SUBSCRIPTION FINANCE

The Ultimate Guide to Churn for Subscription Businesses

What Is Churn?

Churn is defined as the number of individuals moving out of a specific group over a given time period. In subscription business terms, it’s a financial metric detailing how many customers opt to end their existing relationship with your company.

Churn is a vital metric that offers insight into a subscription business’s performance, providing a foundational assessment of customer retention and revenue. Every company experiences some churn across the calendar year, but consistently high churn rates are a big red flag. If a subscription business can’t keep customers on board, they’ll struggle to hit their revenue goals and maintain the runway needed to grow over time.

Of course, there are multiple types of churn that a subscription business can measure, which we’ll review next.

(Note: From here on out, we’ll address voluntary churn—the deliberate choice to end a business relationship. However, involuntary churn is also possible. This happens when a customer leaves the business relationship by accident. This is usually due to a payment failure or some type of IT error, but it’s often an easy fix when the customer in question wants to stay on board. As such, we’ll focus on the bigger topic of voluntary churn and how to reduce it.)

Types of Churn to Measure

Customer churn measures how many customers cancel their subscriptions in a given time period, independent of how much revenue you’re earning from them. This metric is comparable to your Retention Rate metric, which is simply a different way to express your churn calculation.

(Note that customer churn measures the number of customers up for renewal who decide to continue service, not new customers gained in that time period.)

Revenue churn, on the other hand, measures whether a given cohort of recurring revenue is retained over a given time period. It’s not customer-specific, but it provides important context for other calculations (such as net revenue churn, which addresses upsell revenue, as well as other pricing strategy considerations).

How to Conduct a Churn Analysis

You can’t address churn without knowing what you’re working with. Your first step is to conduct a churn analysis to see where your business stands. We advise all subscription businesses to make this a priority. Research on customer loyalty shows that even a 5% increase in customer retention can boost profits anywhere from 25-95%.

Let’s start with the standard customer churn calculation. Here are your steps:

Choose a time range to measure (monthly, quarterly, etc.)
Divide the number of subscribers who have left by the total number of subscribers you began with

Multiply the total by 100 to get your churn metricIf you want to calculate customer churn for all of 2021, for example, use this formula:

[100 (customers lost in 2021) / 2,500 (total customers at beginning of 2021)] X 100

Customer Churn Rate = 4%

You can segment and run various customer churn calculations for different time periods, customer groups, specific products, and more. Over time, these reports will form the foundation of long-term churn modeling to make broader forecasts about customer behaviors.

Your revenue churn calculation is similar:

Revenue Churn Rate = (revenue canceling or lapsing during [time period] / total revenue up for renewal during [time period]) X 100

For example: if you wanted to calculate your revenue churn rate for the month of January, here’s how it might look:

$5,000 (total revenue lapsing in January) / $75,000 (total available revenue for renewal) X 100

Revenue Churn Rate = 6.6%

These assessments are typically done on a monthly or yearly basis, but each company should choose a reporting window that aligns with their subscription models. (A yearly report won’t do much good for a company that predominantly sells month-to-month subscriptions.)

Overhead-traffic

Which Churn Metrics Should I Use?

Depending on your subscription service model, this answer will vary.

If all customers pay the same amount for your subscription, the results of both metrics will be the same. Companies in this category usually just track customer churn and leave it at that. Things get more complicated as you start segmenting your customers. If you offer multiple subscription plans (as most businesses do these days), you’ll need to measure both to get an accurate snapshot of your churn. There’s no other way to get the financial data you need to create the context for more detailed reporting and metrics, such as calculations for net revenue churn or customer life expectancy.

Regardless of your approach, consistency pays off here. You want to gather data to help establish historical trends that will support longer-term churn predictions and forecasting.

Of course, these types of calculations require that you have a healthy supply of customer data at your fingertips, which is why you need to have a centralized subscription management platform that makes data analysis easy for your sales, IT, and marketing teams. It’s possible to do it by hand, but most larger companies will eventually need subscription analytics platforms to stay on top of their financial metrics.

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Conduct Assessments on the Impact of Churn on Your Business

We’ve discussed how to calculate churn and a few types of churn you’ll want to stay on top of, but how can businesses tell what churn rates are acceptable and what impact those rates have on business operations?

Zuora has developed a framework for helping businesses answer these questions, based on three simple, repeatable steps:

Acquisition Rate Comparison

Your first step is to assess the flow of customers coming in versus those going out. Start by comparing your churn rate with your customer acquisition rate (a metric defined as the number of new customers added over the same period churn is being measured), divided by the number of customers you had at the start of that period.

This gives you a broad measure of customer growth vs. loss and whether your churn rate may prevent you from reaching your other goals.

Past Rate Comparison

After the initial analysis stage, lots of companies find themselves in a state of paralysis — they have a huge amount of new information, but are still afraid to pull the trigger on a new pricing plan in case something goes wrong. That’s a mistake.

The lesson here is to be cautious with your existing customers, but there is no time like the present to apply new pricing to new customers. Set a timeline for when your new subscription pricing will be available to new customers, and work backwards from there.

It’s imperative to pilot your new pricing with both new and existing customers. Make sure that your catalog lets you support both your old and new pricing, so that you can test, iterate, and repeat.

Peer Rate Comparison

In the final step, you’ll assess your own churn calculations against industry benchmarks to get a sense of how your company stacks up against key competitors. When subscription businesses start discussing churn benchmarks, they often want to jump to this step to see how they compare against outsiders – but in our experience, this phase should only be performed after taking stock of your own situation. Without that essential foundational data, comparisons to third-parties are meaningless.

Zuora has compiled dedicated research on this very topic in our Subscription Economy Index Study. We’ve made this report available for free to subscription businesses, but before getting into those details, we must review the reason we’re all here: Strategies to reduce churn in your subscription business.

How Do I Reduce Churn in My Subscription Business?

That’s the million-dollar question. In the early days of subscription sales, companies (nearly all of whom have poor churn management processes) would attempt to prevent churn by making things hard for the customer: Creating multi-step cancellation processes, obscuring cancellation information, requiring in-person communication to cancel, and so on.

We’re long past the point of considering these dark UX tactics as viable options. When customers want to cancel, make it easy for them to do so. You won’t win them back by frustrating them further.

Instead, subscription companies should examine their workflows to determine how to prevent customers from reaching the churn point in the first place. Let’s look at a few concrete steps that can help keep customers on board.

Segment Your Most At-Risk and Valuable Customers

The best way to reduce churn is to avoid it in the first place, but how can you predict when a customer might choose to leave?

They’ll tell you themselves—by way of the insights hidden in your customer relationship management (CRM) software. Have customers struggled to make payments? Have they complained about services? How many times have they contacted support? Ideally, you’ll have a subscriber management platform at work that allows you to aggregate all customer insights across sales, billing, and support.

Modern analytics platforms leverage APIs and SDKs to extend into your existing business applications to make this process easier, pull information, and allow you to generate custom reports on Churn, Lifetime Value, and other subscription metrics.

Backed by this information, you can create customer segments for those most likely to churn and those who are safe. This segmentation shows which customers may need more hands-on outreach and provides an easy method of prioritization and where to focus your attention. There’s no better way to succeed in the subscription economy—even when customers do leave.

Prioritize Your Existing Relationships
When a customer says good-bye, many companies immediately seek new prospects to fill the gap. This is fine, but as we know, it costs far more to acquire a new customer than to retain an existing one, by some estimates, 5-25 times more expensive.

In other words, investments made in your existing customer base may yield substantially higher returns than those spent on your acquisition cycle. Set schedules for regular outreach within your subscription management platform and find out how subscribers feel about their services.

You may also consider developing additional educational resources that further extend the value of your arrangement, such as webinars, demos, loyalty/incentive programs, and more, all to help them get excited about their partnership with your company.

The Journey to Usership

The playbook for modernizing monetizing, and scaling your business

If this is your very first subscription offering, take a look at this Monetization Playbook for additional information on how companies in different industries have ventured into their first subscription

Refine Your Subscription Cancellation Email & Exit Process

Despite your best efforts, customers may leave the nest, and that’s okay. At this point, your goal should be to learn from them and understand what forces drove them to cancel in the first place. Your subscription cancellation email is a great way to do it.

Create a template that hits all the obvious points—thank them for their service and so on. But while you’re at it, ask them for details you can use to better serve your existing customers. If the customer was a high-value one, you may even schedule an exit interview to connect with him or her directly. But either way, your mission is to get direct feedback that you can leverage in the future.

Put some thought into this, but don’t overwhelm them. Keep things short, sweet, and personal. Many customers won’t bite, but with enough refining, you can develop a template that generates consistent results.

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Minimize Subscription Churn With Data-Driven Processes

Small amounts of churn may be acceptable as the cost of doing business, but churn can quickly spiral out of control when hidden problems go uncorrected.

To reduce churn. collect and organize the data you have, get insights into your customer motivations, and predict how to focus your attention to meet customers’ needs before they jump ship. These are foundational subscription management efforts that support your processes today as well as future processes that may take you beyond the world of subscription sales.

It’s become commonplace for companies to leverage more sophisticated software solutions to meet these goals. These subscription analytics software platforms offer a variety of out-of-the-box metrics for analyzing churn as well as assessment tools for tracking and analyzing trends, including statistical models for predicting potential churn trends and segmentation tools for managing customers.

Subscription management platforms like ours at Zuora were designed for this very purpose. We’ve made it easy to corral your key financial and performance metrics and get deeper insights into the motivations that drive customer behavior.

If you’re ready to get proactive with your churn management strategies, check out Zuora Collect, proven to maximize your subscription revenue and reduce churn

Explore Zuora Collect.

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