The biggest challenge for a subscription business is: CHURN.
Reducing churn is one of the most important steps you can take to boost the performance of your subscription business; in this article we will focus on the two main areas of churn:
Active Churn & Delinquent Churn.
The higher your churn rate, the more customers your business is losing and the more difficult it becomes to cover your acquisition costs and scale your revenue. Identifying and analysing churn, then making good business decisions based on your data, can be difficult, costly, and time consuming.
What is Subscription Churn?
Subscription churn refers to the rate at which the company loses its subscribers because of subscription cancellations, be it voluntary or involuntary.
Churn rates really matter for subscription businesses because they are an important indicator of long term success. However, reducing churn not only increases LTV, but ultimately leads to greater return on your customer acquisition cost (CAC).
Why should your business think about subscription churn?
Customer acquisition cost (CAC) is the total cost of sales and marketing required to acquire a customer. Regardless of the strength of your marketing strategy and the effectiveness of your approach to nurturing leads – every customer costs money to obtain. In fact, consistently acquiring new customers is considerably more expensive than maintaining and upgrading existing customer relationships. And the more customers you churn, the more money you spend to recoup the loss of business by finding new ones. CAC eats away at bottom-line revenue and fundamentally works against financial growth — the lower you can keep it, the better. One incredibly effective way for subscription businesses to keep CAC low is by actively fighting against churn, here’s how…How to Calculate Subscription Churn
Benchmarking your own business’ churn rate will highlight the potential return on investment from addressing subscription churn. Revisit these calculations periodically to understand the effectiveness of your anti-churn strategies and actions.
In its simplest form, your churn rate is calculated as the ratio of the number of subscribers lost during a specific period of time (usually a month, or a year) divided by the number of subscribers present at the beginning of that time frame. Churn is typically expressed as a percentage.
Subscribers who have churned
(in a given period i.e. month)
Subscribers at the beginning of that period
Example: If your business had 250 customers at the beginning of the month and lost 10 customers by the end, you would divide 10 by 250. The answer is 0.04. You then multiply 0.04 by 100, resulting in a 4% monthly churn rate.
Although calculating churn rate looks pretty straightforward, how exactly you define those two numbers can greatly affect the output. Business-dependent external factors may wreak havoc on our understanding of what number comes out.
To dig deeper into churn calculations we feel Profitwell explains it best.
Why should you calculate your churn rate?
Churning customers ultimately results in a loss of revenue, that’s why you should calculate your churn rate.
No matter how good your product or service may be, it’s important to track your customer churn rate. Once you know and understand your churn rate, you can work on finding ways to reduce it.
The 2 types of subscription churn you will encounter.
Not all subscribers leave for the same reasons. Identifying the different churn types within your business is the first step to understanding your churn and implementing successful solutions.
1. Active Churn – voluntary cancellation.
Active Churn (or “voluntary churn”) is when a customer actively chooses to cancel their subscription for your product/service. As much as you don’t want people to cancel their subscription, there’s always an opportunity to improve your active churn rates, and learn from cancellations. There are many reasons a customer may decide to actively cancel their subscription with you. Here are just a few of the most common ones:
- Change in circumstances: Your customer no longer requires your product or service due to a change in their circumstances.
- Financial Reasons: Your subscribers can no longer afford to keep buying your products or using your service.
- Price: Your subscriber believes that your product/service isn’t good value for money and therefore deems it too expensive.
- Product: Your product isn’t matching the customers expectations.
- Poor Customer Service: Your subscriber has experienced poor customer service and no longer wishes to spend money with you.
- Habit: Their habits change so they no longer use your products at the same rate so cancel their subscription.
- Freebie Hunting: They only subscribed for the initial free trial or discount(s) and never intended to continue after this period of free/discounts ended.
- Competitor Switch: Your subscriber has decided that your competitors are doing it better than you (ouch!).
How To Reduce Your Active Churn
Be proactive. Not reactive.
Churn prevention involves looking at the underlying causes that lead to lost customers and addressing them proactively.Having a churn prevention plan will help you to eliminate potential issues before they even occur.
Remember – reducing churn can increase LTV and can lead to greater returns on your customer acquisition costs, so continuously working to reduce active churn rates should be part of your ongoing subscription business growth plan.
Be Proactive.
To help get you started we’ve put together some preventative steps you could take in order to help reduce the active churn in your business. It’s not an exhaustive list, but these steps are a great place to start:
1. Review Your Buyer Personas.
Selling to bad-fitting customers could be one of the reasons you’re experiencing high active churn rates. So, here’s a quick question for you…
“When did you last invest any time or resources into understanding your customers – at a deeper level?”
A: Never?
B: 12-months ago?
C: Longer?
If any of the above answers apply to you, then it’s time to get to work on your buyer personas.
A buyer persona – also known as a customer persona or audience persona – is a detailed description of someone who represents the target audience for your product/service and is typically a ‘semi-fictional character’ based on the data you already have, and/or based on the market research you have done to attract your ideal customers.
Having detailed customer personas allows you to focus on your customers wants and needs, instead of your own.
With a clear understanding of your ideal customer, you and your team can build a strategy around helping your customers meet their needs. This should mean you attract valuable leads and customers that are the right fit for your products and services – which in turn will help to reduce your active churn rates, increase your LTV and see a greater return on your CAC.
- Your turn:
Spend some time on building out detailed buyer personas for your products and/or services.
It will take some initial thought and effort to properly build out detailed buyer personas, but the results will more than justify the time spent on the front end.
2. Allow Subscriber To Skip. Push. Pause.
Not all customers who actively attempt to cancel their subscription with you need to be lost customers. By this we mean that there are processes you can put in place that will put them into a ‘consideration phase’ – i.e. is cancelling the right option for them?
They may be happy to; skip a month, push the date on to receive their products over a longer period of time, or pause their subscription.
My Personal Experience With The Pause Option:
As a Gousto subscriber (for my family of 4) I made the decision after 2 months to cancel my subscription. My reason for choosing to cancel was due to me ordering the same meals each week to satisfy the pallets of my two teenagers – which was becoming very repetitive for all of us!
Gousto made the process very simple.
Of course I could have cancelled my account, but with the transparent prompt to Skip or Pause it made me realise that my reason for initially deciding to cancel wasn’t due to their product, or their service.
I actually enjoy not having to think about shopping for evening mid-week meals, so it was my own personal circumstances that made me realise we simply needed a break from the subscription and therefore the Pause Subscription option was right for me.
So, well done to Gousto – as I am not a lost customer, but simply a customer who needs a break. When I am ready I will hit the ‘Reactivate my subscription’ button – or even ‘Order a box’ for a one off delivery.
- Your turn:
If you don’t have the option for your customers to pause, skip or easily change the length of their subscription, then we would recommend that you add this to your roadmap for imminent implementation.
3. Review Your Cancellation Process.
Let’s be sure we’re on the same page when it comes to your subscription cancellation process.
“You’ve made it easy for people to cancel with you, right?”
If a customer decides that the skip, push or pause option isn’t for them, don’t make the mistake of having them jump through hoops to cancel their subscription. This strategy very rarely ends well and can be damaging to your brand. We’ve seen many subscription brands do this in the hope it will stop their customers from cancelling, when in reality it might do the exact opposite. Let’s use this pet brand as an example…
PET FOOD SUBSCRIPTION BRAND
Sarah has just lost her beloved Cocker Spaniel, Red, after 10 years – she’s heartbroken.
A week goes by and Sarah remembers she needs to cancel Red’s food subscription.
Expecting it to be a simple click of a button to cancel (like with their pause or skip feature), Sarah soon finds herself frustrated and upset after spending 10 minutes researching how to cancel. She finally discovers that the only way to cancel is by phone or email.
Sarah sends an email and after 48hrs she finally manages to get her subscription cancelled.
Fueled with anger, upset and frustration Sarah takes to social media to share her experience of cancelling, whilst heartbroken over Red.
Over 50 people comment on her post, which is met with equal anger and frustration toward the pet brand.
Fast Forward 6 Months:
Sarah is ready to introduce a new dog into her life. She loved the ease of having Red’s food on a monthly subscription. But, guess who Sarah will NOT be going back to?
You got it!
All because the cancellation process was difficult and time consuming when emotions were at an all time high.
Summary: Sarah wasn’t a lost customer, but simply in the “change of circumstances” category.
- Your turn:
Making your cancellation process difficult is NOT a winning strategy.
Although this is a fictional example, it’s equally a very real account of what can happen when you put barriers in the way of people cancelling their subscription. It is not good for your brand. And you’re highly unlikely to ever win this customer back. Review your own cancellation process so that you have the opportunity to win customers back in the future.
4. Survey Customers Who Cancel
It may take some time to gather enough data to identify a trend, but having a cancellation survey in place could help to build a picture of the actionable steps you need to take in order to prevent more customers from cancelling their subscription.
Your cancellation survey (also known as an exit survey) should allow you to:
Identify problems that are causing customers to cancel
- Find areas to improve your user experience, product/service, and pricing
- Create a strategy to improve customer retention and reduce churn
The golden rule when it comes to your cancellation survey is – don’t ask too many questions.
People do not have the time to complete long winded surveys.
You have a few seconds of their time, at best. Therefore this is your opportunity to grab some key information in the shortest time possible.
Try to gather information that is invaluable to you, yet only takes them seconds or minutes to complete.
Let’s take a look at how one of the biggest subscription brands do cancellation surveys.
Birchbox
To cancel a Birchbox subscription it’s as easy as clicking on Account Settings and clicking the Cancel My Subscription link.
A pop-up with a cancellation survey appears with some pre-populated answers to their question.
- Your turn:
The data you collect from cancellation surveys will assist you in creating persona segmentations and will allow you to build relevant customer win-back campaigns.
For example, if a customer selects:
- I’m all sampled out – this could be a case of asking them if they wish to Pause their subscription or push the date on, rather than cancel.
- Moving – you could wish them well with the move and send them a discount code to use when they’ve moved. You could segment this audience into an automated 3-month win-back campaign. Make it personal by asking “how did the move go?”.
- Financial reasons – this is a sensitive one, but you could ask if a free month or a discount code would help them? Show some empathy. Let them know you care.
You get the gist.
And it should go without saying; it’s pointless having a cancellation survey in place if you’re not going to regularly review the data.
Each answer will lead to valuable data, which in turn will allow you and your team to proactively work on your active churn rates and customer win back campaigns.
Prevent Active Churn TODAY!
This is by no means an exhaustive list of preventative ways to tackle Active Churn rates – but hopefully you’ll find that it’s a good place for you to start.
2. Delinquent Churn – involuntary.
Delinquent churn (also known as involuntary churn) is when a customer credit card or payment fails.
Sadly, for most subscription businesses this is the biggest reason for losing money. In fact 20-40% of customers churn due to failed payments.
Here’s just a few delinquent churn reasons:
- Insufficient funds
- Card has been reported lost/stolen
- Expired Card
- Limit Failure
- Processor Problems
- False Fraud Prevention
How To Reduce Your Delinquent Churn
The good news is that you can put steps in place to prevent delinquencies and reduce a good chunk of involuntary churn from happening in the first place.
If you know that 20-40% of your customers are churning due to failed payments, why wouldn’t you put the effort in to reduce delinquent churn?
The way to do it is simple: contact your customers.
Many business owners worry that by contacting customers about updating payment details could lead them into thinking ‘do I want this product/service’?
However, if you have a great product or service then why would they want to cancel? They’ll be more than happy to update their details.
Here are two ways you can contact your customers:
- Post-Dunning Emails. Send post-dunning emails in a sequence to make sure that they are reminded in a timely manner.
- Target customers where they are — in your product.
Emails work, but there’s the potential for them to be ignored until it is too late. Therefore in-app notifications (i.e. your mobile app, desktop login) meet your customers where they are and can have two major benefits:- Right Place: They get customers at the right place — you can get them to input their information there and then.
- Right Time: They get customers at the right time — By using in-app notifications you are getting customers when they are experiencing the value of your product and want to continue. They logged in for a reason, they’ll update their information for that same reason.
Once you have your dunning system in place, there are other ways that you can reduce the amount of delinquent accounts overall:
- Increase Plan Timeline: If your product/service lends itself to having a longer plan option, then during a payment update you could push them towards a longer-term plan – i.e. pay for 3-months, every 6 months, annual. This will reduce the potential of having monthly payment issues – but be mindful that the next payment for your customer will be higher. It’s important to carefully monitor the data when testing this option in order to make the right decisions for your business.
- Go Upmarket: A higher Annual Contract Value (ACV) is correlated with lower churn, both active and passive. Thinking about retention when developing your monetisation strategy is paramount. If you are able to create a VIP/Enterprise offering within your business model, this could get you much higher lifetime value customers.
With tools such as Profitwell, Recurly, Chargebee, to name just a few – you can discover more about delinquent churn and how these types of tools can help you to automate the majority of your processes.
A Good Dunning Email
I forgot to transfer funds to my grocery bank account where my Gousto subscription comes from- which meant that Gousto got there before I did. I had insufficient funds in my account, and so my account was about to churn.
However, I’m really glad this happened as it allowed me to see one of the best dunning emails I’ve seen for tackling delinquent churn.
Below is the email that was sent to me, and I want to highlight what particularly stood out to me:
- They put you at ease by saying ‘Don’t worry – it’s easily fixed, by following the below steps’.
- They provide a frictionless way to update payment details, if needed.
- What I really loved the most was this..We’ll have another look tomorrow at 11am, before taking the payment at noon.’
This was the genius part in my opinion.
Why?
Because I knew I had until 11am the following day to transfer the money to my shopping account and they would then attempt the payment again at 12 noon. I didn’t have to panic and drop what I was doing straight away – all I needed to do was ensure I’d transferred the money before 11am the next day.
Well done Gousto!
A genius dunning email to help reduce delinquent churn, whilst providing a great customer experience.
Subscription Churn Benchmarks.
Now that you have an understanding of how subscription churn is calculated, and the two different churn types. Let’s take a look at some industry benchmarks.
A study conducted by Recurly examined a sample of over 1,500 subscription sites.
Image source: https://recurly.com/research/churn-rate-benchmarks
Benchmarking by Industry
Different industries have different factors/reasons that affect voluntary and involuntary churn. As shown in the image below, a SaaS (Software as a Service) subscription model will experience significantly lower churn rates than a Box of the Month (think Glossybox, Barkbox, etc) subscription model. However, both of these industries vary from the ‘overall’ churn rate benchmark, which is why it’s important to dive deeper into your own industry numbers.
Image source: https://recurly.com/research/churn-rate-benchmarks
“Box of The Month” Subscription Businesses
Churn in this category is driven by whether the box contains necessities or luxuries, new discoveries or lifestyle essentials. A “box of the month” business will typically experience higher churn rates than the industry average.
Overall Churn = 10.54%
of chich Voluntary Churn = 9.41%
of which Involuntary Churn = 1.13%
SaaS Example
A SaaS business model has a higher proportion of B2B (Business to Business) customers, which tends to experience less churn. Remember that customer acquisition costs might still be high for SaaS businesses.
Overall Churn = 4.79%
Voluntary Churn
ALL = 3.73%
B2B = 3.50%
B2C = 4.04%
Involuntary Churn
ALL = 1.06%
B2B = 1.07%
B2C = 1.02%
Key Insight:
“Be sure to regularly benchmark your churn rate against your own industry averages”
Need our help?
We’ve broken down different churn types and given you some quick-start tips that businesses like yours can benefit from.
However, if any of this feels a little too complex, overwhelming and/or time consuming then we’re here for you.
Our expertise is in increasing business ROI and reducing CAC through effective and efficient churn strategies. If you would like to discover how we can help your business, why not book a strategy call by clicking the Book A Call button below.
