Churn

There’s always movement. Within systems, components are constantly wearing out and getting used up. This includes both the material and information within a system and the parts of the system itself. Keeping a system functioning requires ongoing replenishing of both the stocks and the parts used to maintain them. We call this process of attrition “churn.”

There are examples of churn everywhere. For example, your favorite sneakers wearing out after lots of use. The skin cells on your body being constantly replaced. Trees in a forest die and new ones grow. The parts in a car deteriorate with time; some need replacing, and some render the car unfixable once they break. People move in and out of cities. System components are never static, and to run a successful system you need to understand how and why parts wear out. The churn model is a lens through which you can look at that kind of system change and learn how to work with it.

In business, churn refers to the loss of a customer, whether that’s because they canceled a subscription, stopped buying a product, moved away from a store, or something else. No business can retain every customer forever. However, the rate of churn varies depending on factors like the availability of alternatives, ease of switching, and overall satisfaction. Often given as a percentage, churn is an indicator of whether a product fits its market. Churn can be hard to notice when new customers replace those who leave. Tracking departures separately from new sales reveals how much acquisition is needed just to maintain the customer base.

Growth may be good in business, but churn is also important to consider. It doesn’t matter how many new customers a company gets through the door if those customers don’t stick around long enough for the company to earn back the cost of acquisition. If churn is too high, a company may run out of money acquiring new customers.

Churn can also refer to the turnover of employees, something that varies between industries because of the varying costs for both employees and employers. If hiring and training new employees is costly, a company has an incentive to keep churn low, and vice versa. Fast-food restaurants, for instance, have a higher employee churn rate than governments. A certain level of churn, even just from people retiring, helps bring in new perspectives and experiences. Too much churn prevents expertise from accumulating.

A customer retention rate of 90 percent may look strong. If a competitor retains a further 5 percentage points over the same period, it needs fewer new customers to replace departures, other things equal. The period and customer groups must be comparable.

When churn is too high in a system, replacing what is lost or used up becomes a process of running to stay in the same place. Once we get stuck in the trap of keeping up with churn, it’s time to step back and reassess if it’s worthwhile or if there’s another way. Replacement costs can become unsustainable when departures exceed the system’s capacity to replenish them.

Because churn is inevitable in all systems, it’s useful to ask how we can use it to our benefit. Churn can present opportunity. Like a snake shedding its skin, replacing components of a system is a natural part of keeping it healthy. New parts can improve functionality, and new people bring new ideas. Counterintuitively, some turnover allows us to maintain stability. Replacing what is worn out also gives us a chance to upgrade and expand our capabilities, creating new opportunities. Is it worth going through contortions to keep every customer, or should we let a certain percentage go and focus on the core customers who keep our business going? Is it worth trying to retain employees who have lost interest in the job or who would experience more professional growth elsewhere? Understanding your situation through the lens of churn can help you figure out how to harness the dynamics that drive it.