Subscription churn measures the rate at which customers or subscribers discontinue their subscription during a time period. The value is typically expressed as a percentage. SaaS, streaming services, and subscription box services are three industries that monitor subscription churn.
Churn is a crucial metric because it reflects the rate at which a company is losing customers, which can directly impact revenue and growth. A high churn rate can erode the subscriber base and require the company to acquire new customers at a faster rate to maintain or grow its business.
There are two types of subscription churn:
Gross Churn measures the total percentage of customers who cancel or unsubscribe during a specific period, without considering new customer acquisitions. It provides insights into the overall health of the subscriber base.
Net Churn measures not only customer cancellations but also the expansion of revenue from existing customers. It considers upgrades, cross-sells, and additional spending by current customers.
The Net Churn Rate can be positive or negative with a positive Net Churn Rate meaning the company is losing more revenue due to churn than it’s gaining from upsells and expansions. A negative Net Churn Rate indicates that the company is growing its revenue from existing customers even after accounting for churn.
High churn rates, whether in gross or net terms, can be detrimental to a subscription-based business, as they require constant customer acquisition to maintain or grow revenue. Reducing churn through measures such as customer retention strategies, customer service programs, and product improvements is a common goal for such businesses.
Subscription churn can be calculated using two main formulas: Gross Churn Rate and Net Churn Rate. The formulas differ in their focus, with Gross Churn Rate measuring the percentage of customers who cancel or unsubscribe and Net Churn Rate considering the impact of expansion revenue from existing customers:
Gross Churn Rate: (Number of customers who canceled during a period / Total number of customers at the beginning of the period) x 100
Net Churn Rate: [(MRR lost due to churn – Expansion MRR) / Total MRR at the beginning of the period] x 100
The components for gross churn rate:
The components for net churn rate:
Both formulas express churn rates as percentages, making it easier to compare and analyze churn rates across different time periods or businesses.
Here is an example of how to calculate both Gross Churn Rate and Net Churn Rate for a fictional subscription-based company.
A SaaS company offers a CRM software by subscription. At the beginning of a specific month, it had 1,000 active subscribers. Over the course of that month, it experienced customer churn, and some customers canceled their subscriptions.
Here are the numbers for this scenario:
Number of customers at the beginning of the month: 1,000
Number of customers who canceled during the month: 50
Total Monthly Recurring Revenue (MRR) at the beginning of the month: $50,000
Monthly revenue from expansions (upsells, cross-sells): $5,000
Calculation Gross Churn Rate:
Gross Churn Rate = (50 / 1,000) x 100 = 5%
The Gross Churn Rate in this example is 5%, which means 5% of your customers canceled their subscriptions during the month.
Calculation Net Churn Rate:
Net Churn Rate = [($50,000 – $5,000) / $50,000] x 100
Net Churn Rate = ($45,000 / $50,000) x 100 = 90%
The Net Churn Rate in this example is 90%, indicating that, when considering both customer churn and the expansion of revenue from existing customers, the net effect on MRR is a decrease of 90%.
A positive Net Churn Rate indicates that the company is losing more revenue due to churn than it’s gaining from upsells and expansions. In this example, the high Net Churn Rate suggests that efforts should be made to reduce churn and encourage more upselling and cross-selling to existing customers in order to achieve healthier growth.
The average subscription churn rate can vary significantly depending on the industry, type of subscription service, and workings of the individual company. There is no universal churn rate that applies to all subscription-based businesses. Instead, churn rates can range from very low (less than 1% per month) to relatively high (over 10% per month) depending on various factors.
Here are some considerations for understanding subscription churn rates:
Industry: Different industries have different expectations for churn rates. For example, some SaaS companies may aim for a churn rate of less than 5% per month, while a video streaming provider might have a higher churn rate.
Type of Service: The nature of the subscription service matters. Some services, like essential business tools, may have lower churn rates because they are critical to daily operations. In contrast, entertainment-focused services may experience higher churn.
Customer Segment: Churn rates can vary among customer segments. Enterprise customers might have lower churn rates than individual consumers due to longer contract terms, higher switching costs, and the need for the application for business operations.
Customer Acquisition and Onboarding: How customers are acquired and onboarded can impact churn. Well-targeted marketing, a smooth onboarding process, and customer support can reduce churn.
Pricing and Value Proposition: Pricing strategy and the perceived value of the service can influence churn. If customers feel they’re getting substantial value for the price, they are less likely to cancel.
Contract Length: The length of subscription contracts can factor into churn. Longer contract terms can result in lower churn rates, as customers are committed for a longer period.
Customer Satisfaction: High customer satisfaction and positive experiences can lead to lower churn rates, as satisfied customers are less likely to cancel.
To determine what constitutes an “average” churn rate for its company, a business should look at its churn rate compared to industry norms and monitor trends over time. Keep in mind that while lower churn is generally better, the goal is not necessarily to have the lowest churn rate possible but to maintain a healthy balance between customer acquisition and retention. Reducing churn and optimizing customer lifetime value are ongoing efforts that involve improving the product or service, customer support, and customer engagement.
To mitigate churn and improve customer retention, consider the following strategies:
Deliver Exceptional Customer Value: A company should ensure that its product or service provides real value to customers and meets their needs effectively and work to continually improve this product or service.
Offer Flexible Subscription Plans: Provide a range of subscription options, including plans with different features, price points, and contract lengths to accommodate diverse customer needs.
Strive for Excellence in the Customer Onboarding Process: A business should streamline the onboarding process to help customers get started quickly and understand the value of its product.
Provide Proactive Customer Support: A business should provide excellent customer support and respond quickly to customer inquiries and issues.
Engage with Customers: Maintaining regular communication with customers through email, newsletters, or in-app messaging to keep them informed about new features, updates, and best practices will lead to higher customer engagement. A business should also seek customer feedback on how to better its product or service.
Monitor Customer Usage and Behavior: A business should see customer analytics to track customer behavior and identify early signs of dissatisfaction or disengagement.
Retention Incentives: Offering retention incentives, such as discounts, free upgrades, or extended trial periods, to customers who show signs of canceling their subscription can be a way to reduce churn.
Customer Loyalty Programs: Many companies find that implementing customer loyalty programs or rewards encourages longer engagement.
Billing Transparency: A business should be as transparent and straightforward in billing practices as possible to keep customer trust.
Churn Analysis and Action: A business should regularly analyze churn data to identify patterns and understand why customers are leaving. Use this insight to take targeted actions for improvement.
Reducing churn is an ongoing process that requires a combination of efforts to enhance the customer experience, meet customer needs, and build long-term relationships. The specific strategies that a business chooses will depend on its business model, industry, and customer base, so it’s essential to monitor results and adjust your approach as needed.