subscription churn
SaaS ProvidersSubscription Service Providers

What is subscription churn? How to calculate and reduce subscription churn?

9 Mins read

Have you ever pondered how good restaurants use the ‘personalization’ technique by remembering your particular food or taste preferences to keep you coming back to them? You prefer and go back to them because you feel valued – this strategy, though ancient, is still widely used by successful businesses. Much like traditional businesses, subscription-based companies too employ personalization to reduce customer churn, thereby maintaining a loyal customer base.

So first of all, let’s understand what is subscription churn.

What is subscription churn?

Subscription churn refers to the count of subscribers or customers who discontinue their payment for a product or service within a specified timeframe. This metric can be interpreted in various ways, allowing companies to determine their own method of calculation that aligns with their organizational needs.

Why churn matters in the subscription businesses?

Subscription churn poses a major obstacle to the expansion of subscription-based businesses. According to a 2022 report by KBCM Technology Group, private software-as-a-service (SaaS) companies face an average annual revenue loss of 14% and a customer loss of 13%. Additionally, these companies encounter an average nonrenewal rate of 10%.

Churn is important because it directly influences a business’s consistent earnings, putting financial stability at risk for those who don’t deal with it directly.

subscription churn

Source: Freepik

Here are some of the reasons that explain why subscription churn matters:

Cost of Acquiring Customers (CAC)

It is generally more expensive to gain new customers than to keep existing ones. High churn rates mean that a business must spend more to replace lost customers, which can reduce profits.

Predictability of Income

Subscription businesses rely on the assumption of regular income. This consistent revenue stream enables more effective planning, investment, and growth tactics. However, high levels of churn disrupt this stability, complicating revenue forecasts and resource allocation.

Total Revenue from a Customer (Lifetime Value – LTV)

LTV is the expected total revenue a business can earn from a single customer account. Increased churn lowers LTV as customers leave before making more purchases or renewing subscriptions, thus diminishing the revenue potential from each customer.

Effects on Growth

Customers that stay contribute to growth not only through continued subscriptions but also by referring new customers. Losing a customer means losing their ongoing business and the future business they might have referred.

Efficiency of Operations

Dealing with constant customer turnover demands additional resources, whether in staffing, training, or technology, leading to higher operational costs and diverting attention from growth or innovation efforts.

Feedback on Products and Services

Regular customer departures can signal underlying issues with a product or service. If customers consistently leave, it may point to unresolved problems, unfulfilled needs, or areas needing enhancement. Regularly analyzing churn can provide valuable insights.

Impact on Brand Reputation

High churn can harm a brand’s image. In the digital marketplace, where reviews and recommendations significantly influence buying decisions, ongoing negative feedback or the impression of frequent departures can turn away potential new customers.

Confidence of Investors

For businesses looking for external funding, a low churn rate signals stability and long-term viability, while a high rate can signal trouble, possibly making it more challenging to attract investment.

How is subscription churn calculated?

Churn can be represented in several ways, including as a ratio, a specific revenue figure, or as a total count of customers who have discontinued their subscription to a product or service.

A simple way to calculate churn is by using the formula:

Churn Rate = (Number of cancellations within a timeframe/ Total subscription at the start of that timeframe) × 100

Additionally, churn can be illustrated through various metrics depending on what aligns best with a company’s needs. Some examples include:

  • Customer Churn: This is a straightforward count of customers who have stopped using a service, applicable to scenarios where customization of software solutions isn’t possible.
  • Customer Churn Rate: This represents the percentage of total customers lost during a specific period.
  • MRR Churn: This denotes the monetary loss in Monthly Recurring Revenue (MRR) attributed to customer churn.
  • MRR Churn Rate: This calculates the percentage loss in MRR due to churn, providing insight into how churn affects monthly revenue.

These metrics offer businesses different lenses through which they can view and understand the impact of churn. This enables them to plan and strategize effectively to address and mitigate such issues.

Also read: What is churn rate in the subscription business and how to calculate it?

What are the common causes of subscription churn?

Here are some of the main causes of subscription churn:

  • Mismatched Customer Base: Often, customers sign up for services without fully understanding if it’s the right fit for their needs, leading to inevitable departure for alternatives that better match their requirements.
  • Competitive Disadvantages: Customers will switch if they believe another product better fulfills their needs, even if yours is technically superior.
  • Unmet Customer Expectations: Customers seek your product for a specific benefit or solution. Failure to deliver expected outcomes promptly can drive them away.
  • Perceived Lack of Value: When customers view your product as non-essential, they’re more likely to consider discontinuing its use.
  • Product Issues: Technical glitches and bugs can frustrate customers, diminishing their trust in your ability to provide a reliable solution.
  • Inadequate Customer Support: Encountering problems without access to effective support can escalate minor issues, impacting customer satisfaction.
  • Payment Issues: Simple as it may seem, churn often occurs due to payment failures, such as expired credit cards.

What is the difference between voluntary and involuntary churn?

Voluntary churn in SaaS businesses occurs when customers consciously decide to cancel their subscriptions due to dissatisfaction or a perceived lack of value. However, focusing solely on reducing voluntary churn might cause businesses to overlook involuntary churn, which can significantly impact revenue and customer retention.

Involuntary churn happens for reasons outside the customer’s control, such as payment failures due to expired credit cards, lost or stolen cards, bank rejections, or network errors during payment processing. Interestingly, involuntary churn accounts for a substantial portion of overall churn, estimated between 20-40%. (Source)

Revenue churn: Understanding churn beyond customers

Businesses often track customer churn, which tells them how many people stopped using their services. But what about the money lost from those customers? That’s where revenue churn comes in.

Why Track Revenue Churn?

Imagine you have a subscription service with different tiers (Basic, Pro, Premium). Even if you keep the same number of customers, you could lose money if many switch to cheaper plans. Tracking revenue churn helps you catch this!

Measuring Revenue Churn

  • Revenue Churn Rate: This shows the percentage of recurring income lost in a period (e.g., month, quarter).

Use this formula: (Lost Revenue during the Period / Total Revenue at the Start of the Period) x 100

Example: Let’s say, the recurring revenue at the start of January (or end of December) was ₹40,000, and the lost revenue during January due to churn was ₹5,000.

(Jan Lost Revenue / Jan Recurring Revenue) x 100 = (5,000 / 40,000) x 100 = 12.5%

  • Net Revenue Churn Rate: This considers both lost and gained revenue, showing if you’re growing or shrinking overall.

Use this formula: (Gained Recurring Revenue – Lost Recurring Revenue) / Starting Recurring Revenue x 100

Example: Say your monthly recurring revenue is ₹12,000, you gained ₹600, and lost ₹1200.

(Gained Revenue – Lost Revenue) / Starting Revenue x 100 = (600 – 1200) / 12,000 x 100 = -5%

  • Net Negative Revenue Churn Rate: This happens when gained revenue is higher than lost revenue. It’s a good sign!

Use the same formula as Net Revenue Churn Rate, but a negative result means you’re growing.

Example: If your recurring revenue expanded ₹1200 and churned was ₹600.

(Gained Revenue – Lost Revenue) / Starting Revenue x 100% = (1200 – 600) / 12,000 x 100% = 5%

By tracking these metrics, you can understand if your business is losing money on existing customers, even if they stick around. Remember, keeping existing customers happy and paying more can be cheaper than acquiring new ones!

Also read: Customer Churn Analysis: 5 Ways to Analyze Churn Data

What strategies can be implemented to reduce subscription churn?

Here are some of the top strategies you can use:

  • Monitor churn metrics: Proactive monitoring allows you to spot issues early and take action before they snowball. Tools like RackNap can provide valuable insights for proactive measures.
  • Enhance onboarding experience: First impressions matter! Make sure new subscribers understand your value proposition through clear communication, tutorials, and helpful resources. Accurately portray what your service offers. Manage expectations to avoid disappointment.
  • Provide exceptional customer support: Responsive, friendly, and knowledgeable support can turn frustrated customers into loyal ones. Invest in training and consider 24/7 availability.
  • Update and improve your offering regularly: Stay ahead of the curve by consistently adding features, content, and improvements. Show customers you’re committed to their needs.
  • Minimize involuntary churn: Automate renewals, offer diverse payment methods, and update expired cards to prevent unintentional cancellations. Reach out to inactive users through personalized emails, notifications, or calls. Highlight relevant features, address potential issues, and show you care.

Other strategies:

  • Administer a feedback loop: Gather feedback from churned customers to understand their pain points and improve your offering.
  • Set flexible pricing plans: Cater to different budgets with tiered pricing or a “lite” version of your service.

Also read: How to select the right pricing strategy to attract and retain your subscription business customers?

  • Introduce loyalty programs: Reward long-term subscribers with discounts, exclusive content, or other perks to increase retention.
  • Invest in personalization: Customize experiences based on individual preferences to boost engagement and make users feel valued.
  • Engage in community building: Generate a sense of belonging through forums, events, or social media groups to create a deeper connection with your customers.
  • Conduct exit surveys: Understand why customers leave through exit surveys to improve future experiences and reduce churn.
  • Implement win-back campaigns: Entice churned customers to return with special offers or new features. Targeting existing users can be more cost-effective than acquiring new ones, as discussed above.

What are the best practices for communicating with customers pre- and post-churn?

Customer churn is sometimes unavoidable, but fear not! Smart communication can keep them around and even win them back. Here’s how:

  • Leave your footprints: Don’t let them forget you! Within 24 hours of their departure, send a personalized “goodbye” email expressing appreciation and understanding. Leave the door open for their return without being pushy.
  • Exit surveys: Don’t let their exit be in vain. Include an exit survey in your email to gather valuable feedback on their reasons for leaving. This goldmine of information can help you improve your service and prevent future churn.
  • Win them back: They may have left, but all is not lost. Craft targeted win-back offers based on their feedback and pain points. Address the issues they raised and showcase how your service has improved. Personalize these offers and emphasize the value they’ll regain by returning.
  • Re-engagement campaigns: Keep the spark alive! Don’t just send one email and call it a day. Design re-engagement campaigns featuring exclusive content, new features, or limited time offers that might click their interest and bring them back into the fold.
  • Personalize, personalize: Don’t treat churned customers like a generic group. Use their past behavior and feedback to personalize your re-engagement efforts. Highlight features they may not have explored before and address their specific needs.
  • Leave the door open with warmth: Don’t burn bridges. End your communications with a friendly, non-pushy message expressing hope for their return. Let them know they’re valued and welcome back whenever they’re ready.

Remember, communication is key! By listening, caring, and talking openly, you can keep customers happy and avoid goodbyes. So be a communication pro and watch your customer love grow!

How can automation help in reducing subscription churn?

Subscription churn is a challenge for many businesses, but automation offers a promising solution to keep your customers engaged and subscribed. By automating certain processes, companies can identify at-risk customers early, personalize customer experiences, and streamline operations to enhance satisfaction and loyalty.

  • Early Identification of At-Risk Customers

One of the key ways automation helps in reducing churn is by identifying customers who might be at risk of leaving. Through automated tracking and analysis tools, businesses can detect warning signs, such as decreased usage or interaction with the service. This early detection allows companies to proactively engage with these customers, address their concerns, and encourage continued subscription.

  • Personalized Customer Experiences

Remember, customers are more likely to keep using services they are more familiar with. Automation enables businesses to personalize communications and offers based on customer behavior and preferences. By using data analytics, companies can tailor their messages and promotions to meet the specific needs and interests of each subscriber, making them feel valued and understood. Personalized experiences are crucial for customer satisfaction and can significantly reduce the likelihood of churn.

  • Streamlined Operations and Customer Support

Automated systems improve operational efficiency by handling routine tasks, such as billing and customer inquiries, more quickly and accurately. This not only reduces the workload on staff but also speeds up response times for customer support issues. Faster, more reliable service improves the overall customer experience, which is vital for retaining subscribers.

  • Engagement and Feedback Collection

Automation tools can schedule regular engagement activities, such as email newsletters, satisfaction surveys, and special offers, to keep customers involved with your brand. They can also automatically collect and analyze feedback, giving businesses valuable insights into what customers like or dislike about their service. This information can guide improvements and reduce churn rates.

RackNap’s role in reducing subscription churn

RackNap provides a powerful solution to help businesses tackle subscription churn through automation. With RackNap’s business intelligence and analytics dashboard, companies can gain a comprehensive view of customer subscriptions, including real-time reports on customer orders, invoices, and smart forecasting. These insights allow you to understand your churn rates for each plan and identify areas for improvement.

Utilizing RackNap, businesses can automate many of the processes, including billing, service delivery, sales, marketing, customer support and more. RackNap not only helps in reducing churn but also in achieving customer satisfaction and business growth.

To view it in action – Book a free demo now!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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