The Churn Dynamics of Young Brands

49 Pages Posted: 12 Mar 2024

See all articles by Daniel McCarthy

Daniel McCarthy

University of Maryland - Robert H. Smith School of Business

Barak Libai

Reichman University

Verena Schoenmueller

ESADE Business School

Date Written: February 9, 2024

Abstract

The overall churn rate is a critical measure for analysts, investors, and executives looking to assess a young venture’s product-market fit and overall brand health. Yet, the dynamics of overall churn are unclear for young brands. To clarify these dynamics, the authors demonstrate how heterogeneity in customer churn at the cohort level, customer acquisition growth, and cross-cohort differences come together to inform the overall churn rate. Analyzing a unique dataset of 25 young, subscription-based brands, the authors reveal that most brands’ overall churn rates tend to decrease significantly over time—even during periods of rapid customer acquisition growth, which increases the overall churn rate on the margin, and despite the fact that cohort-specific churn rates generally tend to increase over time. A simulation analysis supports these conclusions, illustrating the boundary conditions of the results and highlighting that they likely occur infrequently in real-world data. These results expand our understanding of churn in the context of young brands and highlight the perils of simplistically using the overall churn rate to evaluate underlying trends in customer and firm value.

Keywords: churn, cohort analysis, subscription, product lifecycle, product-market fit

JEL Classification: M31, L25, D12

Suggested Citation

McCarthy, Daniel and Libai, Barak and Schoenmueller, Verena, The Churn Dynamics of Young Brands (February 9, 2024). Available at SSRN: https://ssrn.com/abstract=4722115 or http://dx.doi.org/10.2139/ssrn.4722115

Daniel McCarthy (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

Barak Libai

Reichman University ( email )

Israel

Verena Schoenmueller

ESADE Business School ( email )

Barcelona
Spain
20136 (Fax)

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