In this article, we are going to compare the differences between burn rate and churn rate. These metrics are used to measure the negative attributes of a business. It is important to know these numbers so you can put safeguards in place. This can only be done after you are able to identify burn and churn in your business.
Burn rate is the rate at which a startup is losing money as a result of being in a negative cash flow state. Burn rate may be calculated on a monthly or quarterly basis.
Calculate your startup’s total expenses, minus the income. Usually, the term burn rate is used when in the early development stage, when the startup is using (burning!) investors’ money.
For example, David is the founder of X-Bots – which is a startup that creates office automation software. X-Bots spent a total of $15,000 over the last quarter. X-Bots will therefore have a burn rate of $5,000 per month.
David wants to know how long he can keep the doors open before he needs more capital. Therefore, David realises he needs to calculate the cash runway. The cash runway is the time you are able to stay operating before your startup runs out of money. If David has $50,000 in the bank and is burning through $5,000 per month, David’s cash runway is 10 months.
Churn is the rate at which clients leave. Therefore, you need to ensure that your churn rate remains low. If your churn rate is high, then there is likely something wrong with your product, which you will need to identify to improve.
You can calculate the churn rate over any period you choose. For example, if your startup is in the early stage, you may choose to run weekly reports. It is a great idea to monitor metrics meticulously when your startup is finding its feet. Monitoring churn closely will allow you to react faster to any problems causing a high churn rate.
To calculate churn rate you take the customers that leave and divide by the customers you gained and multiply by 100%. You can apply the churn rate calculation to any time period.
For example, if in month 1 you got 500 new customers and 100 of those customers left.
100 divided by 500 then multiply by 100%, which equals a churn rate of 20%.