How to analyze churn for your subscription business

Various studies have shown that acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one. It’s a big number, but hardly surprising; companies have to spend a lot of money on advertising and sales to acquire new customers.

With that in mind, you want to do everything in your power to minimize your customer churn—the percentage of customers that cancel their subscriptions within a specified time period.

This article will show you how to analyze churn, helping you to improve this key metric and ultimately drive growth for your business.

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How do you measure churn?

It seems simple enough to measure churn: take the number of lost (churned) subscribers over a period of time and divide them by the total number of subscribers during that period of time. So, if you had 1,000 subscribers at the beginning of the month and lost 50 of them, your churn rate would work out to 5% (50/1,000), right?

If only it were that easy.

In reality, it’s a lot more complicated than that. There are a number of ways to analyze churn—determining which one is most applicable for your company depends on what you’re trying to uncover. Here are a few factors to consider:

  • Over which time period are you trying to measure churn? In the above (oversimplified) example, we looked at monthly churn. But you could also choose to measure churn over the quarter, year, or any other given time period.

  • What questions are you trying to answer? There’s a big difference, for example, between churn in Q2 vs. churn in Q3 and change in churn year-over-year.

  • If you have different product lines and customer segments, your churn rates are going to vary across them. Should you look at all of your customers together or break them into cohorts?

  • What qualifies as churn? Is it when a customer cancels—which can be weeks or months before their subscription expires—or when they actually stop paying you?

We will go into more detail on these churn analysis considerations. But next, we’ll explore why you need to measure churn and the different kinds of churn.

Why every subscription business needs to measure churn

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Understanding your company’s churn patterns is critical to understanding the overall profitability and health of your subscription business. Some of the fastest growing companies owe much of their success to low churn rates; Netflix and Spotify, for example, have single-digit churn rates.

While it’s impossible to eliminate all of your churn, there is an acceptable amount of churn and an unacceptable amount of churn. That will vary depending on your industry and customer type—more on that later.

Your churn rate impacts some of the most important metrics for your business:

  • There’s your monthly recurring revenue (MRR). It’s difficult for your company to grow unless your MRR is higher than your churn MRR (the revenue lost every month due to churn).

  • Customer lifetime value (LTV) is the profit generated from the average customer over the period they remain a customer (from signup to churn). Here’s how you calculate it: (average revenue per customer x gross margin percentage) / customer churn rate.

  • Customer acquisition cost (CAC) estimates the cost of acquiring a new subscriber. Customer acquisition is typically an expensive endeavor, which motivates companies to focus on retaining their existing ones.

There are other metrics, but these three are a solid starting point. You can even look at some of them in conjunction to get more detailed churn analytics. The LTV:CAC ratio, for example, is a way to look at the return on investment (ROI) for customer acquisition.

Churn analysis is a valuable tool for any subscription business, but it needs to be deployed in the proper context. Churn rate is a trailing indicator, which means that efforts to improve it will not be immediately reflected in the metrics. As stated earlier, churn rates need to be broken out by product line and customer segment—but that’s not the only way you can analyze churn.

Voluntary vs. involuntary churn

When it comes down to it, customers churn for one of two basic reasons; they either a) purposely cancel their subscription or b) leave because of a payment failure or another reason unrelated to your business. In order to combat churn, you have to figure out how many of your churned customers belong in each bucket.

Let’s start by looking at voluntary churn. If a customer voluntarily initiates their exit, chances are they are not happy with your company’s offering or aren’t getting enough value out of their subscription. A high voluntary churn rate may indicate that your company needs to change its pricing, product offerings, or other aspects of your go-to-market strategy.

But a customer may voluntarily cancel because they don’t want to pay for their subscription right now—maybe they’re busy or they just lost their job. According to PYMNTS.com, around 25% of consumers who are likely to cancel their subscriptions would pause their subscription if the option were available. By using a subscription billing management platform that enables a pause feature, like Recurly, you can alleviate a hefty number of voluntary cancellations.

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Involuntary churn isn’t an indictment of your business, but it is an indictment of your billing system. This type of churn is one of the biggest enemies of a subscription business because you’re unnecessarily losing customers. Involuntary churn is extremely common, accounting for 53% of churn on average—that means more than half your subscribers could be leaving you without any intentions of doing so.

The best way to minimize involuntary churn is by implementing a top-notch billing management platform.

Recurly reduces its merchants’ involuntary churn rates from 6% to 1% on average. In 2020, Recurly helped subscription companies recover a total of $610 million in revenue.

Now that you have a better understanding of voluntary vs. involuntary churn, let’s go into more detail on how to analyze churn—starting with how to calculate it.

How to calculate churn rate

As stated above, the churn rate is calculated by taking the number of churned subscribers over a period of time and dividing it by the total number of subscribers during that period of time.

Churn MRR =
MRR at beginning of month
MRR lost that month — upgrades from existing customers

First, you need to determine when you will consider a customer to be “churned.” Is it when they cancel their subscription? Or when the subscription ends and it isn’t renewed? We recommend that you don’t consider someone to have churned until their subscription ends and isn’t renewed. Assuming you have solid processes in place, you can win back a lot of these subscribers between the time they hit “cancel” and the time their subscription comes up for renewal. If someone involuntarily churns, you can also win them back—if you know the right way to recover failed payments.

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After you define what, exactly, a “churn” is, you have to decide how you will count your customers. This is key to analyzing churn. You have three categories of customers:

  1. Those that signed up prior to the time period and will come up for renewal in the current month

  2. New customers who signed up during the time period

  3. Newly churned customers during the time period

Through an example, we can illustrate how this works in practice:

Let’s say you offer flower subscriptions and want to calculate your monthly churn rate. You start off on February 1 with 9,000 subscribers in San Francisco (type #1). Thanks to a boom in business around Valentine’s Day, you acquire 1,000 subscribers in February (type #2). Over the course of the month, 200 customers fail to renew their subscriptions before expiration (type #3). So, you end the month with 9,800 subscribers.

Your churn rate will vary depending on when you count your subscribers. While some companies use a midpoint or month-end total, Recurly uses the number of subscribers at the beginning of the month. So, in this case, your churn rate would be 200/9,000 = 2.22%.

In the above example, we calculated the monthly churn rate, but that isn’t necessarily the best option for all. Companies with seasonal businesses, for example, may want to measure churn over a longer period of time to decrease the potential for distortions.

Seasonality, it turns out, isn’t the only potential distortion in churn rates.

Why creating cohorts and customer segmentation is important in analyzing churn

We’ve established that churn analysis can’t be distilled into one metric. Creating cohorts and customer segmentation are two more ways you’ll want to analyze churn for your subscription business.

A cohort analysis gives you a greater understanding of churn, such as when your subscribers are churning in their lifecycle. Are they leaving after two months or six? Maybe they’re leaving at a certain time of the year. By breaking your customers down into cohorts, you can learn who is churning, why they’re churning, and when they’re churning. 

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You can derive actionable insights from the results of that analysis. From there, you can strategically target a certain timeframe—i.e., a particular cohort—in the subscriber lifecycle to try to reduce churn.

It’s not just about when your customers are churning, but which of your customers are churning. Let’s say half of your customers are individual consumers and the other half are enterprise clients. The individuals have a churn rate of 18% and the enterprise clients have a churn rate of 2%. The average churn rate of 10% would be highly misleading. Instead, you’d want to look at the churn rate for each type of customer and target them differently. The same goes for product lines, particularly if your company’s offerings are diverse. Here are some benchmarks to see if your business's churn is in a healthy range.

Finally, consider further breaking down voluntary vs. involuntary churn. If your company’s involuntary churn rate is high in a particular region, for example, consider fighting high payment declines by optimizing your gateway strategy.

Wrap up

Learning how to analyze churn isn’t as simple as it appears at first glance, but conducting a comprehensive churn analysis is one of the best ways to assess the health of your subscription business. By understanding churn key performance indicators (KPIs), you can potentially increase your company’s MRR and LTV:CAC—and fuel continued growth.

Frequently Asked Questions

What is churn?

Churn is the percentage of your customers who leave over a certain time period. The importance of minimizing churn (increasing retention) cannot be overstated; for example, studies show that increasing customer retention rates by 5% can boost profits by more than 25% in the financial services industry.

Should I consider someone on a free trial who doesn’t renew to have churned?

You would want to count this person as a churned customer because they failed to renew their subscription. While some companies would opt to exclude people in this category from their churn calculation, Recurly recommends that you include them because they drastically impact your CAC.

What is a good churn rate for my industry?

Churn rates are generally around 3-7%, but vary widely across industries and company types (B2B vs. B2C). Our benchmark report can give you an idea as to how your churn rate compares to your peers.

How often should I measure churn?

You could choose to measure churn over any time period—monthly, quarterly, annually, etc. It can be time consuming to constantly measure churn on your own, though. Look for a subscription billing management platform that helps you calculate churn rates.

How can I track churn?

You could create your own spreadsheets to track churn, but it’s easier to go with an existing option—there’s no need to reinvent the wheel. Recurly, for example, comes with an Analytics Dashboard that gives you a high-level snapshot of your subscriber base and churn rate.

Should I measure churn or retention?

Retention is 100% - (churn rate), so if your churn rate is 6%, your retention rate is 94%. The choice between reporting retention rate or churn rate (or both) simply depends on how you want your company to be perceived.

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