Idea Expansion Series: Higher churn rates can be a good thing

This brief article from Hanging off the Edge is the first of a series called Idea Expansion. Our goal with this series is to spark new ideas by building upon ideas from great minds and applying them to different markets, industries or companies.

The Small and Medium Businesses (SMBs) product and service’s space has grown at extraordinary rates. Companies like Shopify, Stripe and Salesforce facilitate better, longer and most importantly more predictable relationships with customers. It is this higher level of certainty that helps create a counterintuitive insight around losing customers.

This idea was inspired by Ben Thompson from his writing at Stratechery ($).

“I would argue that for Shopify a high churn rate is just as much a positive signal as it is a negative one: the easier it is to start an e-commerce business on the platform, the more failures there will be. And, at the same time, the greater likelihood there will be of capturing and supporting successes.”

Higher churn rates can actually be a good thing, the more at bats in a potentially endless game the higher the probability of shared success. As the surviving SMBs grow, SMB product and service companies grow with them because they are designed to scale. This advantage creates a confidence not available previously when predicting future performance, helping justify higher multiples for investors.

The same may apply for a company called StoneCo (STNE). STNE is located in Brazil, the largest economy in Latin America. They gained a bit of acclaim as Buffett’s Bershire Hathaway participated in the IPO. STNE was the first private merchant bank in Brazil. They have since morphed into a conglomerate of SaaS and financial services offerings, processing payment for 90% of e-commerce transactions in Brazil. They control every aspect of the relationship between SMBs. The beauty of the model is customer acquisition. They build StoneHubs (physical locations) in hard-to-reach and non-major cities in Brazil, and offer merchants a full service solution and award-winning customer service. In sum, their offering is as if Square, Shopify, and Salesforce joined under one roof.

In an emerging market like Brazil the merchants served by STNE previously took part in the informal economy, limited to the exchange of goods or services for cash. StoneCo is capturing value previously unaccounted for with each new merchant who joins. From the most recent Q3 press release, 63,500 new merchants were added, primarily consisting of SMBs. If these numbers continue to grow at a similar pace, regardless of how many merchants churn StoneCo will certainly capture and support plenty of successes.

DISCLOSURE: Authors are currently long STNE as of December 9, 2020.

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