The Problem

Churn is the silent killer. It measures the rate at which customers are passing through that metaphorical turnstile, leaving your services either voluntarily or involuntarily (such as for payment issues.) Either way, that’s your life blood seeping out and you’ll need a transfusion of new customers to replace it. That can make churn an existential problem that it pays to understand and solve.

About Churn

Churn rate is generally measured per month. If you have a 3% churn rate, 3% of your customers are failing to renew each month. The companion concept to churn rate is Retention rate which is usually expressed as an annual rate. While churn measures customers leaving you, retention measures how many stay or come back over the course of a year. These metrics help you to understand customer behavior. For example, if you see high churn and high retention it may indicate that customers want or need your services for only periods of time. Consequently, they cancel when they don’t want you and return later when they again do. They churn, but they are retained. That tells you something important about how your product is used, and perhaps leads you to find ways to make it more consistently relevant.

Types

It’s important to note that the bleeding comes in two types: Voluntary and Involuntary. Voluntary churners are customers who choose to discontinue their service even though they may come back in the future. Involuntary churners are customers that want to continue doing business with you but something in their renewal process prevented it- the most common reason being a failed credit card transaction due to expiration, over limit, or credit card hold. Involuntary churn alone often accounts for about a 1% churn.

In addition to causes like periodic product need and involuntary churn, churn happens for many other reasons such as: product inconsistency or quality issues, new competitive offerings, customer job or workflow changes, budget constraints, familiarity-weakened delight with your product, and others. But the most common reason for churn is price increase. In fact, one survey indicated that price increases triggered 71% of voluntary churn.

Good Churn Rates

All of which begs the question: Just what is a good churn rate? Predictably, the answer is: It depends.

For perspective, streaming services exhibit a wide range of churn rates. Netflix has the lowest churn rate among these services- a relatively healthy 3%, while Stars has the highest at a nearly suicidal 12%.

Cross-industry churn rates

Churn rates vary by product category.

Source Data: Recurly Research

I won’t explore the reasons for each variance here, but let’s take a closer look at the lowest churn category- Software.

Software/ SaaS

While overall software suffers a relatively low average churn rate, the rate differs between B2B software at 4.5% and its B2C counterpart at 5.7%. Part of that difference is due to the fickle nature of consumers, but about 40% of the differential is due consumer’s higher involuntary churn.

Of course, not all software is created equal as shown by the distribution of churn rates across the spectrum of software products. In the quartile of products that have the lowest churn rates the average is about 3% for both B2B and B2C, which means the best of the best have churn rates even lower than that. Meanwhile, products in the highest churning quartile suffer rates of 7.2% for B2B products and 9.7% for B2C. That’s a lot of bleeding.

To be competitive it’s best to use the lowest churn quartile numbers as your benchmark because that’s where your toughest competitors are living. Better still, research the churn rates of your specific category, or best of all, find out what your competitor’s churn rates actually are.

The Solution

There are many potential solutions to address churn rates that are too high. To combat involuntary churn you must assure that renewal transactions can process, that they do process, and that you communicate promptly and recurrently with customers when they don’t.

To combat voluntary churn you must first discover why customers are churning. Exit surveys can help to collect this information, but interviews with customers who have cancelled will give you a much better understanding of the motivations.

Some of the approaches to circumvent churn (dependent upon reason) include:

Allow customers to pause their subscription to accommodate seasonal/ periodic use, temporary budget constraints, or other issues. Better to pause than to have them leave for a competitor.
Provide downscale subscription options to accommodate customers who discover that they don’t need as robust a product as they are paying for.
Encourage customer loyalty by offering rewards for continued use.
Reexplore how customers use the product currently so you may adapt product features and design to accommodate evolving needs.
Create a dashboard to monitor customer usage including metrics such as use frequency, features used, how much time is spent using, paths taken, abandon points, and direct user feedback. Use this data to create a dashboard that classifies customers into groups by churn rate so you may monitor and take action on customers when their metrics dip to levels that signal risk of churn.

Conclusion

In a world where the magic words are “recurring revenue”, churn can kill your business. Better to kill this monster while it’s small.

Sources: Zippia.com, Recurly Research, Secondmeasure.com