Churn and the Subscription Model: A Comprehensive Guide

The Impact of Subscriber Churn

Because it can so drastically impact monthly recurring revenue, subscriber churn is a metric that subscription businesses monitor very closely. Even slight changes in your churn rate can significantly affect revenue growth, making churn a key indicator of the overall health of your business. Subscriber churn eats away at the hard-fought efforts and significant resources you spent to acquire and retain customers. For subscription businesses, the impact of losing subscribers has a compounding effect: the business loses not just current revenue but future recurring revenue as well. 

In fact, various studies have shown that it can be from five to 25 times more expensive to acquire a new customer than to retain an existing customer. In addition to increased operational efficiency, subscribers who have been with you for a longer period of time may be more satisfied and more likely to champion your business by recommending it to friends and family—a very persuasive means of gaining new subscribers.

Your Churn Rate Threshold

To maintain current revenue levels, subscribers who churn need to be replaced, necessitating further investments in sales and marketing. Some churn is to be expected, but to maintain healthy growth, you need to understand what amount of churn is acceptable for your business. 

Not only does a low churn rate support healthy growth, it provides other business benefits as well. Take Netflix, for example—one of the world’s most successful subscription businesses. This OTT streaming service owes a measure of its success to its extremely low churn rate of approximately 9% per month. With a churn rate this low, Netflix has a cushion to experiment with different subscriber acquisition tactics, pricing models, or other strategic initiatives—ultimately gauging what is the right mix of customer acquisition cost (CAC) to lifetime value.

While some amount of churn is unavoidable, it’s important to know the point at which your churn rate enters a dangerous range.

Definition of Terms

Any in-depth discussion of churn should begin by defining the terms related to churn and what each term means.

Voluntary churn occurs when a subscriber actively chooses to cancel or otherwise not continue their subscription—for example, by not renewing at the end of a free trial or gift subscription term. 

Cancellation is when a customer has cancelled their subscription but it has not yet expired.

In this case, the subscription won’t expire until the end of the subscription billing period, for example at the end of the month.

Expiration indicates the point in time when the business no longer has that subscription on its books. For example, if a customer cancels their subscription in the middle of a billing cycle, the subscription won’t expire until the end of the billing period. 

Churn occurs when a subscription expires. This period between the subscriber cancelling and the actual expiration of the subscription (churn) can be an opportunity for you to win the subscriber back. By identifying a subscriber at the moment they cancel, you can take action to encourage them to reconsider and reactivate their subscription before it expires. Read more about this best practice and how to identify cancelled subscribers on our blog

Dunning is the process of communicating with your subscribers about past due invoices. The best dunning tools provide control over both the content and cadence of communications.

Involuntary churn occurs as a result of a failed recurring payment rather than a deliberate action by the subscriber. 

Key Metrics

Subscriber Churn (also called Customer Churn) equals the total number of subscribers who have churned during the month, divided by the number of subscribers active at the beginning of the month. This calculation, when multiplied by 100, provides the churn rate, such as 5%. A subscriber with more than one subscription will not churn until their last subscription expires. You can also break out this rate out into voluntary and involuntary churn, as defined above.  

While this your subscriber churn rate is important, it won’t represent the monetary value of the subscriptions that churned. To understand that, you will want to evaluate revenue churn to understand the amount of recurring revenue being lost from churned subscribers.

Revenue Churn is the amount of revenue lost in one month. To calculate, take all your monthly recurring revenue (MRR) at the beginning of the month and divide it by the monthly recurring revenue you lost that month, minus any upgrades or additional revenue from existing subscribers. New sales in the month don’t count toward revenue churn as you are looking for how much total revenue you lost. 

Revenue churn is not simply another way to measure churn. High revenue churn can indicate that you’re losing a particular kind of subscriber—your high-value subscribers—which will eat away at more of your revenue than churn from average or low-value subscribers. Businesses that only monitor subscriber churn may be missing a key indicator of the state of their business if they don’t also track their revenue churn. 

In most discussions of churn, including this one, the term refers to subscriber churn. Revenue churn is simply another way of measuring the business impact of losing subscribers. 

Retention Rate is the percentage of subscribers you keep relative to the number you had at the start of your period, not including new subscribers. It is the reverse of Subscriber Churn. For example, if you have a subscriber churn rate of 3%, your retention rate is 97%. 

To calculate this rate, take the number of subscribers you had at the end of the period, subtract new subscribers gained during the period, and divide by the number you started with (the number of subscribers at the end of the period).  

Decline Management Efficiency measures the percentage of subscribers who were at risk of involuntary churn and were saved by automated decline management methods. These methods include an account updater service (which updates credit card information to improve transaction success), transaction retry logic, and a smart dunning strategy.

Invoice Recovery Rate looks at the invoices that go past-due and measures what percentage are ultimately recovered before the subscriber churns. Subscriptions Saved tells you how many subscriptions associated with invoices that go past-due are recovered before the subscriber churns.

Revenue Lift (also called Recovered Revenue) measures the percentage of monthly revenue recovered from decline management techniques. 

For more key metrics and how to calculate them, visit this page

Calculating Your Subscriber Churn Rate

Although the subscriber churn rate is a critical metric for any subscription business, there are a variety of opinions about how to calculate it. At its core, your subscriber churn rate is the number of subscriber who churned in a given month divided by total number of subscriber in that month. But how you count the total number of subscribers in a month can impact your resulting churn rate. For example, if a business’ subscriber base is particularly volatile over a short period, this can skew its subscriber churn rate.

Some companies use the number of subscribers at the beginning of the month (which is how Recurly calculates churn), while others use the number at the end of the month. Still others average the number of subscribers at the start and end of the month. The method you choose may be less important than applying the calculation consistently, so that you can compare your churn rate month over month and year over year, as your business grows. 

It may also be helpful to consider how particular aspects of your business may impact your churn rate. For example, if your business is highly seasonal, you should expect to see variations in your monthly churn rate reflecting this seasonality, and these variations might take a longer timeframe to become apparent. 

Or you may have a Basic plan and an Advanced plan, and these two subscriber segments may have very different churn rates. An aggregate number that includes both plans will mask the differences between the two segments and provide misleading data. 

Understanding the specific drivers of your business will help you to approach your churn calculations in ways that are most relevant and meaningful to you. Follow this link for an example of how the same customer behavior in two different months can lead to significantly different churn rates.

Benchmarking Your Business

Once you’ve benchmarked your data, compare your churn rates (voluntary and involuntary) to other businesses with similar attributes, as businesses in different verticals may experience wildly different rates of churn. This holds true for different audience segments (B2B vs. B2C), price points, and plan lengths. 

For example, subscription businesses in the education segment find that their voluntary churn tends to be seasonal, mirroring the academic calendar. Streaming services may experience increased voluntary churn as tent-pole shows end, with subscribers returning when the shows resume. Subscription businesses with many younger subscribers may also experience higher involuntary churn because this demographic tends to have lower spending limits on their credit cards and tighter budgets.

B2B businesses may experience lower voluntary churn that B2C business, as business customers may view the subscription to be critical to their business operations. Annual subscription plans may experience higher involuntary churn since there’s more time between renewals for the payment information to change.

Knowing how your subscription business compares to others in your segment is an invaluable tool for gauging the health of your business. As you gain an increasingly nuanced understanding of the factors that contribute to both voluntary and involuntary churn, you can then formulate more effective strategies to combat this loss of subscribers and their revenue.

Comprehensive research on churn

Recurly Research has published a comprehensive churn analysis based on examining a sample of over 1,200 subscription sites over a period of 12 months. This study found a median subscriber churn rate across all data points equal to 6.12%. The median voluntary churn rate in our sample was 4.68% and the median involuntary churn rate was 1.44%. This study also determined the median subscriber churn rates by industry and by average revenue per customer. View Recurly’s benchmark study on Subscriber Churn Rate here.

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 voluntary and involuntary churn differ is vital to minimizing their impact.

Voluntary churn occurs when a subscriber actively cancels their subscription, whether due to dissatisfaction or changed circumstances. By contrast, involuntary churn occurs as a result of 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 type churn through efforts that focus on improving customer satisfaction. Alternatively, Involuntary churn is passive and happens through card declines and invoice failures. You will want to mitigate this type of churn with tools that minimize transaction failures and which help to recover revenue, such as account updater, dynamic retry logic, and dunning.

These two types of churn can produce widely different churn rates. In our benchmark study, Recurly Research found a median voluntary churn rate of 4.78% and a median involuntary churn rate of 1.44%.

Mitigating voluntary and involuntary churn requires very different strategies, so it’s important to monitor each type of churn separately to measure the effectiveness of the strategies you employ. 

Decline Management and Involuntary Churn

In general, involuntary churn results from failures in processing recurring payments; in particular, payment declines are a major contributor to these failures. If not managed effectively, involuntary churn will result in lost subscribers and revenue.

Why Recurring Transactions Fail

Billing for recurring transactions has an inherent complexity which is not experienced in one-time e-commerce. In one-time e-commerce, If there’s a problem with the transaction, an error message alerts the buyer who can then use another payment method to complete the transaction. 

By contrast, trying to complete recurring payments poses a different scenario. This is because the subscriber’s payment information is captured once, during their initial sign-up transaction, and this information is then held over the life of the subscription and used automatically in each billing period. 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 out of date, the renewal transaction cannot be processed, and the subscriber may be lost to involuntary churn.

Banks also decline transactions for other reasons besides out-of-date information. According to our research, an average of 11.7% of recurring transactions are declined each month. Repairing these transaction failures is critical to reducing your involuntary churn rate.

See Recurly’s research on top payment decline reasons and related recovery rates for more insights and to benchmark your subscription business. 

Decline Management and Involuntary Churn

Reducing payment declines involves three techniques: Account Updater, payment retries, and dunning. 

Account Updater

This is an automated service that actively maintains up-to-date credit card information. Prior to subscription renewals or card expirations, an account updater service validates credit card information and automatically applies new information if it’s available. If the credit card is cancelled, the account is automatically updated to note that the billing information is invalid. When these kind of hard declines occur, your dunning process is your only recourse. 

While Account Updater services are offered by all of the major credit card brands, you’ll gain greater efficiencies and see significantly improved results if you use an account updater service that is integrated with your subscription management platform. 

Dynamic payment retries 

Payment retry logic refers to the logic that determines the timing and frequency of card retries. If a credit card payment fails, depending on the decline reason, the card can and should be retried again. However, timing for the retry and other factors determine whether the retry is successful. The most sophisticated subscription management platforms incorporate machine learning to detect patterns in invoice failures. By analyzing and ‘learning’ from previous transactions, this results in a more intelligent, dynamic approach, which increases transaction success rates.

For example, dynamic retry logic looks at retries on a Visa debit card transaction that ran at different dates and times. The model gathers intelligence which it then uses to gauge which potential attempt is more likely to succeed, and it does so with a high degree of precision. This kind of machine learning requires an extremely large dataset that includes many different types of subscription transactions in order to make these predictions accurately. While a static retry logic could be devised that takes all the relevant variables into account, it would be extremely complicated, error prone, and hard to maintain. Also, a hard-coded static retry logic would grow increasingly stale and less effective as consumer behavior patterns change and evolve. In contrast to a static, one-size-fits all approach, dynamic technology always produces the optimal retry time. 

Read more about the benefits of the dynamic model on our blog. 

retry schedule

Smart Dunning

Dunning refers to automated emails sent to a subscriber when their payment fails and is an important component of your collections process. The emails direct the subscriber to update their payment information by phone or via the subscriber’s account page on your website. By prompting them to correct the issue, their transaction can eventually go through, and you retain the subscriber rather than letting them churn. Effective dunning requires planning, testing and iteration. For example, setting the dunning emails to run for a minimum of 14 days allows for both the automatic retries and the dunning process to have a reasonable chance for success. Allowing more time for dunning improves recovery. However, a dunning cycle longer than 28 days causes invoices to enter into a ‘loop’ state where a new invoice is issued even though the prior invoice was not collected. 

Your efforts to optimize your dunning strategy should also take into account your dunning goals. If your goal is to maximize revenue, use a longer dunning cycle which will increase how many invoices you can collect. If your goal is to minimize the costs related to providing the service or the cost of goods sold, you’ll want a shorter dunning cycle to minimize the time to collect. 

Optimizing dunning leads to improved results, but there are a variety of factors to take into consideration when designing your dunning strategy. Read our blog for a more detailed discussion on how a flexible dunning schedule improves transaction success rates. And follow this link for more dunning best practices. For additional best practices to minimize the impact of declined transactions, read our blog.

dunning effectiveness report

Measuring the Effectiveness of Decline Management 

For subscription businesses, success is predicated on long-term subscriber relationships, and monitoring your subscriber churn rate is key to managing those relationships. High churn decreases the total value of your subscriber base. But as important as your subscriber churn rate is, it’s only a number—it’s not actionable by itself. In order to fight churn in a truly effective way, you need to dig into the data around who churns, why they churn, and when they churn. This is where the insights lie.

Looking at the data month-over-month can reveal trends to which you can respond. For example, B2C merchants tend to experience higher declines from November through January due to higher holiday spending. These declines are typically related to issues with a lack of available credit or funds on credit and debit cards, so more dunning emails over a longer period of time during this window may be effective in driving recovery. During the summer months, B2B merchants might experience more declines as their business customers are away on vacation and not checking work emails.

You may see a higher average decline rate for younger consumers (due to low credit limits), non-profit organizations (due to card purchasing limits or restrictions), or annual subscriptions (more time between charges means more time for card changes). Understanding decline patterns in your subscriber base as well as determining month-over-month decline rate trends is important and can indicate whether or not there’s a problem.

Decline Management Efficiency is a metric used to measure the percentage of subscribers who were at risk of involuntary churn and were saved by decline management techniques. Comparing your performance to other companies in your industry or market segment will help you to fine-tune your efforts further.

To gauge the effectiveness of your decline management techniques, it’s helpful to understand how your churn rate compares to other comparable businesses. Recurly Research studied 1,200 subscription businesses over a four-month period and established benchmarks which include analysis by industry and average revenue per customer. View the research here.

Reducing Voluntary Churn

Perceived Value and Voluntary Churn

Every time your subscribers are billed is an opportunity for them to assess the value of the service, so It’s imperative that you continually work to uphold the value proposition your service offers. Product, Operations, Support, Billing, Marketing, and other teams need to work in concert to keep the perceived value above the perceived cost.

Maintaining a positive subscriber perception is no easy feat. Any number of things could impact a positive impression—poor service, limited choices, delivery problems, incorrect billing—all these can lead to voluntary churn. Your subscription business will succeed when all aspects of your interactions with subscribers meet their expectations, delivering a great subscriber experience, time after time.

Engaged Subscribers and Voluntary Churn

Before you can begin to understand the drivers of voluntary churn, you must determine how much you’re experiencing. It’s imperative to monitor your churn rate every month and track it over time to get a sense of what your average rate of voluntary churn is each month and to discern if there are any seasonal or cyclical trends. 

Then, use a cohort analysis to provide a deeper understanding of why subscribers are choosing to leave by uncovering additional insights about churn behavior, such as when in their life-cycle subscribers are churning. A cohort analysis also allows you to continually test different strategies to prevent churn and quickly evaluate the impact to each cohort. This will help you use your resources more efficiently by strategically targeting a certain time-frame—i.e., a particular cohort—in the subscriber lifecycle. 

To set up a churn cohort analysis, track the total number of paid sign-ups each month, with each month’s sign-ups representing its own cohort. Then, for each cohort, track the retention and churn rates month over month to identify patterns. 

oa-9-2020-sub-retention Free trial

Best Practices for Reducing Voluntary Churn

Speak Their Language

If your business has a number of international subscribers, make sure that you send emails in each subscriber’s preferred language. You should also ensure that high-traffic web pages, such as your payment page, can dynamically display content in the language that your subscribers are likely to speak, based on the location of their IP address. Providing these kinds of localized options improves your communications and encourages stronger subscriber engagement with your brand.

Offer Coupons and Discounts

If you suspect a subscriber or specific cohort is at risk of churning, perhaps indicated by a lack of activity with your subscription service, offer them a discount or coupon to show that you value their business. Coupons are also an effective way to encourage a subscriber who has churned to come back. This can be as simple as sending them an email that says “we’re sorry to see you go” and including a coupon for some percentage off or some additional unit of time for free if they re-subscribe. A small discount or other offer may be all that’s needed to entice some subscribers to return.

Discounts can also be provided as part of a loyalty program which recognizes your most engaged, longest-retained subscribers. For example, refer-a-friend offers reward subscribers for every new paid subscriber they refer. This might include early access to new products or services, a percentage-off coupon toward a new purchase, or some other ‘gift’ for bringing in new subscribers.

Let Subscribers Pause Subscriptions

Another way to reduce voluntary churn is to allow subscribers to pause their subscription. They may love your service or product but for some reason need to take a break from receiving it. Allowing subscribers to pause their subscription gives them an option besides cancelling. And of course, retaining current subscribers is far less expensive to your business than gaining new ones, or in this case winning back those who have cancelled. You also can retain the subscribers’ history and payment information so you don’t have to spend resources on recreating their account if they do return.

Survey Subscribers

To gain insights, automatically send a short survey whenever a subscriber cancels to find out why. Over time, these survey responses may show a pattern which you can address. Net Promoter Score (NPS) surveys are a popular way to determine how likely subscribers are to recommend your subscription product or service to others.  

Your customer service and tech support teams are another source of feedback as they speak to subscribers every day. And don’t forget to monitor social channels for what your subscribers may be saying about you and for you to have an opportunity to respond and perhaps correct a misimpression. Armed with this kind of information from a variety of sources, you can make adjustments to better meet your subscribers’ needs and expectations, thus reducing voluntary churn.

Create Community

Subscription businesses with a strong brand and a loyal following should consider ways that they can create a community for their subscribers that encourages and rewards their engagement and provides opportunities for them to connect with other fans of your business. Having a social media presence is an obvious avenue for this, but there’s so much more than can be done.

For example, the seasonal box from FabFitFun comes with its own magazine with detailed information about each product, along with lifestyle articles, and beauty & fashion tips. To stoke the anticipation of what’s in an upcoming box, some companies send out a teaser email a week or two prior to the box being sent.

BARK (formerly BarkBox) has also sought to solidify their impressive standing in the market through initiatives to create a community for their dog-loving subscribers. In addition to their incredibly popular selection of subscription boxes, they have an e-commerce store, a blog for dog-life enthusiasts, and they even occasionally sponsor dog-themed events. 

Indeed, some subscription box companies have fans who are so enthusiastic, they film and post their own ‘unboxing’ videos to document their joy in discovering the latest box’s contents. The subscription box company, in turn, could feature these videos on their website or social media pages to show their appreciation to their fans and get other subscribers excited. Efforts like this are an excellent way to build a sense of community for and around your most devoted and enthusiastic subscribers.

Regularly Communicate Results

To help subscribers see the value of a subscription service, regularly communicate to them the metrics that matter—those that support the results the subscriber expected when they signed up with you. Subscribers are more likely to stay if they have an objective measure of what the subscription is doing for them or for their business.

For example, increased sales leads or increased customer retention can be important metrics that demonstrate the value of your service. Other metrics should directly relate to the service you’re providing, perhaps number of emails sent, number of video downloads, number of documents viewed, etc. 

Mitigating the Impact of Churn

Subscriber churn is a reality for every subscription business, impacting monthly revenue and growth rates. However, there are some clear drivers of both voluntary and involuntary churn and effective responses your business can utilize.  

Ultimately, mitigating churn requires a multi-pronged approach, with targeted processes and strategies that are based on a thorough understanding of what drives churn. The right subscription management platform includes sophisticated technology and techniques, automated processes, and other key capabilities to help reduce churn. With such a platform, you can win the battle against subscriber churn and increase your monthly recurring revenue. 

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