There are two core metrics that should drive a lot of the decisions you have in your organization; churn & sales. A great agency is constantly studying these two numbers diagnosing them from every angle learning specific areas of opportunity.
The more you are able to understand these numbers and what they are composed of the better you’ll be equipped to making the right decisions for your business.
In this report, we want to look at churn, which is something we’ve been studying for about 10 years across two different agencies. The first one was scaled to over 1,000 clients and the second one we’ve scaled to over 200 full time employees in just 5 years.
When you’re a young agency, churn is so important because 1-2 clients can represent a large portion of your income, however as you scale, the same is true. Imagine you’re an agency like Hite and you’re doing $500,000 per month in MRR.
If you have 10% churn monthly, you’ll need to do $50k in new sales just to break even. If you can create an environment where you’re more likely to have 5% churn, if you do $50,000 in sales you’ll grow by 5%.
Understanding why clients leave and acting on it, isn’t only the key to scaling. Agencies with lower churn, partake in other benefits such as receiving more referrals & a much higher evaluation when it comes to selling the business.
Hite is constantly focused on understanding the why behind our growth & this is essential for your business if you want to scale in 2023.
Churn is critical, especially as you scale for churn is a representation of the quality of your product, service, & customers.
Every agency is constantly battling both the increase of sales and the decrease of churn.
Churn can be broken down in a lot a ways, but for agencies, the most common two churn metrics you’ll see is Client Churn & Financial Churn. These two churn types can be define these two churns as followed:
For Client Churn we will look at the monthly turnover of clients regardless of financial impact.
For example, If in January you had 10 clients pay you then in February only 8 of them paid you, that would be a turnover of 2 clients and equal 20% churn. In this example it would not matter how much each client represented financially.
For Financial Churn, we look at the monthly turnover of revenue regardless of clients.
For example, if in January you had $20,000 in recurring collected MRR and in February you only collected 18,000 of that $20,000, it would represent a 10% churn rate.
Understanding the difference between these two numbers is crucial, let’s look at the following list of clients.
Client A $1,000
Client B $5,000
Client C $2,000
Client D $3,000
If we were to lose Client B, you would have 25% client churn, however you’d have 50% financial churn. There could be a very large difference in these numbers especially as you scale.
The Problem With Researching Churn
Doing research on churn for agencies doesn’t come easily. First off, about 80% of agencies that exist today would be defined as micro agencies, doing less than $15,000 in monthly revenue of which the vast majority do not keep up with, nor have any data on their numbers, especially when it comes to churn.
If you take into consideration those that do keep great track of their numbers, between those they may manage and report back churn in many different ways, even beyond the above numbers.
For example, there is a well known agency that is doing several $100m in annual revenue that keeps track of their financial churn, but in their own way focusing more on net growth vs. churn.
In their model, they look at how much was lost, and measure that against what was upsold in order to come up with a net churn.
With that said, we believe that this report takes all those data points into consideration arriving to tangible and definitive results.