What is customer churn and why is it “the silent killer of the subscription business?”
At a recent Crowdcast talk hosted by Bold’s own Jay Myers (Co-Founder), Patrick Campbell, CEO and Founder of Profitwell broke down what brands can do to reduce customer churn and foster lasting relationships.
Campbell has defined customer churn as “the loss of customers or subscribers for any reason at all.” Businesses typically measure churn as a percentage of lost customers compared to the total number of customers over a given time period. Doing so calculates their churn rate.
So what makes churn rate such an important metric for subscription brands?
- Recurring revenue is the lifeblood of subscription businesses.
- Without predictable revenue it’s difficult to sustain a business and forecast growth.
- Customer acquisition costs are only going up making it cheaper to retain customers than acquire new ones.
Brands that aren’t tracking customer churn may find it difficult to know if their subscription program is healthy. Getting top-of-funnel acquisitions is exciting, but if it costs more to acquire those customers than what they provide in customer lifetime value (LTV) a subscription business could be in trouble.
If you're too busy to catch the entire conversation, we've curated some key takeaways for subscription brands looking to reduce customer churn and drive recurring revenue.
Run the right playbook
“The beauty of the subscription model is that it’s the first commerce model in history that bakes the relationship with the customer into how you make money,” said Campbell.
Instead of having to put out a new coupon or promotion every time you want a customer to shop from you (like stores did back in the day), the subscription model provides an opted-in buyer. However, with that opt-in comes the reality that some customers are going to cancel.
If you’re not thinking about customer churn, you can end up running a “mismatched playbook” said Campbell, the “old-school commerce” playbook where you only make money when you send out an email or run a promotion.
Brands should instead be running the “growth playbook for subscriptions,” which in addition to acquisition, is heavily focused on monetizing and pricing properly and building a long-term relationship with the customer. “You have to make sure you are running the playbook that fits the actual model you are doing,” added Campbell.
Looking for sector-specific insights? Our food and beverage subscription guide is coming in hot.
Voluntary vs. Involuntary churn
There are many reasons why some customers will inevitably churn from their subscription. Maybe they don't want to pay for the product, or don’t feel they are getting the value out of it they had hoped. Maybe they like the product but just aren’t using it enough, or are getting more than they need.
Voluntary churn, or, the percentage of subscribers who actively cancel or don’t renew their subscription during a given time period, is a part of life for even healthy subscription brands.
Though Campbell thinks brands should tackle voluntary churn to a certain extent, he also believes it’s not always an easy problem to solve overnight. Deciding on the perfect product, ideal customer, or optimal pricing strategy that reduces voluntary churn may be lifelong goals for some brands.
Then there’s involuntary churn, which is the type of attrition where customers don’t necessarily mean cancel their subscription. Some of the most common causes of involuntary churn are failing to update personal information or credit limits. Though this more mechanical side of the business may not be as exciting as finding the perfect product or customer, it accounts for almost half of overall churn.
The good news is the mechanical issues behind involuntary churn are often things businesses can fix today, technical issues that can be solved to the tune of less cancellations and more subscriber retention. We'll do a deep dive on some key involuntary churn optimizations in our next bullet.
We recently surveyed over 800 active subscription brands to find out what is truly driving success for subscriptions and compiled the findings in our Drivers of Success: 2021 Subscription Trends.
Three involuntary churn optimizations you can tackle today
Campbell breaks down three key buckets brands can focus on to tackle involuntary churn. The first one is on the money.
Twenty to forty percent of lost customers typically are the result of payment failure. One common scenario is a customer getting a new credit card and forgetting to update their subscription information. Keep in mind, the average US household has 9 subscriptions on the go. Another type of payment failure is where a credit card becomes maxed out without the customer realizing — also a common side effect of having too many subscriptions.
There are too many voluntary churners to afford losing a customer that didn't mean to cancel. Keep on top of payment and credit card failures for a higher retention rate.
Brands like Netflix and Amazon Prime have popularized the monthly subscription model, but it’s important for brands to ask if that makes sense for their product. It might be better if customers subscribe quarterly, even annually. These numbers from Campbell suggest longer-term subscriptions are good for reducing churn:
- Annual customers will retain at a 30% higher rate than a monthly.
- Quarterly customers will retain at 20-23% higher than monthly.
Simply giving the option of a quarterly on annual subscription, or even offering a discount or special gift for long-term retention can take a bite out of churn rate and increase recurring revenue.
Salvage offers are offers made to customers who don’t want to leave but are considering cancelling for some reason. These offers should be tailored directly to the reason for cancellation, which means you’ll need a solid outboarding quiz that customers fill out before they cancel.
Some salvage offers tailored to common cancellation reasons:
Too expensive: Have a free month, or 10% off the next three months.
Too much product: Switch to a quarterly subscription instead of monthly.
Just taking a break: Get a 25% off return bonus on your first month back.
If the customer doesn't like the product, price point, or simply are switching to a competitor, there’s not much you can do except thank them for their business. Salvage offers should be directed at customers who don’t want to cancel but may need to for reasons they feel are beyond their control. Brands that make salvage offers can lower their churn rate by 10-30%.
According to Campbell, brands that focus on the technical or mechanical aspects of their churn rate, and optimize for involuntary churn can increase their LTV by anywhere from 20-50%.
Make customer churn as pleasant as possible
Campbell recalls a time when brands would try to prevent churn by making the cancellation process as confusing, bewildering, or downright difficult as possible, the hope being the customer would just give up and decide to keep their subscription. Unfortunately, some brands even attempt similar tactics today.
In reality the customer will still cancel, except they will have a frustrating experience and will be unlikely to ever return again or recommend the brand to someone else. They may even leave a negative review or speak poorly about the brand on social media.
There are significant advantages to ensuring customers have a pleasant unboarding experience while cancelling. Depending on the reason given, you may be able to save their business with a salvage offer, as discussed earlier. Perhaps their reason is technical in nature and can be quickly solved.
Even if there’s no way to retain their subscription, the better they feel about your brand and the experience they had, the more likely they will be to return later, recommend your brand to someone else, or leave a positive review.
Campbell said: “Subscriptions is a multi-move game. It’s not about the first month. That first month is great, don’t get me wrong, that’s the start of the relationship, but it’s about all those subsequent months that follow. If you spend a little bit more time on this part of your business it has pound-for-pound much higher results than all the effort that went into customer acquisition.”
Ready to get to the bottom of customer churn?
Customer churn is a part of life for most subscription brands. But you can learn to reduce it by better understanding the root causes of why people cancel.
Here are 8 reasons why customers churn.
Watch Campbell discuss each of the reasons for customer churn with tips for brands on what they can do to tackle each in the full conversation below:
Have a question about customer churn or subscriptions? Leave a comment below to keep the conversation going!