You are the founder of Startup ABC
End of year 1: You have acquired 1000 customers
End of year 2: You have 800 customers
You have lost 200. Is there something missing?
Just glancing at this number, it doesn’t seem like you are doing well
Churn Rate= (1000–800)/1000 = 20%
You have lost 20% of your customers.
Now, consider Dollar Revenue Retention
Let’s say, in the first year, all the customers opted for basic subscription
Cost of 1 basic subscription/annum = $1
Startup ABC’s net revenue in Y1 = $1 * 1000 = $1000
In year 2, out of 800, 400 opt for premium subscription, rest opt for basic subscription
Cost of 1 basic subscription/annum = $1
Cost of 1 premium subscription/annum = $2
Startup ABC’s net revenue in Y2 = ($1*400) + ($2*400) = $1200
It’s making more money now.
Dollar Revenue Retention = 1200/1000 = 120 DRR
While evaluating a startup, look into average industry churn rate, along with Dollar revenue retention to get the complete picture.
