Red flag explained · Customers and retention
Monthly churn above 5%: how much of today's revenue lasts a year
Short answer: At 5% monthly churn, about 46% of today's customers are gone within a year unless new sales replace them. Above that, the business depends on a steady flow of new customers, often from the founder's own effort. Ask how churn is measured and where new customers come from.
When the checker raises it
Raised when stated monthly churn is above 5%: medium severity above 5%, high severity at 10% or more.
Why it matters
The share of customers left after 12 months is (1 − monthly churn) to the power of 12. At 7% that is about 42%; at 10% about 28%.
High churn is normal for some products, such as tools people need for one project. It is fine if new sales are steady and do not depend on the seller. It is a problem if growth came from the seller's network, content or ads that stop when they leave.
A worked example
Composite example, not a real listing
Asking price: $60,000
MRR: $2,600
Average monthly profit: $2,250
Monthly churn: 7%
85 paying customers
Revenue verified via Stripe
Business age: 14 months
Owner hours: 5 hours per week
Traffic or revenue sources typed in: Organic search 15%, Direct 45%, Referral 40%.
What the red-flag checker returns: payback of 26.7 months on average monthly profit, and this flag:
Medium Monthly churn 7%
At 7% a month, about 58% of today's customers would be gone within 12 months without new sales.
Ask: How is churn calculated (customers or revenue), and how many new customers arrive each month?
The same example also raises: Concentration not disclosed.
What to check
- Ask whether churn is measured on customers or revenue, and for each of the last 12 months.
- Ask how many new customers arrive each month and through which channel.
- Run the SaaS churn stress test to see payback if new sales stop.
Questions to send the seller
- How is churn calculated (customers or revenue), and how many new customers arrive each month?
- What were monthly customer churn and revenue churn for each of the last 12 months?
- How is churn calculated: by customers or by revenue, and are annual plans included?
- How many new paying customers arrive each month, and from which channels?
Related flags
Useful next
- SaaS churn stress test
- Free red-flag checker: paste a listing and see which flags it raises.
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The checker is a set of plain rules, not an AI model, and its flags are prompts for questions, not verdicts. Composite examples are invented. Informational screening only, not investment, legal or tax advice.