Measuring and reducing churn is paramount to grow faster, smarter, and stronger. Every subscription business should be aware of the importance of churn and how retention can become a competitive advantage for subscription businesses. 

Getting smart about nurturing your customer base is a true competitive advantage for subscription businesses. To turn your churn around, you have to understand it first.

In this article, we'll go deep on:

  • What churn is, why it matters, and industry benchmarks for annual churn rates

  • Voluntary churn vs involuntary churn and the causes behind each

  • Proven strategies and best practices subscription companies can use to minimize both

The importance of churn

Monitoring churn rates means more than calculating how many customers you lose in a period of time.

Active churn boils down to your product. How sticky are your products and services? How does your business compare to others in your market? The exercise your business takes to manage churn -- addressing unused features, removing hiccups in customer experience, tweaking how you collect and store billing info -- makes your product better.

Churn rate refers to the number of customers who canceled or didn't renew their subscriptions in a given time period. The higher your churn rate, the more subscribers and revenue you lose–hurting your bottom line.

Now, not all customer attrition is the same. The two types of churn come down to the customer's choice to leave your service: voluntary and involuntary.

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Voluntary versus involuntary churn is about whether the customer chose to quit the service. Voluntary churn measures how often a customer cancels their monthly or annual subscription on purpose. Involuntary churn is when the customer doesn't choose a subscription cancellation, but instead, it happens from any other factor. We'll define voluntary churn rates and involuntary churn rates more fully.

Naturally, you want to hold onto as many customers as possible for as long as possible. However, it's also unreasonable to drive your team and company toward a 0% monthly churn rate. Churn is a fact of business. And it varies widely by industry and customer type.

That said, how low should your churn rate be? That's what business analysts mean when they refer to a good churn rate. They give your subscription company a realistic target for managing customer attrition in a set time frame. You know you can't hit 0%, but is 10% a good churn rate? Is 8%? When does customer churn turn into revenue churn? We'll get there.

Here are a couple of business benchmarks:

  • The average churn rate is 5.57% across businesses of all types and industries.

  • The voluntary churn rate is 3.95% on average.

  • The average involuntary churn rate is 1.98%.

Recurly Research: What's a good churn rate for your industry?

How does your business compare? Study your business's customer attrition data. For example, Recurly Analytics allows you to track voluntary churn rates and involuntary churn under the Churn Analysis section:

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This chart shows the total number of active subscriptions churned during a given time period. And the churn figures are categorized as either voluntary or involuntary. (You can also measure it by expiration.)

Let's dive deeper into the two types of customer churn rates, the reasons behind them, and how you can prevent losing a customer.

Voluntary churn defined and how to address it

Voluntary churn is when customers start the exit; maybe they're unhappy with the product or not receiving the value they thought they would.

Bad customer experiences are the leading cause of voluntary churn. Competition is tough. Without significant resources dedicated to customer success, you may lose customers because of

  • No room for personalization in plans, billing, and payments

  • Not having a subscriber-centric mindset, and decisions aren't driven by customer satisfaction

  • Not offering cancelation alternatives

How do you go from analysis to action? Follow this example. Imagine you're looking at your Recurly dashboard, specifically the Subscriber Retention report. What you notice is high churn rates around month two.

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Your customers tend to make two monthly subscription payments and then cancel. After some surveys, you discover customers are concerned with pricing.

What proactive customer retention tactics can you deploy?

1. Offer plan and pricing flexibility

Let customers design their own products and personalize their plans with add-ons, upgrades, renewal frequency options, or bundles. Consider encouraging even longer-term plans at checkout, discounted rates, and fewer renewal cycles. Give your customers fewer decision points about keeping their subscription to reduce revenue churn opportunities.

2. Build community and loyalty

Increase emotional engagement and reward loyal customers by creating a sense of belonging. Leverage an omnichannel approach to remind them of the value your product delivers. Twitch Recap and Spotify Wrapped are excellent examples of how digital brands are building strong communities.

3. Allow pausing subscriptions

Cancellation is churn, but that doesn't mean you can't create a friendly cancellation journey. Complex customer journeys can seriously damage the customer experience. Subscribers don't want to feel like you're making it impossible to end their plans. Instead, think about it as a relationship.

Often, customers simply look for a short-term break to deal with factors beyond their control. Make sure they have options beyond canceling with a pause option, which has proven to increase customer retention rates.

Watch on-demand: How to never lose a subscriber

In a nutshell, reducing voluntary churn means understanding your subscribers' behavior, motivations, and preferences.

Study your customers and churn data. Identify how subscribers at risk of churning behave. Pay close attention to what you can offer to address their needs.

Involuntary churn defined and what you can do about it today

Did you know 53% of all customer attrition is involuntary churn?

More than half the time you lose a customer, it's because of an expired card, an insufficient funds error, or some billing issue completely unrelated to your product.

Involuntary churn is defined as customer attrition caused by any factor that isn't the customer's choice. Payment failures unrelated to your business are the typical causes of involuntary churn, also known as passive churn or delinquent churn.

What it means, though, is that your subscribers experienced billing or payment method problems.

How does involuntary churn happen? To be frank, it usually happens accidentally.  Look at these customer churn factors: 

  • Outdated credit and debit card information

  • Declined transactions and failed payment retries

  • Manual or inexistent dunning strategy

Imagine your company is seeing an incredibly high failed transaction rate. Because of this, many invoices fail, enter dunning, and never get collected. Customers may not have the funds to pay or don't know how to update their payment information. Or even notice that they need to. 

What can you do to fight this?

1. Leverage an account updater

The Account Updater allows you to access the most up-to-date credit card information, identifying cards at risk of failure and processing a successful transaction.

Our Account Updater service monitors your customers’ Mastercard, Visa, Discover, and American Express credit cards for changes, updating Recurly's records whenever necessary. It's like having a team in constant communication with credit card issuers.

2. Take advantage of payment retries

It’s impossible to keep up with the +2,000 types of credit card declines, especially if you're trying to do it manually. Automating transaction retries can help you recover soft declines when they’re most likely to occur.

For example, Recurly usesmachine learning to leverage different days and times of day to retry cards, providing our customers with a much higher recovered invoice percentage.

3. Run automated dunning campaigns

Dunning is the process of sending subscribers an email reminder to collect overdue payments. An effective dunning strategy improves transaction success rates and offers control over subscriber communications that cover a topic as touchy as unsuccessful payments.

Sending dunning emails is important to get subscribers to update their card information. Linking directly to an in-app ‘manage subscription’ page is also a best practice, as it ensures no friction in the update process.

When running a recurring revenue business, you’re constantly processing payments. Fighting involuntary churn means having comprehensive decline management, which consists of the ability to communicate based on failed transactions and the ability to try cards after the initial failure.

Watch on-demand: Dunning: 5 dos and don'ts to minimize subscriber churn

Churn rate, customer retention rate, and the right way to calculate them

Churn rate can be a simple formula, but that's also why so many companies miscalculate their churn rate. Here's the regular formula for any time period: 

Churn rate = Churned customers / your total customers

On the face of it, it's simple. You lost some, you gained some, so what's the total and the rate? You could use that formula for years and miss your true churn rate. 

Because of how you're counting your customers. 

Who are you counting as "total customers"? If you're taking that total from the beginning of the time period, your churn rate will artificially skew lower and mask important issues. 

Recurly devised a better formula to calculate churn rates that gives you an accurate readout on your customer attrition story. New customers are more likely to churn than customers who end the month with you. So, use your end-of-period subscribers for your total customers in your churn rate. Here's a quick formula: 

End-of-period subscribers = Beginning-of-period subscribers - Churned customers + Acquired customers

The right way to calculate your churn rate is to account for your business's growth, customer behavior, and the customers you're retained. 

Customer retention rate is the flipside of your churn rate. Instead of counting the customers lost, you count the customers kept and divide it by your end-of-period total. Because retention offers a mirror of churn, you may dismiss the stat. However, depending on the lengths of plans you offer, you'll uncover useful insights by looking at retention rates across longer time periods than your churn rates. If you offer a music streaming service with a monthly plan, consider looking at the annual retention. How many customers have chosen your product for the long haul? If you're offering a SaaS with annual plans, consider a biannual retention rate to uncover which of your customers have built a business or lifestyle around your product. 

The insights you find may lead you to improve your revenue from your existing customer base. 

Revenue churn rate acknowledges a simple fact that some subscribers are worth more money than other subscribers. This formula shows you which percentage of revenue you've lost from your existing subscriber base. Is your business growing, regardless of its subscriber base?  

Revenue churn = Monthly recurring revenue at the beginning of the month / MRR lost that month - additional revenue from existing subscribers

One of the smartest moves your business intelligence team can do is to calculate cohort revenue churns (or even individual revenue churn rates) rather than an aggregate revenue churn rate. The resulting percentages help you identify your most valuable customers. 

Then study their behaviors and keep building your business's capabilities around those behaviors. If you keep it up, you may actually achieve a negative churn rate. And that's a good thing. 

Negative churn rate does not refer to holding onto every customer and adding new subscribers. Instead, negative churn rate is a corollary to revenue churn.

Your business achieves a negative churn rate by earning more from your current customer base than how much you lost in subscription revenue. One obvious but unlikely example: If 50% of your customers upgraded to your premium plan (which costs three times the regular) in one month, and in the same month, you lost all the other customers. Yeah, you lost half your customers, but the other half are paying you three times more. In other words, your recurring revenue outgrew the subscription revenue you lost. That's a negative churn rate.

Understanding subscriber churn: What is it, why it matters & how to calculate it

Burn the churn. Let's keep a good thing growing.

Churn is inevitable in subscription services, impacting monthly revenue and growth rates. However, there are clear drivers of both voluntary and involuntary churn and effective responses you can start applying today.

Decreasing churn requires a two-path approach, with targeted processes and strategies based on a thorough understanding of what drives churn. Leading subscription brands, like AllTrails and Output, rely on subscription and billing platforms, like Recurly, to automatically identify, track, and fight churn.

In 2021 alone, we helped our customers recover

  • Nearly $800 million in revenue

  • 73% of at-risk invoices

  • 8.4 million at-risk subscribers

All while cutting their involuntary churn rate down to 1%. Ready to see this kind of churn transformation up close?

Your next step: Start reducing churn today.