Customer Churn: A No-Nonsense Guide for Subscription and SaaS Businesses
The mere mention of customer churn can strike fear into the hearts of many subscription-based business owners.
If you fail to keep your eye on the customer churn ‘ball’ and pay close attention to signs that indicate your customer is about to cancel their subscription, your business could pay a hefty price.
The great news is that you can hit the customer churn ball out of the park by creating a strategy to reduce customer churn. This no-nonsense guide will give you quick, sharp, and to-the-point information about customer churn and strategies to deal with both voluntary and involuntary churn.
The ball is in your court on what to do next.
What exactly is churn in your subscription business?
In essence, churn means the rate at which your subscription company would lose subscribers because of cancellations or subscriptions that have just been left to slip away.
Customer churn results in a loss of revenue for your business, so it’s important to pay close attention to your churn rate because, ultimately, it can determine whether your business makes it or not.
Customer churn also affects your customer lifetime value (LTV). When you reduce churn, your LTV goes up and you get a better return on acquiring new customers.
Industry churn averages
It’s a good idea to assess the amount of churn your SaaS or subscription business is experiencing in relation to different industry averages.
According to research, the following are different churn stats for subscription businesses:
- The overall churn rate for subscription businesses is 6.12%. B2C companies seem to experience more churn than B2B companies. B2C companies experience 7.69% churn whereas B2B experience only 5.56% churn.
- In terms of the SaaS industry, the monthly churn rate is 5.33%.
Customer churn vs. revenue churn
The two most important kinds of churn in your business are customer churn and revenue churn.
- Customer churn
Customer churn shows you how many customers have cancelled their subscription in a specified period. It’s one of the most useful metrics in a subscription-based business because it helps you to find out what the LTV of a subscriber is. The formula for customer churn is:
The number of subscribers cancelling or lapsing during a time period divided by the number of subscribers up for renewal during that same time period.
Although the formula for customer churn seems simple enough, there are a number of complexities hiding behind this number.
You need to take into account these three things when calculating your customer churn to avoid any curveballs:
- Are you going to focus on churn or retention? Some subscription businesses prefer to use the metrics of customer retention instead of churn. This is because figures of retention may give a ‘warm and fuzzy’ feeling as it’s a more positive way to look at the metrics.
For example, if your customer churn rate is 20%, you can flip this figure and report it as an 80% retention rate. If your business decides to focus on retention instead of churn rates, this can work for you as long as it doesn’t end up with you burying your head in the sand because your retention rates are high. It’s useful to also focus on churn rates because most industries and benchmark reports use this metric.
- Are you going to focus on periods of a month or a year? This decision should be based on the typical customer renewal term of your subscription. For example, if your product or service is renewed on an annual basis, then it would make sense to calculate yearly churn. Use a monthly churn rate if you have subscriptions on a month-to-month basis.
- Compound effect of churn. It’s easy to drop the ball on calculating customer churn because there are so many more complexities involved. For instance, when calculating customer churn, you also need to figure out the compound effect of how much that customer will cost you over an extended period of time.
Let’s say you take into account the average revenue per user (ARPU). If you keep one customer for six months with an ARPU of $50 per month, this customer’s value or income stream is now $300 and not the ARPU of a single cycle. But, think about it. What would the compounding effect be if you viewed your customer base as a whole instead of individuals? This will show you different and more meaningful results.
Say you keep one customer per cycle for five cycles with an ARPU of $50. It would seem logical that the added or saved revenue would be $250. But because of the compounding effect, the real value would be $750.
Some SaaS business owners need some help in getting their heads around the true value of their customer churn. You can get the ball rolling by getting a clear idea of what your actual customer churn is and how much it’s costing you by partnering up with Gravy.
We’re experts in working out the true cost of customer churn for SaaS and subscription-based businesses. When we work with businesses just like yours, the reaction we normally get is a jaw-dropping, “I didn’t know it was costing this much!”
Book a coaching session today to find out how we can work with you to determine the true cost and impact of customer churn on your business.
Revenue churn is the percentage of revenue you’ve lost from existing customers in a specific period. This is another type of churn rate that’s used by SaaS businesses to find out how much loss they’re experiencing. The formula for revenue churn is:
Revenue canceling or lapsing during time period divided by total revenue up for renewal during time period.
This formula doesn’t include the revenue added.
Voluntary vs. involuntary churn
- Voluntary churn
Voluntary churn is when a customer does something specifically to cancel their subscription to your SaaS service, membership site or other type of subscription-based business. There are different ways that SaaS businesses can reduce voluntary churn – for example, improving their onboarding process.
Satisfying your customers is one of the best ways to reduce voluntary churn.
Ways to reduce voluntary churn:
As a SaaS business owner, you have be nearly obsessive about providing value to your customers. Otherwise, they’ll abandon your business for your competitor. One metric you can review is time to first value.
Time-to-first-value is the first ‘wow’ moment you give to your customer. This needs to be immediate and instant if you want to keep your customers.
The following are some ways that you can delight your customers to keep them happy:
- Remind them constantly of the added value of your service or product.
- Make sure your service can be accessed via every platform on every device, especially paying attention to mobile-first.
- Create different learning experiences for your customers in terms of blogs, guides, templates and shortcuts.
You need to keep your eye on the ball when it comes to involuntary churn. This happens when your customers inadvertently lose access to your service. It’s been found that involuntary churn makes up 20% to 40% of all churn.
The tricky thing about involuntary churn is that, no matter how much you improve your services and your customer experience, this issue is still difficult to resolve.
Most SaaS businesses experience involuntary churn when their customer forgets to update their payment information or:
- When a customer loses their debit or credit card.
- When a customer’s card is stolen.
- When a bank declines a payment because the customer has gone over their credit limit or because of a network error.
Most involuntary churn is based on payment processing issues and nothing to do with what your SaaS or membership business has done. According to IBM, involuntary churn affects a huge number of SaaS businesses. They found that 16% of respondents said their subscriptions had been cancelled because they forgot to update their payment details with new credit card information.
It’s important to tackle involuntary churn because it can have a negative effect on customer satisfaction. Customers can become confused if they aren’t aware of the reasons why their payment has failed and, all of a sudden, they can’t access your services.
Even though this type of involuntary churn isn’t your fault, if it’s not dealt with properly, this can lead to the customer being frustrated and leaving your services when they had no intention to do this in the first place.
This exact reason is why you need to have someone in your corner when handing involuntary customer churn. Gravy will put a human face on automation or Dunning software to reduce involuntary churn.
Dunning software may be somewhat successful, but some customers may ignore automated emails (or the email may find its way into a junk folder).
How to reduce involuntary churn:
The first step to reducing involuntary churn is to sort out the difference between voluntary and involuntary. It’s essential to keep your eye on involuntary churn because you literally have customers who are biting your hands off for your service, but they’re unable to pay due to no fault of their own or through no fault of your company.
Check out our post about ways to recover failed credit card payments that’s jam-packed with useful tips on getting your customers back on track and reducing involuntary churn.
Cross the finish line in payment recovery by partnering with us
With Gravy, we provide a full-time focus with real people who work with your customers to get their payments back up and running.
Gravy is here to help you recover more failed payments - point blank period!
We’re leaders in the recurring revenue space and have a full-time focus on helping you recover payments for your SaaS, membership or other subscription-based business.
Why not book a chat with us to find out how we can partner with you to boost your customer retention, reduce your customer churn and ultimately protect your bottom line?
Customer Churn Formula
# of subscribers cancelling or lapsing during a time period / # of subscribers up for renewal during that same time period = Customer Churn
Revenue Churn Formula
*Revenue canceling or lapsing during time period / by total revenue up for renewal during time period = Revenue Churn
*This formula doesn’t include the revenue added.