Fable
How many people left and how much the remaining people cost
Old Cheng opened a gym with a membership model, charging annually. At the end of the first year, he pulled a report: 500 members at the start, 420 remaining at year-end. He calculated a churn rate of 16%. Old Cheng panicked a little, feeling that losing two out of ten people every year meant this business couldn't last.
Accountant Xiao Du looked at the same set of data and reached the completely opposite conclusion. She said: eighty people churned, but of the four hundred and twenty who stayed, sixty upgraded from the basic annual card to the personal training package, and another thirty added nutrition consulting at renewal. Total revenue at year-end was twelve percent higher than the expectation at the start of the year.
Old Cheng and Xiao Du each had their own argument. Old Cheng said: fewer people is fewer people; higher revenue is only temporary, and the base is shrinking. Xiao Du said: most of those who left only bought the cheapest annual pass and came fewer than three times a year; their departure has little impact on revenue. Those who stayed spend more, and spread across each remaining member, average spending rose by eighteen percent.
The two went to consult their friend Lao Wu, who did business analysis. On the blackboard Lao Wu drew two lines: one going down, the curve of membership numbers; one going up, the curve of average annual spending per person. Lao Wu said: these two lines tell two different stories. The one going down tells you "how many people left"; the one going up tells you "whether the people who stayed brought more or less money."
Old Cheng looked at the two lines together and spotted a pattern he had not noticed before: the month with the highest churn rate was March every year—the annual membership renewal season. But March also had the highest net revenue retention of the year, because most of those who renewed upgraded their plans. He had been making decisions in the anxiety of "high churn in March" without seeing the fact of "high renewal quality in March."
Old Cheng adjusted his strategy. He no longer put the entire budget into acquisition, but used one third of the budget for exclusive activities for high-value long-term members: personal training trial classes, nutrition lectures and member competitions. Churn did not fall noticeably, but net revenue retention rose from one hundred twelve percent to one hundred thirty-five percent.
At the end of the year, investors came to look at the data. Old Cheng first gave two numbers: churn rate 16%, net revenue retention 135%. The investor asked: which do you value more? Old Cheng said: I look at both, but when making decisions I trust the second more. Churn rate tells me who left; net revenue retention tells me who left, who stayed, and whether those who stayed are still willing to spend more.
Later, Old Cheng shared his experience with peers and said something that circulated in the industry: churn rate is the scale on a health report—it tells you the number changed. Net revenue retention is the blood test—it tells you whether what changed was muscle or water.