The simple way to calculate your growth ceiling

When growth slows at a startup, the obvious immediate move is more marketing. Spend more money, generate more leads, add features for the sales team to push, and so forth. But if the problem is that customers are leaving or abandoning your product for alternative solutions, feeding new users into the pipeline won’t provide a long-term solution.

Jason Cohen is an author and four-time founder responsible for two unicorns (WP Engine and Smart Bear). On Lenny’s Podcast on January 25 of this year, Cohen went deep on this specific issue, and explained why churn should get a founder’s primary attention when growth stalls out.

The problem is that new sign-ups from growth hacks or marketing campaigns will never offset cancellations if the product fundamentally isn't working. Marketing tools and ads will always bring in new users at a consistent rate, but cancellations grow automatically as your company does.

Cohen suggests that you divide your incoming customers each month by your monthly churn rate, to determine your “growth ceiling.” So if you have 100 new customers a month, and a 5% churn rate, you’ll get to 2,000 customers max. The closer you get, the slower you’ll grow, because almost the same number of people who sign up will ultimately depart.

This is a superior approach to just considering “churn rates” in the abstract. Is a 4% churn rate significantly better than 5%? Who knows? You’re going on vibes here. But looking at it as a cap on your company’s size makes it feel concrete, or in Cohen’s words, “real and visceral and scary.”

Once you’ve diagnosed churn as a problem, potential solutions will likely emerge. Cohen recommends surveying users, but ensuring that you design and organize a format that ensures accurate answers. A drop-down menu that’s not randomized, for example, encourages respondents to just pick the #1 top selection. Instead, ask an open-ended, non-pointed question like “What made you cancel?” that encourages users to speak candidly about the product and their experiences.

How do you usually think about churn? Do you have an internal number for a churn rate that’s “too high”? Hit us up in the comments, we want to hear from you.

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