Subscription Churn

What is Subscription Churn?

Subscription churn describes the number of lost subscribers in a specific period of time, expressed as a percentage rate.

The subscription churn rate represents only a portion of a company’s total churn rate. For companies using a subscription business model, it represents a significant portion (if not all) of their lost revenue from customers.

A company’s subscription churn can be seen from many different angles—how an individual organization interprets it will vary depending on its goals. Generally, the lower the subscription churn rate, the better off a business is financially.

Synonyms

• Churn rate for subscription businesses
• Subscriber churn
• SaaS churn rate
• Customer churn

Why Focus on Subscription Churn?

Companies that use subscription-based pricing for some or all of their products are particularly interested in subscription churn rate, as it is a good indicator of how their customer base is changing.

Subscriptions are a source of recurring revenue, which is the most reliable and predictable type of revenue for a business. By focusing on subscription churn rate, companies can get an accurate picture of customer loyalty as it pertains to their greatest source of predictable revenue.

Subscription churn data also gives stakeholders valuable insight regarding how satisfied their customers are with the company’s subscription products and whether or not they are successfully keeping their subscribers engaged.

Most of the time, high subscription churn rates indicate low customer satisfaction. This could be related to a comapny’s pricing model, its lack of customer support, product issues, or any number of issues.

Conversely, a low subscription churn rate demonstrates customer satisfaction indicates that the company’s product successfully meets its subscribers’ needs. To investors, this signifies an investable company with lots of potential for future revenue growth.

Types of Churn to Measure

There are numerous kinds of churn. Breaking them into groups makes it easy for stakeholders and investors to make sense of the data.

Voluntary Churn vs. Involuntary Churn

Voluntary churn happens when a customer actively chooses to cancel their subscription with the company.

Reasons for voluntary churn include:

• Poor customer service
• Unsatisfactory product performance
• Inadequate features
• Too expensive or priced out by competitors
• Lack of software adoption

Involuntary churn is a customer’s subscription is canceled without their consent (or knowledge). It comprises anywhere from 20% to 40% of total churn. Most of the time, it is preventable.

Common causes of involuntary churn include:

• Expired credit cards
• Insufficient funds
• Processing failures and timeouts
• Lack of payment from customers
• Inaccurate or incomplete customer data
• Inability to collect payment

Customer Churn vs. Revenue Churn

The distinction between customer churn and revenue churn is another important one to make.

Customer churn is the percentage of customers that have canceled their subscription in a given time frame, while revenue churn is the overall revenue lost due to cancellations.

The revenue churn rate looks beyond customer churn, accounting for changes and differences in customer plan and billing cycles, as well as other factors.

For instance, a company that uses tiered pricing or offers multiple subscription plans may experience high customer churn but low revenue churn due to customers upgrading their plans (i.e., from a basic plan to a more expensive one).

Similarly, an organization with a low customer churn rate could have high revenue churn if its highest subscription tieris the source of most of its churn.

Monthly Churn vs. Annual Churn

A subscription company’s monthly churn rate is the number of subscribers that cancel their subscriptions in a given month. Its annual churn rate represents its percentage of lost subscribers in a given year.

The main reason companies should measure both is because they tell different stories about a company’s financial health.

If a company were to only measure monthly churn, they could misconstrue their success (or failure) as a business. By sheer coincidence, its RevOps team may have measured and analyzed only one of its high-churn months and concluded that the company was in trouble.

In reality, the company may have had a low annual churn rate because its monthly churn rates were relatively consistent throughout the year.

The monthly customer churn rate is helpful for quantifying the success of a recent marketing campaign, product update, or customer engagement initiative, while the annual churn rate is more useful for long-term strategy planning.

Other Churn-Related Metrics

Aside from churn rate, there are several metrics to account for when evaluating the entire picture. These include:

• Customer lifetime value (CLV): The amount of revenue a single customer is expected to bring in throughout the duration of their subscription. Companies use CLV to measure loyalty and determine how much a company should invest in each customer.
• Revenue retention rate: The portion of revenue that is retained by existing customers over time. It is a valuable metric for revenue forecasting and assessing customer loyalty.
• Customer retention rate: The percentage of customers that stick around for a given period of time. It is calculated by dividing the number of customers at the end of a month (or other time periods) by the number of customers at the beginning.
• Customer acquisition cost (CAC) ratio: The total cost a company incurs to acquire new customers divided by the revenue associated with those customers. It helps companies understand how much money is being spent to replace lost subscribers.

The interpretation of subscription churn rate and its associated metrics can vary greatly depending on the company.

On average, the churn rate for subscription services is between 6% and 8%. On its own, this doesn’t give stakeholders or investors the complete picture.

For instance, a high average churn rate could be negated by a favorable CAC ratio, indicating that the company is successfully acquiring new customers.

Even with very few subscription cancellations, a company might not be profitable if its customer lifetime value is too low.

How to Calculate Subscription Churn Rate

The subscription churn calculation is similar to that of customer churn. To determine your company’s subscription churn rate, use the following equation:

Subscription Churn Rate = (Number of Cancelled Subscriptions) / (Total Number of Subscriptions) x 100

To separate the number of canceled subscriptions from the rest of the customer base, the subscription company can use different types of data, such as customer relationship management (CRM) software and billing records.

Best Practices to Reduce Subscription Churn

Although it is impossible to stop subscriber churn entirely, there are effective strategies companies can take to reduce it.

Reducing Voluntary Churn

Since voluntary churn results from the customer’s decision, retention efforts can only go so far. If a customer can’t afford a product anymore, found a competing product that suits their needs better, or simply lost interest, the company won’t be able to keep them.

Still, there are several things businesses can do to drive membership retention.

1. Improving Customer Experience

Making sure customers have a positive experience with your product is the single best way to improve your retention rates.

According to a recent report, 86% of customers would leave a brand they trust after just two poor experiences.

Throughout the customer lifecycle, several different factors could constitute a bad customer experience:

• Inability to correctly use the product
• A confusing onboarding process
• Unsatisfactory customer service
• Unclear product features
• Buggy or unreliable product performance
• Poorly designed user interface

To improve the customer experience, the best thing companies can do is survey their current customer base and ask their lost subscribers what they could do to improve.

Creating a survey is easy and inexpensive, and email automation tools make it even faster.

2. Offering Discounts and Rewards

Offering discounts or rewards is a great way to incentivize existing customers to stay with your business. This can be as simple as giving them a discount on their subscription renewal, free access to another product within the company’s suite, or other perks such as gift cards or loyalty points.

A common incentive software companies offer that incentivizes annual recurring revenue (ARR) is a discount for year-long subscriptions. Giving customers a month of their subscription for free when they pay for the year upfront is a popular way to drive customer retention.

3. Improving Communications

Weak relationship building accounts for 16% of all customer churn, according to new data from Retently. Poor communication with customers results in low customer responsiveness and causes subscribers to miss out on new features or product updates.

Fortunately, improving communication with your subscriber base is easy. Here are a few tips:

• Conduct surveys asking about the user experience of your product.
• Send emails with tips to use your product more effectively.
• Share relevant content with customers.
• Send emails when a customer’s subscription is about to expire.
• Use help desk software and chatbots to create communication flows for service issues.

Engaged users who know how to use the product they subscribe to are more likely to utilize the benefits of the subscription.

4. Enhancing User Experience (UX)

User experience (UX) describes the overall experience a user has when using a platform, product, or service. UX factors like ease of use and aesthetic design can have a major impact on customer retention, no matter what kind of product a company sells.

For physical products like furniture and electronic appliances, UX might refer to the product’s assembly process, durability, and portability. For digital products like software and streaming platforms, it may include navigation menus, usability components, or checkout flow.

Digital products especially need to emphasize the user experience. Ease of use, straightforward integration, and intuitive design are the difference between a new six-figure customer successfully implementing and adopting the product and ditching it for a competitor.

5. Accurately Defining the ICP

If sales reps and marketers don’t have a clearly defined ideal customer profile (ICP), they’ll end up closing customers that aren’t suited to use the product.

This can cause user frustration and decreased retention rates, as customers struggle to make use of the subscription or don’t get the expected value out of it.

To accurately define a company’s ICP, team members should:

• Gather and analyze data on their current customers.
• Develop an understanding of their target customer’s preferences, needs, and pain points.
• Determine what type of customers are most likely to be successful with the product/service.
• Identify ideal prospects in terms of size, industry, geography, and company structure.
• Narrow in on customer segments that have the highest profitability and retention rates.

When salespeople and marketers have an ICP to guide them, they can develop the right messaging and go after customers that are likelier to stick around. The end result is a churn rate decrease.

Reducing Involuntary Churn

There are numerous reasons for involuntary churn, all of which have nothing to do with customer satisfaction. As mentioned above, payment processing issues comprise nearly all of involuntary churn cases.

With process automation, companies can reduce the number of wrong payments, failed credit cards, and expirations.

There are several ways to use automated software to reduce involuntary churn.

1. Implement renewal reminders for customers nearing the end of their subscription.

On average, renewals account for 62% of subscription revenue. The easiest way to increase those renewals is to send timely emails reminding customers of the upcoming expiration date.

Most subscription billing systems offer email automation as a standard function—all companies have to do is create the messages and trigger them at the right time.

2. Enable automatic payment for customers who use a single payment method.

When customers enter their billing information, businesses still need to periodically check that the credit card is still active and hasn’t expired or been canceled by the customer.

By using an automated system to monitor this information, companies can reduce the rate of invalid payments and give customers a way to update their information as needed.

3. Implement payment gateways for multiple payment methods.

Payment gateways allow customers to securely store their information and switch between different payment methods without having to enter the details each time they want to pay.

Online merchants can use payment gateways that provide a feature for automatic card detail updates. A backend service regularly checks if there are any changes in the card issuer’s side and updates the customer’s account accordingly.

4. Accept as many payment methods as possible.

Multiple payment methods give customers the flexibility to pay with the method they prefer.

Most subscription businesses accept traditional payment methods such as credit cards, PayPal, and bank transfers.

Nowadays, it’s also possible to offer new forms of payments like Apple Pay or Google Wallet.

5. Create a self-service portal to reduce customer effort.

By the end of 2021, over 33% of B2B buyers were ready to make digital purchases of $500,000 or more in value. And 75% of those buyers were open to paying more than $1 million through self-service ecommerce channels.

A self-service portal allows customers to change their payment information or upgrade/downgrade their plan without having to contact the company directly. It also helps reduce the customer effort of dealing with billing issues, as they can find a resolution on their own.

How Subscription Management Software Can Minimize Subscriber Churn

Businesses are under pressure to automate and optimize their billing process. Subscription management software provides the tools required to do just that, allowing companies to keep customer data organized, track payments better, and identify potential churn risks ahead of time.

Most subscription management software includes features like:

• Automated invoicing
• Recurring payment processing
• Payment reminders
• Subscription plan management
• Automatic payment updates

These tools are essential for reducing churn and creating a better experience for customers.

By automating the entire subscription billing process, companies can improve their customer retention rates and maximize revenue from subscriptions.

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