The churn rate or customer churn shows how many clients stopped using your products or canceled or downgraded their subscriptions in the subscription model.
Churn rate is an operational key performance indicator (KPI) that measures a subscription (or other) business’s overall behavior and presents it in the percentage of customers or revenue loss (revenue churn).
Table of contents
- Churn rate vs. Retention rate
- Pros and cons of Churn rate analysis
- Voluntary and involuntary churn
- Churn management
- Churn prediction
- How to calculate customer churn rate?
- Revenue churn
- Churn rate by industry
- How to lower the churn rate?
Any business in any industry can analyze its churn if they operate a subscription business model. Similarly, companies with clients who pay by recurring payments benefit immensely from calculating churn rates.
Churn is evaluated over a specific period, and a company can monitor monthly, quarterly, or annual churn rates. Therefore, by looking at it, they know how many customers fail to renew or downgrade their subscriptions.
A high churn rate can reduce revenue and indicate customer discontent with a product or service.
The churn rate is one of the most crucial business KPIs for companies with subscription-based businesses, such as the telecom or media industry. A high churn rate, particularly one that continues to rise over time, can impact a company’s profitability and growth potential.
The capacity to forecast churn is critical to the company’s success, whether in Saas, telecommunications, or retail subscription services.
Churn rate vs. Retention rate
Other KPIs to monitor beside the churn rate are the retention rate and customer lifetime value (CLV). Specifically, if the churn rate shows how many customers leave, the retention rate is the number or percentage of consumers that stay.
Both churn and retention rates show customers’ satisfaction with the products and overall customer experience. In other words, by measuring them, a company can analyze what is doing right and where potential problems occur.
They are closely connected, and while a high churn rate is bad, a high retention rate is good. Therefore, in an ideal scenario, a business would have a 0% churn rate that would result in a 100% retention rate.
Pros and cons of Churn rate analysis
The churn rate is an excellent way to examine how the company’s customers change. But there are good and bad sides to using churn rate calculations. A definitive pro of the churn rate is that businesses have an insight into the number of clients who cancel subscriptions.
The churn rate can indicate whether the customers are satisfied or dissatisfied with the product, service, or company. For instance, if a certain number of customers unsubscribe quickly, it can show something is wrong.
A “pro” is also the fact that compared to some other business indicators, the churn rate is relatively easy to calculate.
A disadvantage or “con” is that the churn rate does not clarify the types of customers. When a consumer cancels a subscription, the churn rate calculation does not distinguish between newer and long-time customers. For that, a more comprehensive analysis is needed.
Voluntary and involuntary churn
When analyzing, it’s essential to differentiate between voluntary and involuntary churn.
A voluntary churn is the number of customers who cancel a subscription because of their free choice and personal reasons.
An involuntary churn is the number of customers who get unsubscribed due to inconsistencies, such as missing payment deadlines. For instance, a high involuntary churn can indicate problems in payment processing, lack of payment options, or, most likely, issues in the dunning process. A good way to lower the number of unpaid invoices is the implementation of consolidated billing that combines more bills into a single invoice.
A company must analyze both separately to see an accurate picture and apply appropriate strategies to battle it.
Many companies put much effort into managing their subscribers, and one of the ways to do it is with subscription management software. Undeniably, with a better understanding of the customers, a company can ensure their customers stay loyal through active communication and by considering the feedback gathered.
Churn rate management is responsible for monitoring customers, preventing churn, and reactivating former customers. Therefore, it has two objectives – identifying and engaging with at-risk customers to reduce churn and recovering former customers. This is done through active customer relations management.
For example, companies tend to reach out to their customers regularly. They engage with them, ask questions and gather feedback.
If they see that a customer is not paying regularly or is inactive, the company reaches out and tries to engage the customers to share feedback or be more active.
In addition, they try to find out why customers are not engaging as before and predict whether they intend to cancel a subscription.
In an effort to win back former users, a company will use different marketing and sales approaches.
Churn prediction refers to determining which customers will most likely abandon a service or terminate their subscription. It’s a crucial prediction for many companies because getting new customers is usually more expensive than keeping old ones.
Therefore, in the best case, the companies use billing software with built-in subscription management software and analytics where they can follow their churn rate in real-time. These dashboards, among others, show past, current and potential customers.
Meanwhile, some companies opt to buy or hire third-party software that will consider these changes and help businesses predict churn.
Netflix churn rate explosion
One great example of churn prediction probably gone wrong is the subscription-based media streaming giant Netflix. Surprisingly they have lost over 200,000 subscribers in recent months. For many years they were one of the companies with the lowest churn rate, but in just a few months, they have gone from a 2,4% monthly churn rate to 3,3%.
How could such a significant company fail to predict this loss, and what have they done to prevent it? Is the reason for this churn increase external because of the Covid pandemic ending, or did it happen because of the subscription price increase?
So far, experts claim the reason is the price increase with Gen Z, Netflix’s leading target group, simply not having an income that could support this increased cost.
Others say Gen-Z and Millennials are far more agile in navigating different offerings and are changing their media providers faster. So after their favorite series season is over, they cancel the subscription and return when the new season starts airing again.
The end of the pandemic also meant that people started spending more time outside and less behind their screens.
Nonetheless, the truth is that all these factors influenced the churn rate somehow.
User inactiveness as a warning
Not everything revolves around the price. Inactiveness is a good indicator that a customer can cancel their subscription. A customer that only uses a service from time to time or whose usage is dropping will most likely come to a point where he will wonder if he wants to keep his subscription.
So to keep the customer, the system must trigger a warning, and the company must take action to retain him. A company must understand customers’ behavior, attributes, and needs. Specifically, they must find the right personalized offer for every customer and engage and win him back.
For example, based on view history and personal preferences, Netflix occasionally sends users personalized emails suggesting “shows we think you will like.”
How to calculate customer churn rate?
The simplest way to calculate churn is through the churn rate formula. A company will analyze the overall number of customers lost in a period parallel to customers at the beginning of the same period. The result is the churn rate expressed in percentages.
Any churn rate is always calculated based on existing customers in a certain period and does not take into account newly acquired customers during that period.
For example, a company had 9000 clients last month. During this month, they lost 880 customers. Accordingly, we divide the number of customers that canceled their subscriptions that month (880) by the number of customers at the beginning of the month (9000).
The result is the customer churn rate in percentage, in this case, 9,78%.
Customer churn rate formula: 880/9000*100=9,78%
The revenue churn rate looks at the churn in lost revenue, aka income, due to customers unsubscribing. Therefore, revenue loss can give an insight into a company’s profitability and predictions for future business.
In the same way, as we calculate customer churn, we can also calculate revenue churn. Revenue churn gives more accurate insight into how much monthly or annual recurring revenue a company is losing. It’s one thing to lose 100 customers at an average price of 5 USD per subscription than to lose 100 users at an average price of 100 USD per subscription.
How to calculate the Gross revenue churn rate?
The Gross revenue churn rate is the total monthly recurring revenue (MRR) related to the customers who canceled their subscriptions. In order to calculate it, we must divide the lost revenue in the period (month) by the predicted revenue at the start.
For example, let’s say the company has two subscription plans:
|Plan A||100 USD per month|
|Plan B||500 USD per month|
At the beginning of the month, out of 9000 subscribers, the company had:
|Plan A – 6000 subscribers at 100 USD per month||600.000 USD|
|Plan B – 3000 subscribers at 500 USD per month||1.500.000 USD|
|The predicted Monthly Recurring Revenue (MRR)||2.100.000 USD|
At the end of the month, from the existing 9000 customers, the company lost:
|Plan A – 680 subscribers at 100 USD per month||68.000 USD|
|Plan B – 200 subscribers at 500 USD per month||100.000 USD|
|The total lost Monthly Recurring Revenue (MRR)||168.000 USD|
The Gross revenue churn rate for this month equals 8%, which is less than the 9,78% calculated for the customer churn rate.
Gross revenue churn rate formula: 168.000/2.100.00*100=8,00%
How to calculate the Net revenue churn rate?
On the other hand, the net revenue churn rate is the total monthly recurring revenue (MRR) related not only to the customers who left but also to customers still subscribed.
It doesn’t only look at revenue lost to cancelations but also considers revenue increases from upgrades, price increases, and reactivations and the revenue lost from downgraded subscriptions.
This balanced change in revenue is called Expansion revenue.
Let’s look at an example:
During the month, out of the remaining 8120 subscribers (9000-880):
- 600 decided to upgrade from Plan A to Plan B.
These upgrades resulted in a 240.000 USD increase in revenue (300.000-60.000).
- 100 decided to downgrade from Plan B to Plan A.
These downgrades resulted in a 40.000 USD decrease in revenue (-50.000+10.000).
Overall, the migrations between plans from existing subscribers resulted in a 200.000 USD (240.000-40.000) increase in MRR or Expansion revenue.
The Net revenue churn rate for this month equals – 1,52%, which signals a negative net churn rate.
Net revenue churn rate formula: 168.000-200.000/2.100.00*100=-1,52%
What is a negative Net revenue churn rate?
Whenever we hear the word negative, we think something is heading in the wrong direction. With Net churn rate, it’s the opposite.
Negative Net churn rate signals that the company’s expansion revenue is higher than the revenue lost to cancelations. In other words, the company’s business strategy is right and going well.
They recognize where its revenue comes from and do everything possible to maximize it.
Since it is almost impossible to achieve zero churns, it makes sense to aim for a negative Net churn rate.
Churn rate by industry
Different industries have different factors that affect churn. Understanding these factors helps subscription businesses formulate effective strategies to combat churn.
|Industry||Voluntary Churn||Involuntary Churn||TOTAL|
|Media & Entertainment||3,60%||1,63%||5,23%|
|Box of the Month||9,41%||1,13%||10,54%|
How to lower the churn rate?
Every company aims to have a zero-churn rate. Unfortunately, achieving this is nearly impossible, which is why businesses have several strategies to at least lower churn rates.
First, it is essential to satisfy customers’ needs. The main focus should be on customers and their needs. Therefore, instead of just chasing new customers, businesses must focus on customers already acquired.
As a result, if treated right, these customers will be loyal and stay with the company for many years.
Second, the company should use the churn rate as a KPI of how many customers are leaving and determine why. In fact, the way they can do this is to pay attention to the similarities in user behavior between the customers who unsubscribe.
Additionally, a company can analyze when in a customer’s lifetime churn occurs since there can be external factors such as age, income, or interests. Straightaway, companies can use this information as preemptive measures.
Communication is the key. Every company should engage and communicate with customers. In that way, they get feedback and updates on what they should or should not change.
In this way, they could reduce the number of unsubscribed customers and have a lower customer churn rate.
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