This post is by Tomasz Tunguz from Tomasz Tunguz
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In Rethinking Customer Churn Rate & LTV/CAC, Thibaud Clement illuminates a counter-intuitive concept about churn. The faster you increase your growth rate (acceleration rate), the higher the churn rate. Consider the same startup under two scenarios: one in which the acceleration rate is 50% and one in which the acceleration rate is 0%. In the 50% scenario, churn will be 67% higher. A surprising result. Why does this happen? Because the odds of churn decrease with time, particularly for products with monthly billing. If a business acquires many customers in one month, a big chunk of the customer base is at the point of highest churn risk. We should define acceleration rate. 50% acceleration rate means your growth rate increases 50% per month. In month 1, it’s 7%; month 2, 10.5%; month 3, 15.75%. In other words, acceleration rate is the first derivative of MRR growth. For companies, this will be a short-lived phenomenon because it’s very difficult to maintain high acceleration rates for very long. Growing from 10% m/m to 15% m/m is quite possible in the sub-$5m ARR range, but much harder at $20m in ARR. At that scale, acceleration rate is typically negative (i.e., growth slows). There’s a corollary: this means as growth slows, churn decreases, assuming no changes in customer behavior. A greater fraction of the customer base is mature and much more likely to continue to pay. If your SaaS business is growing really fast, and you’re wondering why churn is growing despite high NPS (net promoter score) or other metrics, this is why.