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Discussion – 


Discussion – 


Churn and Burn: Rocketry 101 for Digital Business


An editorial note: we use terms like “nerd” and “dork” with endearment because that’s a big part of who we are. You didn’t need us to prove it, but we’re about to—because the comparison we’re about to make is pretty dang dorky in terms of intersecting interests.

As you’ll recall, “churn” means losing a recurring source of revenue—for example, when a monthly service subscriber cancels. For the principle we’re illustrating here, you can think of losing email subscribers the same way (even if the newsletter doesn’t directly affect revenue).

Our analogy for today: churn is to digital business as the Central Problem of Rocketry is to space travel.

How to Build Explain Rockets from Scratch

For our purposes, rockets only have two parts: the body and the fuel. A novice rocketeer’s first challenge (as the movie October Sky hilariously depicts) is to design a rocket body that can fly straight—and until you’ve mastered that design challenge, fuel is not your primary concern.

Once your rockets fly straight, you’ll want them to fly farther. Naturally, this means more fuel (and then bigger rockets). As your rockets get bigger, one detail will become painfully clear: fuel is heavy, so much that it’s the huge majority of a typical rocket’s weight. The Central Problem, simply put, is that adding fuel to a rocket also adds weight, which in turn decreases the net efficiency of the fuel. This happens because, the longer it takes to burn all its fuel, the longer a rocket is forced to carry the “dead weight” of what hasn’t burned yet. (See also: why rocketry involves terrifyingly intense math.)

Yes, more fuel typically means a longer flight—but fuel efficiency continues to diminish as rockets get bigger because the fuel has to propel more (and more) of itself. NASA rockets like the Saturn V are so dang huge because space is very far away, and so they necessarily include several layers of Fuelception to get there. First, there’s the tip of the rocket—the part going to space—and the fuel needed to propel it there, which is already a lot. But the first fuel increases the weight of the rocket, so you need a second fuel to help lift the first fuel, and so on (notice that several “used segments” detach on the flight up).

Here’s where churn comes back into focus—and where digital businesses can learn something from NASA nerds. Rocket scientists were only able to “break” the Central Problem of Rocketry and get humankind into space because they’re obsessive about efficiency where it matters; likewise, digital businesses are only able to break through conventional growth ceilings when they fully respect their customer bases as finite critical resources.

This is different from “respecting one’s customers.” You respect your customers if you truly try to serve them well in your everyday work. Respecting your customer base means understanding—in a bigger-picture way—that there are only so many customers in the world for you, which means that losing customers diminishes potential for the future.

The privilege of digital business is that we can reach huge markets without huge resources, so it’s natural to have a “plenty of fish in the sea” attitude even when we respect our customers. But that becomes a dangerous fallacy when the majority of digital businesses serve some niche, which is (by definition) a much smaller segment of the population—and any significant churn becomes a poisonous problem when you remember that (1) finding new customers gets harder over time and (2) you won’t get back the ones you’ve lost.

Each business is a rocket constructed in its own way, propelled in its own direction. Your customers are rocket fuel, except for one important difference: they can choose whether to “churn off” or keep pushing your business upward. If too many of them churn off, your rocket will (eventually) return to the ground—but if enough customers stick around as you grow, you’ll have a shot at making it into orbit. Burn, baby, churn.

Addendum: How to Calculate Monthly Customer Churn Rate

Churn rate is just a percentage-change calculation for recurring revenue—but we’ll walk through the steps for anyone who’s not mathematically inclined. (To be specific, we’re calculating monthly customer churn rate here.)

1. You’ll need two pieces of information: (A) how many recurring customers/subscriptions you had to start the month and (B) how many you had to end the month. If you subtract B from A, you’ll get the third piece of information: (C) how many people “churned out” that month.
2. “Customer churn rate” means “the percentage of customers who churned out over a period of time.” To be specific, you divide C by A—so C/A—then move the decimal point two spaces to the right and add the % sign. (So if someone has 100 subscriptions and 5 churn out, the customer churn rate is 5/100, or 0.05, or 5%.)
3. Monthly Customer Churn Rate usually implies a month-over-month average, meaning “do the above calculation for each month, then take the average of all months’ results.”

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