In this guide we'll explore:1] What is customer retention management?2] Why is customer retention important?3] What is customer churn?4] What are the different types of customer churn?5] What causes active churn?6] Customer retention strategies to tackle active churn7] What causes passive churn?8] Customer retention strategies to fight passive churn9] How to recover failed payment transactions10] How to calculate customer retention ROI
What is customer retention management?
Customer retention management embodies the systems, processes, and best practices businesses should employ to manage the customer experience and retain as many customers as possible each billing cycle. For subscription-based businesses, customer retention should be an ongoing process that is centered around managing and improving the relationship with your subscribers, thereby maximizing your recurring revenue stream.
Why is customer retention important?
To be successful, companies operating under the subscription business model need to focus on two key areas as growth drivers: acquisition and retention. Winning new subscribers with advertising, promotions, free trials, and other prospecting activities is difficult, time consuming, and expensive. On the other hand, losing subscribers turns out to be easy and painful. A small and seemingly insignificant monthly increases in retention can lead to huge gains in average customer lifetime value (ACLV) over time.
What is customer churn?
Customer churn is an often-misunderstood space that is frequently neglected, resulting in unnecessary loss of subscribers and revenue. Companies that rely on recurring revenue need to track several subscription business metrics, also known as key performance indicators (KPIs), that reflect the economics of the subscription business model. Customer churn rate is one of the most important KPIs and is defined as “total cancellations for a given period” divided by “total number of customers during the same period” multiplied by x 100. Other important subscription metrics include annual recurring revenue (ARR), average revenue per user (ARPU), and ACLV.
What are the different types of customer churn?
There are two types of customer churn, each of which has the potential to undermine your subscription business if not controlled:
- Active churn. Also referred to as voluntary churn, active churn happens when a subscriber voluntarily chooses to cancel your service. Active churn caused by intentional cancellations is often indicative of service quality or user experience issues.
- Passive churn. Also known as involuntary or accidental churn, this type of churn occurs when a subscription is involuntarily canceled without a direct action from the customer. Typically, this is the result of an inadvertent payment failure.
It is important to apply different approaches in tackling the differences between these two types of churn. Tackling passive churn will require different customer retention techniques than what you would do to combat active churn, and vice versa.
What causes active churn?
While active cancellations can result from a variety of issues relating to the quality, value, or cost of a subscription, the biggest contributing factor is low subscriber engagement. Low engagement is typified by subscribers drifting from your service, whether due to a perceived lack of value or the customer not knowing about all the content or products you offer. Low engagement-caused cancellations can become exacerbated by one-size-fits-all nurture approaches that don’t take varying levels of engagement into account.
Other causes of active churn that can disrupt the subscriber lifecycle may stem from frustrating user experiences, competitive factors, and poorly executed personalization. It is important to provide customers with a convenient feedback mechanism so you can listen to and fix product or service delivery issues head-on before they result in voluntary churn.
Customer retention strategies to tackle active churn
To prevent subscribers from actively churning, monitor usage rates and trends down to the individual user. Then you will know what your customers are interacting with so you can build subscription management offers and promotions that get them to stay. Here are some strategies to decrease active churn:
- Enhance and personalize every step of the user journey
- Extend flexibility through seasonable subscriptions, support for various payment methods, and the ability to pause a subscription
- Leverage your subscription data to prevent cancellations
- Increase your service value through partnerships and bundles
- Make it easy to leave your service. This may seem counterintuitive, but making the cancellation process quick and easy will encourage your subscribers to return in the future
What causes passive churn?
On average, 20-40% of all churn is passive churn. And as much as 70% of all passive churn is caused by failed payment transactions. Depending on the payment methods your business supports, failed payment transactions may occur because of expired credit or debit card information, lost payment cards, exceeded credit limits, temporary card freezes, or even a change in the customer location.
Passive churn demands your company’s attention. Unfortunately, it is often a secondary priority to tackling active churn. Often, businesses use basic methods like account updaters and retries to fight involuntary churn, but then give up when no results are achieved. Some may cease efforts because of the perceived annoyance that constant outreach may cause customers.
Customer retention strategies to fight passive churn
Passive churn means losing a customer who didn’t want to leave in the first place. Mitigating the effects of passive churn requires your business to be proactive in implementing a customer retention solution that addresses the root problems of accidental churn. Deploy advanced tactics and take control before your subscriber engagements are lost forever. Strategies to fight passive churn include:
- Use an account updater to pull the latest available information from card networks to keep your customer accounts completely up to date.
- Get smarter about retries. Some traditional retry methods are random, like trying every Tuesday, and therefore not very effective. Dig deep into your underlying subscription data to uncover trends, such as the most advantageous times to retry.
- Build an internal “saves team” whose attention and resources can be focused on outreach to contain passive churn.
When it comes to accidental churn, it is important to assume positive intentions from subscribers to ensure continuity of service. There is no reason to assume that customers whose payments fail are ready to discontinue your service. Suddenly discontinuing it and deleting a customer’s data will cause long-term damage to your business.
How to recover failed payment transactions
Mitigating passive churn by recovering failed transactions requires more than traditional retry strategies. Successful churn management is based on intelligent analyses of payment data, history, and behavior. Knowing how to recover a failed transaction is a specialized science that requires a learning process, experimentation, and expertise. Sophisticated retry technology hinges on deep subscription data and recommendations on who, what, when and where to act without upending the customer’s subscription, even temporarily.
How to calculate customer retention ROI
Even the smallest increases in your subscriber retention rate can have a large impact on your recurring revenue stream. For example, a modest increase of just 5% in your monthly retention rate can increase your subscriber base by 40% after 24 months. That’s why it is important to carefully track your subscription metrics such as churn rate and subscriber ROI (sROI). Refer to our retention ROI calculator to see how small increases in customer retention can result in substantial gains over time.
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