Churn and Addressable Market Space

The concept of churn and the overall addressable market space is something that many startup founders do not think about.  Founders use an odd variation of math where the minus sign simply does not exist.  They talk about total users, and they talk about user growth.  They never seem to talk about users lost.

Churn, or Churn Rate simple means:

the annual percentage rate at which customers stop subscribing to a service or employees leave a job.

Basically churn is the amount of users or customers you expect to lose. An important nuance of this is that is usually relates to the people you lose out of happenstance.  Founders and entrepreneurs always want to think they control whether they gain or lose customers, but in reality “life happens”.  People move away, they get bored of a product, they out grow a product, a new spouse doesn’t like them spending resources on something they have loved for years.  Basically you lose people because, “crap happens”.

As an example there was a credit card issue with Amazon and my Wall Street Journal subscription lapsed.  I’ve simply never gotten around to resubscribing. Or I used to go to Whole foods every weekend, but my wife now does a Yoga class near a Mom’s and so we shop there instead.  Whole foods can’t do anything about my wife’s yoga habit.  They lost us just due to circumstance.

Why churn is important to startups is because they may not know what their addressable market will be. How many people that they can deliver a product or service to who would buy that product or service at any price.  Beyond that how many people are aging into the market space every year?

Where many startups get trapped is that they believe a finite customer base is an infinite customer base.  You hear all the talk about markets being worth billions upon billions of dollars, but many times the real market is a minuscule fraction of that.  Why churn matters is because you have to ask yourself whether you will end up strip mining your possible customer base on the way to find success.

So with Failed Normal we are both adding new members, and losing members.  I see both the additions and subtractions so I have to question whether there will be a point when I can burn through the addressable market.  For me this is unlikely.  At 10,000 paying members I’ll have have far more members than I need, and in 2014 there were approx. 6.5 million tech professionals in the US alone.  Beyond that every politician and parent is telling there kids to get into tech so the market continues to grow.  So it is unlikely that I would eat through the entire addressable market even as churn continues.

On the other hand I look at things like Meal Kits.  How many people actually want meal kits?  How many people will pay for meal kits once the novelty has worn off? With meal kits competing with not just other meal kits companies, but with delivery from restaurants, improved grocery stores, etc I would argue it’s very possible that through basic churn that they could eat through their entire market space.  Especially in the startup space the larger you try to grow the more significant an issue churn becomes.

The goal in business, at least as I was taught 25 years ago, it to create something sustainable.  It’s not about success today, tomorrow, or next year, but whether you have a reasonable expectation of being around a decade from now.  For customer growth there will be a number of variables you can adjust.  You can change price, packaging, delivery time, quality, etc.  You can’t change people moving away, trends changing, general boredom with a concept, etc.  You need to make sure in your growth plan you are calculating these losses you can’t do much about.

I have seen entrepreneurs seem like rock stars over night, only for them to burn through the entire customer base in less than a year and burn out. As I will reiterate for the thousandth time about the PC repair industry, it doesn’t matter how good you are if people are simply unwilling to pay for repair, or their systems are more reliable than they were the market will dry up regardless of what you do. Personally I want to be at the table of a pie factory, not dividing up an ever shrinking pile of crumbs…

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