Retention or Churn?

User based forecasting in service businesses is usually done on a monthly basis and consists of three metrics and some basic math. You look at the 1) number of users you had last month, say 100 (Previous Month Net Users), 2) the number of users you had last month that didn’t come back this month, say 15 (Churned Users) and 3) users who showed up this month that weren’t users last month, say 20 (New Users). Previous Month Users minus Churned Users + New Users = Net Users. 100 -15 + 20 = 105, = 5% month-over-month Net Users growth.

Despite this simplicity, we often debate the nagging issue of whether to talk about churn or retention. At first I didn’t think it was a meaningful distinction since the two are the mathematical inverse of each other. Who cares whether we talk about churn or retention? You do the math different, but the numbers and ratios are the same.

It turns out to make a difference in the psychology of business performance discussions. Talking about retention is more comfortable because it feels like an accomplishment, we “saved” or “kept” this many customers. Good job! If I had 100 customers and kept 85% of them, that is a lot. Feels like I did a good job. But if you report on churn, saying that I lost 15 users, it feels bad.

Opportunity cost is an emotionally distant abstraction, whereas taking something from me hurts right now. So if your organization needs to make people feel good, report on retention. (I’m not being sarcastic, ensuring that folks feel good at work could be as important as delivering results, depends on the org).

However, if you want to focus your team on improving Net Users, report on churn. And yes, it is a psychological trick to make people feel bad about what they lose each month. It creates more urgency.

The key to balancing the stress of focusing on what you lost is two-fold. First, have a team culture that values honesty, truth and transparency. Ensure that you communicate to your team that success in the short term is process-oriented and not results-oriented. That is a better way to talk about “failure.” Second, spend time setting realistic goals for churn improvement. It could be that a 15% churn rate is the best you’re ever going to get for the product you have. No need to pressure folks to make massive improvements to the 15% churn rate if no one else in your industry can beat that number. If there aren’t improvements to be made, then go ahead and report retention to make folks feel good and focus on a different metric.

Of course, you can report both retention and churn, but that leads to everyone randomly choosing to talk about one or the other and then folks have to do math in their heads (reporting rule #495: don’t make your audience do math).