reflect a company's business model.

Customer retention matters a whole lot early on when the loss of a single customer has an outsized impact. Early-in-revenue startups need to get sophisticated fast about customer retention metrics. But where to begin?

Start with Churn, but after understanding a key thing about Churn math. Churn is one of those concepts that everyone in SaaS understands intuitively, yet there’s no real convention or common definition for how it is calculated and used inside a company.

So to get started right, remember this: 

When your contract period equals your measurement period, your churn rate gives you an accurate count of the $ disappearing from your ARR base during that period. 

If you have quarterly contracts, measure churn quarterly. Monthly, monthly and annually, annually. Because when your Churn measurement period is different than your typical contract period, you get somewhat arbitrary results. We did a long explanation of why but it comes down to ensuring the base amount of ARR up for renewal in a period matches the dollar amount of business that churns. 

This one fix means your churn metric properly compares the churn that does happen against the actual windows during which customers could churn in the first place.

For further reading, we created a series of primers on customer retention metrics:

Originally published August 26, 2021.