If you're an investor in a subscription-based business, you're no stranger to churn. It's an important metric in gauging customer turnover, but how well do you know the term?
After all, the percentages seem so small -- and the changes so puny -- that it's easy to dismiss the vital measuring stick, or simply boil it down to a "churn is up" or "churn is down" binary rush to judgment.
Let's dive right in by taking a closer look at the churn rates of five popular subscriber services.
| Company |
Latest Quarter |
1 Year Ago |
|---|---|---|
|
Netflix (NASDAQ:NFLX) |
4.2% |
4.1% |
|
Sirius XM Radio (NASDAQ:SIRI) |
1.8% |
1.7% |
|
DISH Network (NASDAQ:DISH) |
1.86%* |
1.70%* |
|
DirecTV (NASDAQ:DTV) US |
1.42% |
1.42% |
|
DirecTV Latin America |
1.59% |
1.35% |
|
TiVo (NASDAQ:TIVO) |
1.3% |
1.5% |
*DISH results for all of 2008 vs. all of 2007.
Save for perhaps Netflix, the numbers seem pretty small. They're not. Churn is typically calculated on a monthly basis -- the number of customer cancellations in a quarter is divided by the sum of beginning subscribers and gross subscriber additions. That figure is then divided by three months.
In other words, if someone tells you that Netflix only shed 4.2% of its members during the holiday quarter, they would be off by a third. Netflix actually lost 12.7% of the total of its existing and new subs during the period.
Things get a little hairier when companies only track a certain chunk of their audience. Let's break down Sirius XM. The company began the fourth quarter with 18.9 million subs and added 1.7 million gross additions. If everyone had stuck around, Sirius XM would have 20.6 million satellite radio fans onboard. Instead, the company took in 1.6 million cancellations, or 7.8% of its total. So why is churn 1.8% instead of 2.6%? Well, Sirius measures churn by only the total of its self-pay accounts.
TiVo's churn also needs a little color. It may be the only company to have improved its churn rate, but TiVo measures churn only for its "TiVo-owned" subscribers, or the 1.6 million members it services directly. The churn may appear attractive, but would you believe that TiVo and DISH are the only two companies on the list to close out the quarter with fewer subscribers than when it began?
So do make sure that you measure churn on an apples-to-apples basis. It's also important to note that the relatively higher churn rate at Netflix isn't problematic. The company spends little on attracting new subscribers, whereas a company like DirecTV, Comcast (NASDAQ:CMCSA), or TiVo will spend far more in subsidizing hardware or in-home installation.
And, lastly, don't assume that any percentage shift is small. DISH going from a churn rate of 1.7% in 2007 to 1.86% in 2008 may appear to be a matter of mere basis points, but it's actually a better than 9% spike.
Churn is an important thermometer. Make sure you know where to stick it to get the appropriate reading.
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