Every company faces churn; it’s inevitable. As your company scales, your subscription base may grow to a point where churn is part of your business. This loss requires new subscribers to make up for churned revenue. However, acquiring new customers can cost five to 25 times more than retaining current ones.
Nowadays, companies need to aim for net negative churn if they plan to survive in the long run. It’s proven that increasing your customer retention rate by 5% can raise your profits up to 95%. With this premise, it’s no surprise that negative churn has become a desirable metric for subscription businesses.
Negative churn occurs when the monthly recurring revenue (MRR) from your existing customers exceeds the revenue lost to churn. In other words, reaching negatives on churn means that customers have become high-performance savings accounts.
It is a powerful growth mechanism for subscription businesses, as it takes some pressure off of customer acquisition efforts to focus on expansion, cross-sells, and upsells.
Churn can be measured over any chosen period–monthly, quarterly, or yearly using the following formula:
Net Churn = (Churned MRR - Expansion MRR) / Starting MRR
Churned MRR is the revenue lost to downgrades and cancellations
Expansion MRR is the revenue from existing customers’ upgrades
Starting MRR is the monthly recurring revenue at the beginning of the period
Let’s say you own a company that offers royalty-free music and sound effects to digital creators. You’ve started the month with 100 customers paying a $30 subscription; two decided to cancel the service, but three of them upgraded their tiers and now pay $45 monthly.
Your churn formula would look similar to this:
Churned MRR: Two subscription cancellations = $60
Expansion MRR: Three upgraded plans = $135
Starting MRR: 100 customers with $30 monthly subscription = $3,000
($60 - $130) / 3,000 = -2.5%
In this case, expansion MRR is higher than churned MRR, meaning you’ve earned more from existing customers than you lost.
Churn rates vary widely across industries and customer types. Recurly’s churn rate benchmark casts 5.6% as the median for the subscription industry. However, this may become unsustainable as your customer base expands. As David Skok illustrates:
Imagine your business has a $10K MRR during the first month, increasing by $2K each month after that. A 2.5% churn rate is manageable initially. Still, as you close the fifth year, the same rate costs your company $64K monthly:
ALT: Image of a graph showing how churn rate behaves over time for subscription businesses
And here’s where the negative churn rate goal comes in: Achieving negative churn will help you save up more of what your company is losing and increase your MRR.
Assume your business has a -2.5% churn rate. Expansion revenue from existing customers and your new customers’ sales will help you earn up to $180K every month by year five, creating a business nearly three times bigger than in the previous scenario.
ALT: Image of a graph showing how negative churn rate behaves over time for subscription businesses
Hard but not impossible, negative churn is one of the most effective growth methods for any business. So, how can you prevent and avoid subscription churning?
Looking at the formula, you can identify two methods to reach negative churn–reducing customer churn and expanding your monthly recurrent revenue. Let’s review each one.
The fewer subscribers who cancel your service, the closer you get to a negative churn rate.
Conducting surveys is the best way to get information from your current subscribers. Choose the appropriate moment to ask your customers how they are using your product, what features they’d like to see in the future, and what challenges they are experiencing. Analyze their answers and identify pain and opportunity points to work on and improve your services.
On the other hand, the best moment to ask for feedback on churned customers is right after canceling their subscription. Understanding their cancellation motives will help you overcome the objection and reduce future churn.
Early subscriber churn is common when customers aren’t sure how to use a product, and a high churn rate on initial subscription periods might indicate this. Prepare educational content to support your customers in setting up your product to make the most out of it from day one.
Involuntary churn happens when a subscriber’s payment is declined due to an expired credit card, changes in bank information, a server error, or insufficient funds.
While there isn’t much you can do about lacking funds; you can start managing these declines. Recurly effectively automates declining management:
Account updater for updates on payment information
Expiration date forwarding for card expiration date updates
Intelligent retries to retry failed transactions
Dunning to encourage customers to update their payment information
Recommended reading:7 Strategies to reduce subscriber churn
Keep your current customers falling in love with your service by adding more value to their subscriptions through
High-adoption products call out for receptive customers. Show your subscribers what they’re missing out on and how your business will help theirs.
Consider creating urgency by reminding them when they’re about to run out of access to certain features due to tier limitations. Offering an upgrade or free trial to remove these restrictions is an effective way to convert and expand your monthly revenue.
When designing your pricing strategy, give your customers the option to enhance their subscriptions. Expansion opportunities are perfect for pushing add-ons, as users can add extra features or seats to their current tier instead of upgrading to a higher plan altogether.
Similar to add-ons, cross-selling allows you to offer stand-alone or complementary services to their main subscription.
Recommended reading: Maximizing subscription revenue recovery infographic
Understanding what negative churn is is key to scaling your business. Whether by engaging more, restructuring your pricing strategy, or offering more upgrades, the path to achieving negative churn starts by adding value to your customers.
When should I consider a customer “churned”?
There are two moments: When they cancel their subscription and when the subscription ends and isn’t renewed. However, we recommend that you consider someone to have churned when they don’t renew their subscription.
Should I include involuntary churn in my negative churn rate calculation?
Not really–involuntary churn means that your subscribers left without any intention of doing so, while voluntary churn means they’ve decided to go. While calculating your churn rate, consider only those subscribers who canceled willingly.
What is the best way to analyze churn?
Customer churn analysis is valuable for any subscription business as it impacts some of your company’s key metrics, like monthly recurring revenue (MRR), customer lifetime value (LTV), and customer acquisition costs (CAC). Take a look at Recurly’s guide on analyzing churn for your subscription business.