Running a subscription-based or SaaS business can be hard. Knowing your wildly crucial customer churn rate and what to do about it? Well, that shouldn’t be. No math degree required.
Customer churn rate.
There it is again. Ugh.
You know you need to pay attention to it, but what exactly is it you should be paying attention to?
And how on earth do you calculate it without needing an engineering degree?
Fear not, business owner.
It is a crazy world out there right now, but understanding your customer churn rate — and how to simply crush it — shouldn’t add to the crazy you already face.
So, say adios to the blogs that double as a calculus exam and read on for the last guide to customer churn rate reduction you’ll ever need.
Bonus: No math degree required.
Double bonus: Well, stick around, and you’ll learn how to get an A+ in:
Customer churn rate is the exact percentage of your customers, clients or subscribers who either end their subscriptions voluntarily or involuntarily cancel or don't renew their subscriptions during a given time period, divided by total number of remaining customers, clients or subscribers.
This may seem complicated, but let’s not make it more complicated than it needs to be and how other blogs may make it seem.
Yes, there are numerous ways to calculate your customer churn rate. However, the goal in this article is to make it so simple that you don’t get stuck in the weeds of finding each and every nuance of the churn problem when you can focus on creating a solution.
Another way to put it? Let’s not lose the forest for the trees.
Customer Churn Rate Formula
Number of subscribers or customers canceling or not renewing (voluntarily or involuntarily) during a time period / Number of subscribers or customers added/renewed during that same time period x 100% = Customer Churn Rate
Step 1: Choose a set period of time.
Step 2: Calculate the number of new subscribers or customers added during this time period.
Step 3: Calculate the number of subscribers or customers lost during this time period.
Step 4: Divide the number of lost subscribers or customers by the number of acquired subscribers or customers.
Step 5: Take that number and multiply it by 100%.
To give this a practical spin, let’s pretend you added 5,000 new subscribers in Q1. In that same time period, you also lost 500 subscribers.
To calculate your Q1 Customer Churn Rate, you would take the 500 churned subscribers and divide it by the 5000 new customers, then multiply that number by 100%.
You are sitting at a customer churn rate of 10%.
For most industries, this is standard when it comes to involuntary churn. But, when you mix in voluntary churn, you may be in for a rude awakening.
Before you click off this article and pour yourself a tall one, hang with us! There is light at the end of the tunnel. In order to stop the bleeding, however, you first need to understand what you are dealing with and the extent of the damage.
By now you have a better grasp on just that by applying the handy-dandy formula to your churn, but there truly are some other useful variables to keep in mind as you decide how you are going to calculate your customer churn rate.
Variables to consider include:
Again, there are at least a million other ways to slice and dice your customer churn rate calculations (OK, maybe I’m exaggerating a bit...or maybe not), but let’s continue to keep it simple to get to how to fix this thing before it gets worse.
Now that you have a pretty good idea of your customer churn rate, I am about to throw a quick — but important — curveball at you. Batter up. Again, there truly can be a mountain of complexities involved in thinking through your customer churn rate.
However, for most subscription-based and SaaS business owners, simply grasping a general picture of your customer churn issue is all you need to start fixing it. You do NOT need a Ph.D. That said, I don’t want to make your head explode further. I do, however, want to encourage you to think through this one HUGE piece before we move on to how you can crush your churn problem.
Because let’s be real, even if you only have one customer or subscriber churning each month, you indeed have a problem. But, it’s not a problem exclusive to you or, just as likely, because of you. We’ll get to that in a sec… Let’s talk about — gasp — the compounding effect of how much losing that one customer will have actually cost you over an extended period of time.
Say you take into account the average revenue per user (ARPU). If you keep one customer for 6 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. Think about it for one quick second.
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 5 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. Mind-blowing, right?
Now I think I have your attention.
Help! My Brain Really is About to Explode! *Zack Morris Time Out*
Hold up...we get it! Some subscription-based and SaaS business owners need some help in getting their heads around the true number of their customer churn rate. 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 are here to help — FAST. 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!” But, we got this — and we got you! Let's chat!
If thinking about the compound loss in revenue of ONE churned customer wasn’t enough to have you stand at attention, here are more reasons why this one number can change your businesses’ revenue plan for good. I don’t have to say it twice. You already know customer churn leads to a loss of revenue for your business, so it’s important to pay close attention because, ultimately, this rate can have as much impact on your business’ health and survival as much as your growth metrics.
Yes. No matter what your growth team or sales gurus may tell you, reducing your customer churn rate can impact whether your business makes it or not.
If that doesn’t make you excited about finally putting an end to the churn madness, here are more reasons WHY focusing on your customer churn rate matters:
While each of these are extremely important to sustaining the health of your business’ growth, LTV perhaps remains at the top of the list. As we went over in explaining compounding churn, your customer churn rate indeed affects your customer lifetime value (LTV).
You JUST worked hard and spent money to get these paying customers in the door, and off they (and their money) go… Suffice to say, when you reduce your customer churn rate, your LTV goes up and you get a better return on acquiring new customers.
Still, many business owners still see their customer churn rate as the cost of doing business. This is why you’ll hear lines such as:
Or, even worse…
While some metrics are truly vanity metrics, this, my friend, is not one of them.
Customer churn rate is a big ol’ deal.
As promised, we are getting to the good part.
And, as Lil Jon would say, “YEAHHHHH!”
OK, so maybe this doesn’t elicit as much excitement as listening to your favorite jam on a patio during a warm, summer Friday night, but I can tell you it will at least lead to a better night’s sleep.
Oh, and more revenue.
Who doesn’t want that?!
YEAHHHHHH! Me too!
No longer can you say, “Churn is churn. Does it really matter why the customer or subscriber is no longer paying me? Let’s just fix it all and be done.”
Um...yes. Yes, it does.
Why your customer or subscriber leaves is as important as understanding why they stay. Again, let’s compare it to getting treatment for an illness. Why you are sick will determine what you are treated with. So, what’s the proper course of treatment for your customer churn rate illness? Let's start with the basics.
Voluntary churn is when a customer does something specifically to cancel their subscription to your SaaS service, membership site, or other types 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.
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 engaged — and paying.
The following are some ways that you can knock your customers’ socks off to keep them happy:
SaaS companies, start-up businesses, and even big social media companies can all increase MRR by improving customer loyalty. Decreasing revenue churn is one of the most overlooked ways to retain a large number of customers.
Customer satisfaction is highly correlated with the quality of your customer support. A great way to retain customers is to focus on customer feedback as well. Listen and take note to what they have to say and cancellations will likely decrease.
Marketers are known for promoting new products, but they can also appeal to loyal customers and improve customer retention with content.
A little can go a long way to reducing voluntary churn, so make sure to add some of these tactics and strategies above as soon as you can.
Take a quick breather... I am about to drop a bit of a bomb.
While you can and must do all you can to reduce voluntary churn, here’s the deal with involuntary churn: It can actually be your biggest bucket of churned customers, especially when it comes to failed credit card payments.
Involuntary churn happens when your business loses a customer who didn't necessarily intend to cancel their service or membership. In fact, it’s been found that involuntary churn makes up 20% to 40% of all churn.
Let that sink in for a second.
According to IBM, involuntary churn affects a huge number of SaaS businesses. It found that 16% of respondents said their subscriptions had been canceled because they forgot to update their payment details with new credit card information.
And, get this: That is only one of the more than 100 ways credit cards can fail. This means nearly every customer or subscriber is unknowingly at risk of churning just about every day.
The most sobering thought is you are likely losing revenue and customers who are not necessarily at risk of leaving on their own.
Some of the top reasons credit card payments fail to include both soft and hard declines, such as:
The payment gateway may be working correctly, but there’s an error with the configuration, such as an incorrect username or password.
The customer has reached their maximum credit limit and can’t make any more purchases.
This isn't common but, in some cases, your merchant account may not be set up to accept the transaction.
If your customer is an authorized user on someone else's credit card account, the primary cardholder may have deactivated the secondary user's card.
The customer's credit card has expired. them constantly of the added value of your service or product. 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.
Bottom line: These are things out of your control. But not for long.
So, what’s a business owner to do?
Not only do you not always have the time nor access to all the reasons a card fails, and how you should approach getting the payment back online, but neither does your team.
And, unfortunately, neither does software.
But, there really are things you CAN do to kick the customer churn rate habit and start recovering those customers and their payments now.
Here are 4 ways you can help you and your customers live your best lives:
Your customers are the bread and butter of your business, and keeping an eye on their behavior is the starting point of recovering failed credit card payments. Not having enough money in the bank is considered to be a ‘hard’ decline whereas ‘soft’ declines are payment failures that result from problems with payment processors, your network, or your gateway.
2. Focus on Personalization
Let’s be honest. When something goes wrong with money on the line, it can be a tricky subject to navigate. This is why, in a pandemic society, customer experience can easily make sure involuntary churn doesn’t become voluntary churn. The usual dunning emails may offer convenience, but they don’t offer the best experience. Asking for money is a delicate balance, and one Gravy strikes empathetically every day.
3. Dunning Software Doesn’t Care
Despite claims otherwise, automated emails and dunning software only with limited success. Here’s a fact that might just make you weep: Software on average only recovers around 15% of all credit card payment failures.
Think about it this way: When you have an issue, need to return an item, you want to know a HUMAN is on the other side of the computer screen, phone call, or email. And not just any human — an empathetic human who is there to help and answer any questions you may have. Automation can’t do much more other than bringing awareness to your issue, which is a mere fraction of your battle to reduce your customer churn rate. As we say at Gravy, “Software just can’t care.”
Another eye-opening fact about dunning software emails is that 85% of them go unread. Unfortunately, most businesses give up on recovering payment when the dunning software emails fail.
When it comes down to it, this is the only strategy that truly works to reduce your customer churn rate effectively. In a subscription-based or SaaS business, it is crucial that you have someone (or a team of people, including data specialists) who wakes up every morning and goes to bed thinking about reducing your customer churn rate each and every day.
You built your business to thrive, and customer churn is the number one enemy you face — now more than ever. But, failed payments don’t have to be the end of the story. A measly 10%-15% recovery rate doesn’t have to be the end of the story.
Having your team pulled away from growth and admin tasks to focus on this full time doesn’t have to be the end of the story. Having to hire a VA outside of a vetted safety net and a comprehensive team of retention specialists and data specialists who become part of your family like Gravy to do this dreaded task doesn’t have to be the end of the story.
While you may not have a magic wand you can wave to make your churn problem turn into a pile of cash, we know someone who does... In fact, we are that someone! Consider Gravy your Churn Fairy Godmother.
There is an alternative for you and your team. Not only can you take the steps above to evaluate where your customer churn rate really stands, but you can also do something about it...or you can let us take it off your hands completely.
No worries. No frustrating conversation. No cares. You can have predictable revenue each month. You can have your customers back.
You absolutely can trust the churn reduction and customer retention experts who work with your subscribers and customers with empathy and consistency in a proven process that WORKS. Today, more than ever, your business deserves the power of a human voice bringing your costumers back online.
You deserve what the world’s most powerful brands and businesses have discovered and are switching to in droves. You deserve personalized payment recovery at scale.
Gravy will PAY YOU for the chance to recover revenue and customers for you. No one else can guarantee that kind of cash each month.
Even in the midst of chaos and crisis, your business deserves to thrive. But simply by keeping the customers you have staying — and paying — longer, your business can achieve the stability and oxygen it needs to be poised for growth in the weeks to come.
Gravy will be a safe harbor for your revenue through our industry-leading, human-driven failed payment recovery and customer retention service. Conversations matter. Revenue matters more than ever. Let us help you stabilize it.
And yes, we will pay you. No bull. Lock in guaranteed revenue — paid by us. “WHAT?! Tell me more!”
Say no more! Schedule an EASY, one-call consultation with our team today, and learn exactly how much we can recover and retain for you, and have you up and running. Sidenote: I literally can hear the “One call, that’s all” ads in my brain… but it really is that simple! Our experts in revenue recovery will help you come out of this season stronger through retaining your customers and returning revenue to you seamlessly — and successfully.
Don't miss your chance to secure guaranteed revenue and customers. Stoke that curiosity — and book a call today.