I came across a great post by VC Tomasz Tunguz on a great growth mechanism: negative churn. In effect, negative churn creates the same compounding effect as a high-rate bond; over time it generates tremendous growth. Negative churn means that the actual churn rate, the number of customers or players moving out of a collective group over a specific period of time, is lower than the increase in the value of the retained customers.
What is negative churn
Tunguz uses a great example to illustrate negative churn. Say your company has a five percent monthly churn rate, which means that five percent of your users quit each month. In Tunguz’s example, the remaining 95 percent of the customers increase their spend with your company by ten percent, so total revenue from this cohort (group) of users is equal to 105 percent of the revenue from the previous month. Even with 5 percent monthly churn, each month this cohort of users becomes increasingly valuable.
In the 5 percent monthly churn case, the company exits the year with $919 in monthly recurring revenue and the customer lifetime value (assuming a one-year lifetime and no virality) is $77. In the negative churn case (where you have a 10 percent monthly increase in spend), your company’s revenue is 73 percent larger at $1592 and the LTV is worth $133.
In both cases, the company has the same number of customers (or game, players). But with negative churn, revenue is over 70 percent higher. This shows the power of compounding growth every month.