In this article, we will compare the differences between burn and churn rates. These metrics are used to measure the negative attributes of a business. It is essential to know these numbers so you can put safeguards in place. This can only be done after you can identify burn and churn in your
business.
Burn Rate
Burn rate is the rate at which a startup is losing money due to being in a negative cash flow state. The 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 in the early development stage, when the startup is using (burning!) investors’ money.
For example, David founded X-Bots – 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 when you can stay operating before your startup runs out of money. If David has $50,000 in the bank and is burning through $5,000 monthly, David’s cash runway is ten months.
Churn Rate
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, something is likely wrong with your product, which you must 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. Monitoring metrics meticulously when your startup is finding its feet is a great idea. Monitoring churn closely will allow you to react faster to any problems causing a high churn rate.
To calculate the churn rate, you take the customers that leave, divide by the customers you gain, and multiply by 100%. You can apply the churn rate calculation to any period.
For example, if in month one, you got 500 new customers and 100 of those customers left.
100 divided by 500, then multiplied by 100%, which equals a churn rate of 20%.
