How a $11 billion unicorn calculates the user churn rate

Editor's note: This article from the United States famous red dot venture Tom tunguz Hand, by a number of well-known overseas science and technology Media and VC Media reprinted, Chinese version by Heaven Zhuhai Branch Rudder compiled. How do you calculate the user churn rate for your own startups? How many users are lost per month? That can't hold the key, because there are big customers and small customers. By the upward sales rate? That is biased, because it is possible that your individual users will bring you a large amount of sales, and give you a false prosperity of the hypothetical, do not see the large number of users lost the fact. Let's take a look at the computational secrets of the ServiceNow user churn rate that the author inadvertently peeked at.

Before preparing their registered listing statement (S-1) for ServiceNow, the world's third-largest SaaS company, I happened to be aware of the two ways that the company used to calculate churn rates in its most recent annual report, the key factor affecting our profitability. One is a little more common, but the other is a simple, yet extraordinary, way to add to the SaaS Company's very effective computing. Let me give you a description of both of these two ways in the report:

• up-Sell rate: earning more sales from customers who have already purchased our services is crucial to our growth, which we call "up-sell rate" (Upsell rates). This is how we calculate our upward sales rate: the loss caused by the fleeing user is deducted from the annual contract value (annualized contract value, also called ACV) resulting from upward sales, divided by the ACV of all users during that period ( Heaven Zhuhai Branch Rudder Note: that is, the upward sales rate = (upward sales ACV-escape user loss ACV)/a total contract ACV. For example, if you are a video content provider called Cool vision, you had 100 paid users last year, and each user purchased $1000 per year of "average user" License. This year you through the upward selling way, tell these users said "ordinary user" account can only see Japanese action movies or Japanese love movies, and we now provide "advanced user" account can watch Japan "love action film", but also can provide a limited number of old division of the service of the services Oh, but the price to add 500 yuan. This seduce 20 users to upgrade their license to the "Advanced user" account. At the same time, there are 10 of Patriots heard that there is no domestic love action film can be seen, there is no continuation of the fee, fled. So here's your up-sell rate: up-Sell rate = ((x 20-1000 x)/(+ x + x 20) = 0%. That is, the amount of money you earn upward is actually just enough for you to fill the hole in the loss caused by the user's loss. ). The upward sales rate calculated by our company on the last day of 2014,2013,2012 is 36%,31% and 30% respectively. Our upward sales are mainly from the purchase of more license by our customers and other paid services that users subscribe to.

• Renewal Rate: the way we calculate the renewal rate is 100% minus our user escape rate. Our user escape rate refers to the ACV loss caused by fleeing users, divided by the acv of all users who have been renewed during that period and the loss of ACV from the user ... So our corresponding renewal rate for the past few years is 97%,96% and 97%.

The upward sales rate is actually calculated by the so-called "reverse user escape rate (negative churn)" approach, which is widely used in many SaaS startups.

The concept of "reverse user churn" is hard to define, so let's start by describing the impact it has on startups and figuring out what it's all about. Represents a description of the growth in revenue for an imaginary SaaS company in 2014. The start-up company will have 100 new customers every month, and each user will pay $1/month to use the products and services offered by the company. is the so-called have to lose, this company will certainly have a user churn every month, here we assume that is 5% per month wastage rate, so this kind of calculation, in January in the 100 new users, to the end of December, the rest of the people are about half. This can be clearly seen in the picture.

In response, let's look at another company that shows a 5% "reverse user churn rate". What do you mean? The company is talking about a 5% churn per month, but the remaining 95% of the reserved users will spend an extra 10% of their money to buy other services (up-sell credit) in the case of regular monthly payments, so the total revenue will become 105%. So it looks like the user is losing every month, but the company doesn't stop growing, but it has a 5% growth rate.

But there are some drawbacks to this approach, and if you use it alone to judge a company's health, it may lead to miscalculation.

For example, if some users buy a large number of your company's services, your upward sales rate will appear high, or even reach 100%. But if you have a 10% loss per month at the same time, even if you get up to 100%, your start-up business must be in trouble.

So in addition to using this approach, startups tend to count the number of users fleeing so they can see the illusion of a false boom in which the upward sales rate is high as a result of a large purchase by one person.

But there's also a problem with counting the number of users fleeing, because if your start-up users are very diverse, have a lot of heavyweight users, and have a few small users who are even missing or irrelevant, then some of these small users may feel like your start-up users are fleeing too high.

Therefore, the method of calculating the renewal rate proposed by ServiceNow is a good substitute for the calculation method of the number of users fleeing. This approach will not allow a few users to spend a lot of money to cover up the fact that users flee, but also to reflect the health of your business.

So, as mentioned earlier, when we want to calculate our renewal rate, use the following equation:

Renewal rate = 100%-Fleeing customer acv/(fleeing customer ACV + total renewal of user ACV)

You can try to bring this renewal rate into your SaaS start-up, believing that it will definitely give you a clearer picture of your users and bring unexpected surprises to you.

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How a $11 billion unicorn calculates the user churn rate