Churn: What it is & why it matters
Subscriber churn is a metric that subscription businesses monitor very closely. Even slight changes in your churn rate can drastically impact your revenue growth.
Let’s dive deeper into the real subscriber churn definition, how it affects your business, and proven tactics to prevent it.
This growth metric has two faces–revenue and subscriber churn. These two go hand in hand but aren’t always the same.
Subscriber churn equals the number of subscribers who have canceled during the month. While this rate is essential, it won’t represent the monetary value of lost subscriptions.
Revenue churn indicates the recurring revenue you’re losing. It is not simply another way to measure churn: high revenue churn can mean you’re losing your high-value subscribers, which will eat away at more of your revenue.
If you only monitor canceling subscribers, you may be missing a key indicator of the state of your business. Tracking these two metrics will tell you how many customers have left your company and how much money they take.
Voluntary vs. involuntary churn
There are two types of churn: voluntary and involuntary. The total subscriber churn rate is an aggregate of both types. Understanding how these differ is vital to minimizing their impact.
Voluntary churn occurs when a subscriber actively cancels their subscription due to dissatisfaction or changed circumstances. By contrast, involuntary churn occurs due to a failed recurring payment rather than a deliberate action by the subscriber.
Because voluntary churn indicates an active subscriber’s desire to discontinue paying for your product or service, you will want to address this through efforts to improve subscriber satisfaction.
Alternatively, involuntary churn is passive and happens through card declines and invoice failures. You will want to mitigate it with tools that minimize transaction failures and help recover revenue.
Calculating subscriber churn rate
At its core, subscriber churn rate is the number of subscribers who canceled in a given month divided by the total number of subscribers in that period, multiplied by 100.
What is a good churn rate?
To scale subscription revenue, you must understand what is acceptable for your business. Some subscription industry churn benchmarks are:
Knowing how your business compares to others in your segment is an invaluable tool for gauging the health of your business. Additionally, by understanding the factors that contribute to subscriber churn, you can formulate effective strategies to defeat it.
Reducing voluntary churn
Every time you bill subscribers is an opportunity to uphold the value proposition you offer.
Keeping a positive subscriber perception is complex–a lot could impact a positive impression. Subscription success results from delivering a great subscriber experience, time after time.
Monitor churn every month to set your average churn rate, identify behavior trends, and understand why and when subscribers are leaving. Leverage this data to test different prevention tactics.
Let’s review some expert best practices.
Offer coupons and discounts
Coupons and discounts are an effective way to encourage at-risk and churned subscribers to come back. They can also be part of your loyalty program. Offer early access to new products or services, a coupon for new purchases, or a subscription as a reward for engaged subscribers.
Let subscribers press pause
Subscribers may love your product but, for some reason, need to take a break. Allowing consumers to pause their subscriptions gives alternatives to canceling and is less expensive than winning them back.
The pause functionality can also give us a sign that they didn’t cancel, but something else might be up so we can proactively reach out to learn more and help them through any challenges
– Pascal van Opzeeland, Userlike Marketing Director
Subscriptions drive loyalty, but that loyalty should go beyond your product. Consider new ways to reinforce your community, providing opportunities for consumers to connect with other fans of your business. Twitch does a great job building a strong community with its annual recap.
In addition to increased operational efficiency, consumers who have been with you for longer may be more likely to recommend your business to friends and family—a persuasive means of subscription growth.
Reducing involuntary churn
Recurring billing has an inherent complexity that one-time purchases lack. When there’s a problem during a single transaction, an error message alerts the buyer, who can use another payment method. For recurring payments, the subscriber’s payment information is captured once during sign-up and then held over the life of the subscription.
Over time, payment information can become outdated, and each new billing event, or renewal, presents a chance for the payment to be declined. If the payment information is outdated, the renewal transaction cannot be processed, and you’ll lose the subscriber to involuntary churn.
How can you prevent this? Reducing payment declines involves three techniques: Account Updater, payment retries, and dunning.
Leverage an Account Updater
Before subscription renewals or card expirations, an account updater service validates credit card information and automatically applies new information if available. If the credit card is canceled, the account is automatically updated to note that the billing information is invalid.
While all major credit card brands offer this service, you’ll gain greater efficiencies and significantly improved results if you use an Account Updater integrated with your subscription and billing platform.
Use dynamic payment retries
Payment retry logic determines the timing and frequency of card retries. If a payment fails, depending on the decline reason, the card can and should be retried. However, the timing of the retry and other factors determine whether the retry is successful.
Sophisticated subscription and billing platforms, like Recurly, incorporate machine learning to detect patterns in invoice failures. Analyzing and learning from previous transactions results in a more intelligent, dynamic approach, which increases transaction success rates.
Design a smart dunning strategy
Dunning refers to the automated emails sent to a subscriber when their payments fails. It's essential during your collection process, as it directs subscribers to update their payment information and allows the transaction to go through.
Effective dunning requires planning, testing, and iteration. Optimize your strategy according to your dunning goals: Use a longer dunning cycle to increase the total invoices collected and maximize revenue. Use a shorter cycle to reduce collection time and minimize costs.
Watch on-demand: 5 dos and don’ts for dunning.
Keep a good thing growing
Subscriber churn is a reality for every subscription business, impacting monthly revenue and growth rates. However, there are some clear drivers and effective responses your business can utilize.
Now that you've discovered the real definition of churn and how it affects your business, it's time to start tracking and preventing it.
Subscription and billing platforms, such as Recurly, offer the necessary technology, automated processes, and other key capabilities to help reduce subscriber churn and increase your monthly recurring revenue.