Last updated: April 19, 2022 Blog
Some of the most common reasons for customer churn in subscription businesses include:
- Lack of flexibility and control
- Poor customer experiences
- Diminished value
- Price increases
Given how essential customer retention is for subscription businesses, and its direct link to LTV and profitability, effective churn management is a must. After all, thriving in this industry is often more about retention than conversion, where you establish a loyal customer base of people who stick with you for the long haul.
With that in mind, here’s why reducing churn is so integral to this business model and actionable strategies on how to improve customer retention.
Why Improving Customer Retention is Profitable
Lowering your churn rate is one of the best ways to add to your business revenue without extra costs. On top of that, higher customer retention can dramatically improve your brand equity, giving you a competitive advantage and contributing to greater longevity.
1. It’s 50% Easier to Sell to Existing Customers
Forbes mentions that it’s much easier to keep selling to existing customers rather than seek out new prospects — about 50% easier to be exact. Once you have customers plugged in and set up with recurring products, revenue keeps coming in with minimal effort. It’s just a matter of maintaining relationships and keeping your customers happy.
2. Increasing Customer Retention By 5% Boosts Profitability By 75%
Forbes also notes that a seemingly small increase in customer retention can have a significant impact on profitability. They quantify, saying that just a 5% increase in customer retention can lead to as much as 75% more profitability.
There are two main reasons why.
First, acquiring new customers costs five times more than retaining an existing one. Second, keeping existing customers happy can increase profit margins on orders. For example, early allergen introduction baby food brand Ready, Set, Food! was able to boost its margins by 25-35% per order by optimizing its platform and offering more flexibility to its customers.
3. The Majority of Future Revenue Comes from 20% of Existing Customers
You may already know the Pareto Principle, which states that 80% of the consequences come from 20% of the causes. This applies to countless aspects of business, and churn management for subscription businesses is no exception.
“80% of your future profits will come from just 20% of your existing customers,” the Gartner Group explains. “That means the revenue sources you’ve been trying to find are likely sitting right under your nose, waiting to be nurtured and cultivated.”
Rather than staying on “the hamster wheel” of constantly trying to acquire new customers, which can be time-consuming and costly, improving customer retention is a far more effective strategy that can drive the lion’s share of your profits without racking up massive marketing costs.
How to Improve Customer Retention Subscriptions
Now that we know about the importance of churn management for subscription businesses, here are some solutions for improving customer retention specific to e-commerce.
1. Use Customer Behavioral Data to Make Better Decisions
Typically, the best way to start is to closely monitor customer behavior to identify patterns and trends through advanced analytics. Upscribe, for example, lets you carefully track the health of your subscription program by displaying active subscriptions, new subscriptions, subscriber churn, and cancellations, as well as net revenue and average subscriber value.
By using a business snapshot and visual graphs, you can gain in-depth insights into the trajectory of your customer retention and pinpoint potential areas for improvement. In turn, you know exactly what to focus on to better serve your customers and keep them around longer.
2. Offer Subscription Flexibility and Control
As we mentioned earlier, a lack of flexibility and control is a major source of frustration for customers and a common cause of churn. That’s why it’s important to make it easy for subscribers to make changes to their subscription or individual shipment.
Say, for instance, someone wanted to upgrade or downgrade their current plan. You would want to make switching their plan simple with zero friction. The process should also be intuitive, where they can make changes without any “heavy cognitive lifting.” Instead, they should jump on your website, make the necessary changes, and move on.
3. Provide Alternatives to Cancelling
Sometimes a customer cancellation is outside your control. Maybe they found a cheaper competitor or simply no longer need your product. Other times, however, you can decrease your churn rate by giving a customer an alternative to cancelling.
Crash-free coffee and plant-based proteins brand Four Sigmatic uses cancellation flows to automatically send emails based on the particular action a customer takes. So if someone changes their subscription, Four Sigmatic promptly sends an email to confirm they want to do it, and offers other options instead of cancelling, such as choosing a cheaper plan.
This kills two birds with one stone, because it humanizes the cancellation flow, while also providing the brand with valuable data they can later use to improve their products, customer communication, and subscription experience.
4. Optimize Offers for High-Value Customers
Keeping in line with the 80/20 principle, where most sales come from a few loyal customers, it’s important to 1) Identify your high-value customers and 2) Give them optimized offers from time to time. This helps instill deeper loyalty, which naturally boosts customer retention, while often creating brand advocates in the process.
One example is to set up automated subscription discounts, where high-value customers get exclusive access to deals to show how much you appreciate them. Another is to offer targeted upsell opportunities based on prior purchase history or what’s currently in their cart.
Churn management for subscription businesses is one of the best ways to increase profitability. Rather than constantly chasing down new prospects, providing existing customers with the best possible experience while continually refining the process is a natural catalyst for bigger profits. It’s just a matter of understanding the main reasons for customer churn and addressing them head-on.
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