How to fight churn, boost customers' LTV, and never lose a subscriber
It's a big promise: "Never lose a subscriber."
After all, isn't a churn rate of 0% impossible? Even in the best-case scenarios. Even if you've maxed out your customer loyalty programs, established an iron-clad payment method, and created a retention strategy that markets the best side of your business to your most loyal customers to move them through the customer journey with a destination every sales rep hopes for.
Even with all that, isn't a 5% churn rate the best your subscription business can do? Not if you want to unlock your true customer lifetime value (LTV).
Let's take this opportunity to challenge you.
Subscription companies like yours can (and should) fight customer churn rates and strive for 0% customer attrition.
The obvious reason is one every sales rep knows: A company must grow its customer base and hold them for as long as possible.
There's one more reason, an aspiration reason. A reason that can simultaneously create key differentiators in your subscription model, generate more revenue per user and weave your business into the fabric of society in the way Netflix, Spotify, and even Dollar Shave Club have achieved. Are you ready to hear it?
The journey to a 0% churn rate will make your business better.
It will prune and refine your subscription model offerings and challenge long-held beliefs about your industry, driving your business to become a student of your customers–analyzing consumer behavior, subscriber relationships, and the drivers behind purchases.
All the while, you'll boost retention, grow your average revenue per customer, and win back those at-risk customers before they cancel, encouraging you to manage today's serious market realities:
Changing customer behaviors in a very short period of time
Uncertain markets as customers' wallets shrink or grow
New expectations directly affect how customers view pricing and long-term value
Despite these headwinds, there is good news in the latest ecommerce consumer trends. Your subscription business also has tailwinds, advantages over non-subscription businesses that directly impact your revenue.
We'll get into those in a moment–but before you can take advantage of those tailwinds, you must fight churn.
Analyzing customer churn rates and what to do about them
What is churn rate, exactly? The formula to calculate churn rate is deceptively simple:
Divide your churned customers by your total current customers in a time period.
Churn rate is a simple formula to quantify how many subscribers your business is losing. If your churn rate is 8%, then your customer retention rate is 92%.
However, the specific answer for your business depends on a few things:
Which customers do you count as churned?
How are you counting total customers?
First of all, you need to understand what sets cancellation and churn apart. In short, when a pre-paid customer cancels, you have a window before their paid subscription ends. Your internal marketing strategy and customer success team should go the extra mile in that time frame. You want to count the customers who have truly churned.
Next, are you counting the total customers for that time frame correctly? Most business analysts will compare the total who churned at the end of the month to how many subscribers you have at the end of the month.
Recurly recommends a different methodology: Take your customer total from the beginning of the time frame. You've all seen trial users start and leave in days. Rather than let those figures cloud the trendlines you want to study, calculate your churn rate using your total customers at the start instead of at the end.
Once you have an accurate monthly churn rate, you have a few more key metrics to consider.
Because not all churn is the same, you've got voluntary churn where a customer chooses to end the subscription. Then, there's involuntary churn, where a customer's ended account has nothing to do with customer satisfaction. Instead, a payment glitch or failed renewal process dropped the customer.
Voluntary churn is a different customer experience than involuntary churn, and your business should treat them differently and employ different retention strategies for each. As you analyze these churn types, you'll uncover the specific behaviors in your subscription model that signal customer loyalty, at-risk customers, and the drivers behind customer lifetime value.
Remember the framework for analyzing churn rate. You're not primarily focused on customer loyalty, even though that seems to be what churn rate specifically measures.
Instead, always analyze your churn rate in the context of your customer acquisition cost (CAC). Finding new revenue in the current customer lifecycle is always more efficient than acquiring new-and-valuable customers. Analyze your churn rates with an eye for valuable feedback that could be the idea for a killer new feature or a signature differentiation.
Keep this question in mind: "What does our customer feedback tell us about our churn rate?”. And, of course, "How do I reduce churn?"
7 keys to reducing customer churn
You could say Recurly is the expert at fighting churn and keeping a good thing growing. And subscription businesses have a good thing. The U.S. consumer is more loyal to brands they subscribe to. Also, subscription-based businesses grow 8 times faster than non-subscription companies.
What are the best tools for reducing customer churn?
Rock-solid onboarding experiences. Don't discount the power of first impressions, right? Set the right expectations early in the journey to make that customer's lifetime last longer. Reinforce those expectations in other lines of communication–ensure your email newsletters follow the same onboarding logic and finesse, and you may lower customer support complaints.
Personalize, personalize, personalize. Trial lengths, bundles, freemium options, one-time purchases, ad-based tiers, and billing frequency. One of the best ways to offset pressure from price increases is to let subscribers build their own plan, whether you're offering a subscription box, streaming, or any other creative idea. Improve user experience by offering levers and dials to personalize plans.
Add a pause subscription button. Guide customers to pause subscriptions instead of canceling. You can curtail voluntary churn by being flexible and keeping the relationship in play so you have their ear for special offers.
Connect to your community and listen. Customer feedback matters; they're asking for your business to do more for them.
Improve your dunning practices. Follow-up emails keep your average customer paying their subscription costs on time and prevent payment issues. It's one of the best ways to protect your recurring revenue while keeping lines of communication active.
Test even longer-term plans for long-term value. Make the renewal choice less frequent, and your revenue churn may turn negative as you discover truly valuable customers.
Smart payment processing. This is the big one. Involuntary churn accounts for 53% of the total churn, and you can curtail it by working with the right recurring payment partner.
These keys will unlock churn-stopping power in your business. Meanwhile, dropping customer attrition correlates to a higher average revenue per user (ARPU). We're not saying that a low churn rate directly drives ARPU. Instead, it's a correlation.
The exercise of fighting churn is aligned with raising your customer lifetime value.
Just because the goals align doesn't mean you can count on one to directly affect the other. Improving customer attrition rates can increase subscriber lifetime value by making those lifetimes last longer. However, that's one dial among many that you can turn into a business leader.
Let's dig into strategies you can follow to turn customer loyalty into lifetime value.
Subscriber Lifetime Value: How you turn loyal customers into valuable customers
Of all the metrics related to your churn rate, customer lifetime value is your north star.
On the journey toward 0% churn, you'll make a dozen decisions about your business. Finding the best length of free services for trial users, re-enticing those inactive customers, and even finding the right cadence for your email newsletters—you're working toward finding the features that turn around unhappy customers and add to your loyal customer base.
Along the way, you'll uncover new offerings your active customers find valuable.
Customers are more loyal to the subscription services when they develop an emotional connection to them. You've seen poor customer service turn customers away. The flipside also happens: You can turn your average customer into a die-hard fan by offering exactly the subscription box plan they've been hoping for. Imagine the power of identifying subscribers with an emotional tie to your business, and plugging them into your feature design and premium plan designs.
That's how you turn a loyal customer base into a growing source of recurring revenue.
It's also a recipe for negative churn. As in, your recurring revenue from existing customers increases beyond what you lose from churned customers. It's possible, especially when you're committed to improving customer relationships and the user experience.
So, how much does your average customer spend from when their subscription starts to the end of the relationship?
It's more than a theoretical question. The lifetime value of your subscribers should set an upper limit on your customer acquisition costs. After all, the worst-case scenario would be to spend $50 in marketing and sales so that one user spends $10 in your entire customer journey.
Now that you see why you should grow your LTV, let's talk about calculating it.
Calculating your customer lifetime value (LTV)
Customer or subscriber lifetime value is an estimated profit you can expect from your average consumer from the time they sign up to when they leave. The formula looks like this:
Lifetime value = (Average revenue per customer x Gross margin percentage) / Customer churn rate
There are plenty of ways to refine your analysis of lifetime value. Each one can offer you a different lens for your business. To analyze past behavior before a certain feature, calculate the average revenue per customer based on purely churned customers. To quickly overview your present customer base, average your annual revenue from all customers.
Determining your subscriber LTV is vital to revenue forecasting. At the same time, lifetime value analysis can pave your path to proactive customer service. You can identify growth potential hidden in your customer base.
Look at the LTV in your cohort analysis, and you might uncover innovations waiting to be explored. Perhaps your most profitable subscription box customers have been making regular one-time purchases. That implies a new premium offering that incorporates the side product could be enticing for this customer segment. Perhaps you'll uncover that the lifetime value of your freemium customers drops significantly after months. You might be giving away the store to an audience who isn't especially invested in your business's success.
With a thorough lifetime value analysis, you can make wise moves to offset revenue losses by shutting down less profitable options. Meanwhile, you can turn cohort analysis into a regular feed of actionable data for your customer success teams.
Not all customers have the same value. Shape your subscription offerings. Identify the user experience pathways that signal someone is invested in your product. Take out your customer journey map and find the unhappy customer behavior that also signals an interest in premium offers, auto-renewal customizations, or any of a dozen features you create as proactive customer service.
That's the nuts and bolts of how to turn loyal customers into a profitable business.
Of course, one of the surest ways to increase subscriber lifetime value is to find ways to stretch that customer lifetime out as long as possible. As in, customer retention and fighting churn.
Improve subscription retention today to grow your business for tomorrow
Every retention strategy has a single goal: Keep the customer relationship alive. Creating the customer community, upselling to those high-value cohorts, and even setting new trial offers—these efforts' success is limited by customer churn.
Now is the time to take subscriber retention seriously. But where to begin?
Understanding how your competitors approach customer acquisition and retention is the foundation of every strategy. Marketing and growth leaders across every industry want to know the latest churn rate benchmarks and how these numbers impact the trajectory of the subscription industry.
Recurly has compiled the data of over 2,200 leading subscription brands to inform your churn management strategy. Check out The State of Subscriptions: The churn chapter to get the most recent trends, their overall impact in the industry, and Recurly’s impact on our customers’ churn rates.