Negative churn, the holy grail of subscription business models

Global numbers: revenue and costs

Revenue is the money you get when people use your product. Cost is any money that has to be spent or given up in order to get your product going. Basically, revenue will be used to pay for your costs. When you can afford to pay for your monthly costs, the surplus will be used to offset the investment of the months when the monthly revenue didn't cover the costs.

  • Infrastructure: it's all the necessary costs to keep the service running. In this category, I include website and app hosting costs, domain registration, tools for e-mail marketing, SEO, A/B tests, online chat system, etc. Usually, these costs are recurrent; therefore require a lot of attention every time you hire a new service like the above.
  • Development: here are all the costs to develop and implement new features in your website or application, including programming, interface development, visual design, logo design etc.
  • Marketing: every investment you do to attract clients, such as AdWords, Facebook ads, ads on websites, magazines, newspapers, and TV. We should also include here the costs with flyer printing and distribution, coupons, folders etc. It is important to note that in the beginning, you will very likely need to invest time and money in ways to attract clients for free. This is a long-term investment, but it will help you to save on marketing expenses in the future.

Individual numbers: CAC, LT, and LTV

The revenue and the costs are global indicators of your product's health. It is important to have also individual indicators, i.e., one for each of your customers.

  • CAC: is the Customer Acquisition Cost. It is the sum of the associated costs with finding and getting the attention of potential clients, and bringing them to your site, converting them into users of your web product and later, into a paying user. For example, imagine that you have only invested in Google AdWords and, on a given month, you have spent $1,000 and got 10 new clients in that month. Dividing $1,000 per 10, you'll have a CAC of $100. That is, your cost for getting each client is $100.
  • LT: it's the Lifetime of your client, i.e., how long on average a client is your client. This number only makes sense when you have a recurrent revenue stream. Using the previous example, let's imagine that the LT of clients you have acquired is 20 months.
  • LTV: it's the Lifetime Value, or the value of a client while he stays as your client. It's the revenue this client generates while still your client. Following the previous example, let's imagine this client generates monthly revenue of $8. Multiplying the LT of 20 months by the $8 per month gives us an LTV of $160.

Revenue churn

Revenue Churn is a measure of the lost revenue for a business model based on subscriptions, calculated in terms of client churn and the total revenue over a period.

Monthly revenue churn = revenue from clients who canceled on the month / total revenue of the month.

In order for your product to grow, it is necessary to have an increase in the monthly revenue higher than your monthly revenue churn.

How is it possible to have negative churn?

The negative churn occurs when your existing clients use more of your software product and they have to pay for it, and revenue gain exceeds revenue lost from existing customers who purchase less over time, including clients churn. For example, when clients upgrade a service plan with more features, when they hire additional services, when they pay for additional usage, or when they buy more access accounts.

Lean Product Secrets

The Lean Product Secrets brings together the hands-on experience of three successful digital products enthusiastic. Get to know their secrets for idealizing and evolving products, and their combined experience on Design Thinking, Lean StartUp, and Product Lifecycle Management.

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Joca Torres

Joca Torres

2.5K Followers

Digital product development advisor, coach, and board member. Also an open water swimmer and ukulelist.