Subscriptions explained: What is churn rate?
Subscription models continue to grow exponentially with no signs of stopping. Competition rises, shopping priorities shift, and prices change; yet one thing is certain: not all subscribers will stay with you forever.
Enter churn rate, the number of subscribers who cancel your service during a specific period. It may seem like an easy formula, but it's a more complex calculation in practice.
For instance, when will you consider a customer to be churned? Is it when they cancel their service? Or when the subscription ends and isn’t renewed? To avoid confusion, our team has created this guide to help you better analyze your churn rate.
Why is customer churn rate important?
We could list several reasons why keeping an eye on churn rate is vital, but it all comes down to these main three:
Churn measures growth. Churn rate tells you how engaged your customer base is and helps you forecast growth in the long run.
Churn impacts other subscription metrics. Churn affects all revenue-related indicators, increasing acquisition costs, and reducing new customers’ lifetime value (LTV).
Churn helps you understand your audience. When subscribers leave as fast as they sign up, your retention efforts aren’t reaching their true potential. Identify common churning reasons to revamp your strategy–more on this below.
Keeping a low churn rate is critical for any business, as it determines the stability and growth in the long term. Even a slight fluctuation can impact your revenue, especially when trying to scale.
What is a good churn rate?
The short answer is: it depends.
Churn varies widely depending on the industry, pricing, and average revenue per customer (ARPC). We’ve analyzed over 1,500 subscription sites to compile comprehensive benchmarks. Overall, subscription businesses lose 5.6% of their customers monthly–5% in B2B companies and 7.1% in B2C.
However, these numbers aren’t necessarily the norm, as churn rates tend to get turbulent when a company starts to scale.
Can churn be negative?
Actually, it can. Negative churn occurs when the MRR from your existing customers exceeds churned revenue. It is a powerful growth mechanism and a desirable metric for subscription businesses since it takes some pressure off customer acquisition to focus on expansion, cross-sells, and upsells.
How often should you analyze churn rate?
We know monitoring your churn rate can become addictive, but keep in mind that day-to-day or week-over-week changes don’t reveal much insight. In this case, it’s better to look at longer time frames.
Our advice is to add this metric to your monthly reporting. For example, quarterly churn can help you identify trends or gaps, while annual churn can help you better evaluate your year-over-year growth.
Subscription management and recurring billing platforms like Recurly can automate this reporting for you–becoming a single source of truth for data. Leverage our Plan Performance reports to get a breakdown of retention status and churned MRR.
Why do subscribers churn?
Before diving deeper into churning causes, we first need to understand the difference between involuntary and voluntary churn.
Is the customer churn rate related to payment declines. It is not related to your offerings per se, yet directly affects retention.
On average, businesses lose up to 1.39% of subscribers to involuntary churn every month. To avoid this, we strongly recommend working with more than one payment gateway so that all transactions are processed even when your main gateway is down.
Recommended reading:The Importance of Multiple Gateways for Subscription Businesses
Sometimes, subscribers aren’t even aware of their failed payments–there are more than 2,000 reasons why a payment can fail. Make sure you’re communicating these declines to your customers, and encourage them to update their billing information.
Dunning campaigns are key engagement opportunities in the subscriber lifecycle that can meaningfully improve retention.
Voluntary churn happens when customers initiate the exit. Overall, around 4% of subscribers voluntarily end their subscriptions. There are plenty of reasons customers churn, but we’ve summarized them into three categories:
Pricing and spending: 86% of U.S. consumers spend up to $200 monthly on subscriptions, and while quality remains the most important reason for sign-ups, 19% of subscribers still prioritize price.
Lack of value: Value and pricing had always been hand in hand–until the recent DTC shift. Today, value isn’t restricted to price tags but the entire subscription experience. If your brand can’t meet consumers’ expectations, they won’t hesitate to explore other options.
Weak brand loyalty: Users are unwilling to settle for anything below what they consider best. If subscribers can’t identify a solid reason to stick to your brand, they’d easily switch over to your competitor.
These aren’t just churning reasons, these are improvement opportunities. Analyze your subscriber lifecycle, identify gaps, and revamp your retention strategy to meet your subscribers’ demands.
Get more insights: Subscription fatigue: Why do customers churn in DTC?
Keeping an eye on your churn rate
As a subscription business, growing your customer base is a priority. Learning what churn rate is and how it compares to other brands in the industry is a perfect start to understanding where you’re standing and how much you can improve.
Looking for a subscription management platform to track churn? Our team can help you build a tailored solution that fits your needs. See what Recurly can do.