June 26, 2018 | Authored by: Kevin Cancilla
Mastering subscription retention by understanding churn
Churn is among the biggest headaches for any company offering products or services on a subscription or recurring payment basis. The rate at which customers leave your service affects every phase of the subscription lifecycle, from acquisition to retention to success, making it all the more important for subscription businesses to understand churn.
But determining churn rate isn't always a straightforward process. Many factors affect customer retention, and some can fly below the radar of subscription services. Others are more complex than a customer just wishing to cancel.
Mastering your subscription retention rate begins with learning about the very underpinnings of churn. Understanding these variables can help you better craft a churn control strategy and retention policy that generates greater customer success.
What is churn?
"What is churn?" is a basic question to ask, but one that needs to be defined nonetheless. It's essential knowledge for any company operating on a subscription business model.
Churn rate is a measurement of attrition. Often expressed as a percentage, churn is the share of customers who have left a subscription service in a given time period. This raw figure — often taken month to month — is used as the basis for higher-level metrics like subscription retention, or a business's efforts to keep customers subscribing. In general, a good customer retention period is any month (for example) in which new users outnumber customers discontinuing services.
Terminations can happen for a variety of reasons, which leads to the dichotomy of active/voluntary churn versus passive/involuntary churn:
- Active/voluntary churn is when a customer consciously chooses to leave a subscription service
- Passive/involuntary churn is when a customer's account is unintentionally interrupted by a system error, failed payment transaction or some other hidden cause
Why does churn matter to subscription companies?
Churn and retention are critical to the subscription business model — they essentially determine whether a company lives or dies. It's one thing to continually acquire new customers with discounts, but if a majority of users leave after a month, costly acquisition efforts become even more expensive and unsustainable. Such results could also point to deeper-seated issues with the company. Frequently, high churn bleeds into other areas of the business model.
Underperforming subscription retention diminishes recurring revenue, the very lifeblood of subscription companies. Recurring revenue by its very definition is steady incoming money that can be depended upon. Customers that stay on also represent the best targets for increased spending. Subscription companies rely on this revenue method, but unmitigated churn can disrupt forecasts and inflows to the point that it becomes an existential problem.
Consider software-as-a-service (SaaS) companies, businesses that sell subscriptions for cloud-based products like human resource management software or corporate expensing software. Clients are often charged on a monthly basis, with the benefit of stable projected revenue inflows. However, wildly fluctuating churn rates undermine this value proposition, and in fact can cause immense damage to the bottom line. These negative outcomes can be prevented if companies take the steps to improve subscription retention and proactively address churn.
Understanding the causes of churn — and how to fight them
Knowing the implications of a high churn rate, subscription businesses must dedicate themselves to tackling the root causes of both voluntary and involuntary churn.
According to Emarketer data, as many as 80 percent of mobile app users churn within three months. Streaming video on demand (SVOD) companies, over-the-top (OTT) providers, subscription box businesses and communication service providers (CSPs) are just as vulnerable to the risk of defection, which they must guard against.
So why do customers churn? The decision to leave could just as well be due to one bad experience as it could be attributed to the culmination of many little things or an error that halted an otherwise positive customer relationship.
Customers churn because:
- They become dissatisfied with the product or service over time
- They have accounts for many similar products or services (SVOD in particular is highly competitive) and opt for one over the other
- Their credit card or payment information isn't processed correctly and service is mistakenly discontinued
- They feel misled by introductory rates or promotions and pay more than expected
This isn't an exhaustive list of why customers churn, but it represents some of the most common pain points. On the other end of the spectrum, customers stay on because:
- They find value in the product or service
- A niche interest is served
- Exclusive content keeps them active
- They receive personal recommendations
- The easy-to-use platform prevents frustration
Understanding the good about subscription retention is crucial to preventing the bad of churn. Here are some strategies for customer retention success:
Don't promise what you can't deliver
While low rates and special bundles may get customers in the door, it won't be long before they exit if they feel they've been misinformed about what they're actually signing up for. Limit churn by being as transparent as possible about prices and renewals — which is required by law in many cases.
Smoothly onboard new users
No matter how easy signing up may be, if using the service or product itself proves challenging, you can bet subscribers are primed to churn. Offer as many resources as possible to support new users as they first begin to utilize your offering.
Communicate valuable information frequently
Effective customer outreach is a must to battle churn. Customers who are engaged with useful communications (such as those detailing new features, offers or use cases) may be more inclined to see value in the service.
Monitor customer activity
Keeping an eye on usage rates can also help identify potential churn challenges before they materialize. A customer whose use of the service has nosedived or who skips updates is a often churn ready to happen.
How Vindicia can help
While there are a number of strategies subscription companies can implement to address churn, the simple fact is that these businesses often need some help. Vindicia can act as that partner and help battle churn with subscription intelligence and data, faultless billing, subscription know-how and a robust platform designed with tools to minimize churn. We're the Subscription People, and with decades of experience and millions of transactions, we've built up a knowledge base that any subscription business can draw on to control churn.
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