Subscription businesses rely on seamless, automated payments for their revenues, and the last thing they want is for their customer churn rate to threaten their long-term viability.
Customer churn concerns all subscription companies, including music and video streaming service providers (such as Amazon Video, Hulu, Netflix, Spotify and YouTube), media companies (such as The Guardian and The New York Times) and telecommunications firms that offer digital connectivity like smartphone, television and wireless network services (such as AT&T, Sprint and Verizon). Churn can also impact SaaS providers that offer access to cloud-based eCommerce, marketing, graphic design and other software services (such as Adobe Creative Cloud, FreshBooks and Mailchimp).
Recurring payments can fail for several reasons, including outdated payment card information, insufficient funds in customers’ bank accounts or “do not honor” codes from customers’ issuing banks. These issues could block customers’ access and prompt them to reconsider a service’s value, boosting churn rates as consumers reach for their cancel buttons. So what can companies do to counter this issue? The following Deep Dive explores the factors that contribute to churn and the steps merchants can take to effectively manage churn and ensure that it does not eat away at their revenues.
Voluntary and Involuntary Churn
Churn typically falls into one of two categories: involuntary or voluntary. Each type occurs for its own reasons, so understanding the differences can be essential to keeping customers satisfied and engaged for the long haul.
Voluntary churn is the more straightforward and common of the two types, accounting for 60 percent to 80 percent of churn. Customers who decide they can no longer afford their subscription service will voluntarily cancel. This can also happen when subscribers tire of their meal kit services, or when businesses get frustrated with their SaaS options for failing to live up to expectations. The latter is why many SaaS providers focus on customer satisfaction to reduce cancellation risk.
Involuntary churn accounts for the remaining turnover, occurring when customers lose access to services for reasons beyond actively canceling, such as if their payment methods develop problems. Expired credit cards or changes in a company’s billing information — as the result of an office move, for example — can result in declined charges and blocked service entry. False positives due to aggressive security measures, maxed-out payment cards, “do not honor” codes or mislabeled charges could also result in a disconnection from offerings.
These involuntary churn factors have nothing to do with customer satisfaction — at least initially. Persistent issues can frustrate confused customers who are unable to access their services, and can lead to declined satisfaction and subscription abandonment. Involuntary churn has the potential to precede voluntary churn if technical and billing issues are not prevented or quickly resolved.
This type of activity can erode a subscription company’s revenue if left unaddressed and can take several months to be apparent, so businesses that realize the severity of involuntary churn should move to calculate and carefully track it.
Calculating, Tracking and Fighting Churn
Healthy subscription businesses must comprehend the causes of voluntary and involuntary churn, and this begins by understanding how to calculate churn rates.
Companies can compute churn by first selecting a month or year to focus on. The rate is determined by dividing the number of customers churned during that period by the total number enrolled at the start of the period.
Recently reported data from a survey of 1,200 websites offers subscribers some useful benchmarks, such as the overall industry monthly churn rate, which is 5.6 percent. B2C companies experience churn at a rate of 7.05 percent, compared to B2B companies’ 5 percent. Rates were lower for SaaS companies, with a median churn rate of 4.79 percent. Box-of-the-month services and OTT providers had much higher median rates — 10.54 percent and 10.01 percent, respectively. Businesses can use this comparative data to understand how serious their churn rates are depending on their niche within the space.
One key reason that subscription businesses should take involuntary churn seriously is the challenge of replacing those who are currently enrolled. Recent data indicates that it is between five to 25 times more expensive to gain a new customer than to keep an existing one.
Several available services can help merchants reduce involuntary churn. Account updaters batch-check card details prior to each renewal, confirming details with issuing banks, card networks, processors, merchants and customers. Any failing part of the chain can possibly slip through the account updaters, however, and involuntary churn would then occur.
Tokenization is also key to reducing churn risk. Bad actors can misuse information to illegitimately gain access to user accounts when consumers’ credit card information gets compromised, ultimately causing users to cancel their subscriptions. Tokenization can help encrypt that payment information, allowing merchants to securely keep consumers’ cards on file for recurring payments while preventing the risk that card data will be compromised.
Other solutions like direct debit can help merchants reduce churn by pulling funds directly from consumers’ bank accounts rather than credit or debit cards, which could expire. Such solutions can simply transact with a customer directly to considerably reduce the likelihood of churn, unlike cards, which are beholden to a complicated network of players, including issuers and processors.
Involuntary churn is not caused by any one factor, but can chip away at merchants’ overall satisfaction rates and needlessly lower revenues. Understanding its causes is the first step for subscription businesses to get ahead of these issues and focus on providing great services rather than fixing payment processing issues. Subscription merchants that address churn’s impact have a better chance of mitigating revenue losses, which can damage firms’ long-term health.