Churn describes a situation where customers or subscribers stop using a business's products or services within a certain time period. It's a metric that businesses track to assess customer retention, loyalty and overall satisfaction. A high churn rate indicates that a substantial number of customers are leaving, which can be a sign of issues with the product or service, market competition or customer-service strategies.

For any business, keeping churn low is synonymous with making sure that customers are happy, loyal and unlikely to switch to a competitor. Understanding churn helps businesses to adapt, create strategies and maintain their valuable customer base, ensuring long-term stability.

Below, we'll explore what businesses need to know about churn management, including more details about why it can have so many consequences, as well as the best ways to handle it.

What's in this article?

• Types of churn
  
• How to calculate churn
  
• Why is churn so important for subscription businesses?
  
• How to identify the causes of churn in your business
  
• Strategies for managing churn
  
• How Stripe can help
  

Types of churn

Churn isn't just a metric – it's a complex signal of a business's relationship with its customers. Examining churn requires a closer look at customer interaction, satisfaction and loyalty. Here's a look into the different types of churn and what they can indicate about a business:

• Voluntary churn: Voluntary churn, also known as active churn, occurs when a customer deliberately chooses to part ways with a business. It often reflects deeper issues – perhaps a gap in the product's value proposition or dissatisfaction with customer service. Businesses that track this type of churn can learn a lot by engaging in post-churn interviews or surveys. The key is to listen and act on the feedback, using it to guide product improvements and customer-experience strategies. This type of churn also leaves a trail of data – cancellation reasons, customer service tickets and usage patterns leading up to the churn. Businesses can use this data to pinpoint moments of friction in the customer experience and thus design targeted interventions that may prevent churn.

• Involuntary churn: Involuntary churn is beyond the customer's control, and often happens because of failed payments or service issues. To reduce involuntary churn, a business must have a plan for payment processing, a strong customer support system and a proactive outreach programme to re-engage customers who may not realise that they've churned.

• Passive churn: Passive churn is the silent type of churn that occurs when a customer stops engaging, but without cutting ties formally. It's indicative of a lack of engagement or forgotten utility. Detecting passive churn requires close monitoring of engagement metrics, such as reduced logins, decreased activity or failure to renew. Addressing passive churn means re-engaging customers through personalised marketing and outreach, reminding them of the value that they might be overlooking.

• Revenue churn: Revenue churn goes beyond customer numbers to dollars, providing a financial perspective on churn. It's important for a business to differentiate between the loss of many low-spending customers and the departure of a few high-value ones. This perspective helps to prioritise retention efforts based on financial impact. Analysing revenue churn prompts a business to develop tiered retention strategies, sometimes focusing more on high-value customer segments that contribute the most to the bottom line.

Each type of churn indicates where a business may be falling short or what it's doing right. A nuanced response to churn can turn analytics into an asset for sustainable growth.

How to calculate churn

Calculating churn can provide you with valuable insights into customer retention and business health. Here's how churn is typically calculated:

• Determine the time: Choose the period over which you want to measure churn, whether it's monthly, quarterly or annually.

• Define churn: You need a definition of what constitutes churn for your business. For a subscription service, this may be when a customer cancels. For an app, it could be when a user hasn't logged in for a certain period of time.

• Know your customer base: Identify the number of customers that you had at the beginning of the period. Only count customers who could have churned, meaning that they were on board before the period started.

• Count the churned customers: Tally up the number of customers who left your service during the period that you selected.

• Do the maths: The churn rate is calculated by dividing the number of churned customers by the total number of customers at the start of the period and then multiplying by 100 to get a percentage.

Here's the churn rate formula:

Churn rate = (Number of churned customers / Total customers at start of period) × 100

For example, if you start the month with 200 customers and 10 of them leave by the end of the month, your monthly churn rate would be:

Churn rate = (10 / 200) × 100 = 5%

This is a basic formula. There are more complex ways to calculate churn which take into account new customer acquisition during the period or the value of the customers lost (revenue churn).

Why is churn so important for subscription businesses?

Churn is a top concern for subscription businesses for a variety of reasons, including:

• Customer acquisition cost (CAC) vs customer retention: The resources invested in attracting each customer are lost when that customer leaves. A high churn rate can swiftly deplete a business's capital, making the business unsustainable because of the high costs of replacing lost subscribers with new ones.

• Impact on customer lifetime value (LTV): Churn cuts into customer LTV, reducing the total revenue that a business can expect from any given customer. A reduced LTV translates to diminished revenue over time and limits the available capital for reinvestment into business growth.

• Indicator of underlying problems: A high churn rate can signal underlying issues with the product or service, such as customer dissatisfaction or a mismatch between the available product or service and market needs. It can also reflect the strength of the competition if customers find more compelling options elsewhere.

• Growth vs churn: For a subscription business to expand, subscriber growth must exceed churn. When churn rates are high, it places enormous pressure on the business to acquire customers at a high rate, often leading to a focus on quantity over quality.

• Revenue predictability: One of the strengths of the subscription model is the predictability of revenue streams. Churn introduces volatility into this equation, complicating financial forecasting and potentially affecting investor confidence.

• Interruption of customer data flow: Continuous customer data is important for refining and personalising services. Churn breaks this flow, hindering a business's ability to improve and tailor its services to meet evolving customer demands.

• Word of mouth and market perception: Subscribers who leave, especially if they do so out of dissatisfaction, are likely to share their negative experiences. Such negative perceptions can spread rapidly and broadly on social media, affecting the brand and its ability to attract customers.

Churn is not just a number to monitor – it's a multi-faceted indicator of a subscription business's health and long-term viability. Tackling churn requires a comprehensive, data-informed strategy which prioritises customer satisfaction and engagement as much as growth and acquisition.

How to identify the causes of churn in your business

Identifying the causes of churn requires a combination of analytical rigour and a sharp eye for customer behaviour patterns. Here's how a business can determine the reasons behind customer departures:

• Deep dive into the data: Start with a thorough analysis of customer data. Look for trends in usage, such as declining engagement or specific features that churned customers rarely used. This can point to product features that may not be hitting the mark or an overall decline in the perceived value of your service.

• Customer feedback: Never underestimate the power of direct feedback. Exit interviews and surveys can provide valuable information. They give you direct insights into why customers are leaving. Are they unhappy with the service? Was a competitor's feature more appealing? This data can be quantitative and qualitative, suggesting a narrative behind the numbers.

• Support ticket analysis: Scrutinise the issues raised by customers who later churned. Was there a common complaint or issue that wasn't resolved to their satisfaction? This can reveal operational or product-related shortcomings that are driving customers away.

• Market changes: Closely monitor market trends and competitor moves. Sometimes an increase in churn can be attributed to external factors, such as a change in customer preferences or a competitor entering the market with a disruptive alternative.

• Segmentation studies: Break down your customer base into segments and look for churn patterns within each group. High churn in a particular segment can indicate a misalignment between customer needs and your product's features or pricing structure.

• Cohort analysis: Observe the behaviour of customers over their lifecycle by cohort, such as the month in which they signed up. This can reveal if churn is connected to specific onboarding processes, seasonal trends, or changes in your product or policies over time.

• Usability testing: Sometimes, the problem is not the product but the user experience. Conduct usability tests to see where customers may be getting frustrated or where they may be encountering difficulties within your service.

• Financial factors: Don't overlook pricing structures. Assess whether your price points remain attractive and fair in the eyes of customers on a regular basis, because finances are a common cause of churn.

Combining these methods will provide a multi-dimensional view of churn causes. There's rarely a single culprit. Instead, churn is often the result of several overlapping factors. Businesses can use this knowledge to address the causes of churn proactively, with the goal of delivering a service that retains its value for your customers.

Strategies for managing churn

• Customised predictive churn models: Develop a customised machine-learning model that integrates with your customer data platform. This model should analyse a variety of variables that go beyond usage statistics, such as support ticket sentiment, payment history and social media engagement, to predict which customers are at risk of churning. With this model, you can identify at-risk customers early and initiate targeted retention strategies.

• Value-driven product evolution: Conduct a deep behavioural analysis to see how customers interact with different aspects of your product. Use advanced A/B testing to experiment with feature changes and measure their impact on retention. Regularly update the product based on these insights, ensuring that it adapts to changing customer needs and preferences.

• Cohort-based retention campaigns: Segment your customers into cohorts based on their behaviour, acquisition channel and lifecycle stage. Design bespoke retention campaigns for each cohort. For instance, users acquired from a particular marketing campaign may display a different type of behaviour and churn risk. Tailor your communication and retention efforts based on these insights.

• Advanced customer health scoring: Use a health score system that aggregates various indicators of customer satisfaction and engagement, such as net promoter score (NPS), feature utilisation and service interactions. Use this score to prioritise your outreach and customise interventions for each customer segment.

• Behavioural email trigger programmes: Set up an automated email marketing system that reacts to specific customer behaviours. If a user hasn't logged in for a while, send an email automatically, containing valuable insights or updates that they may have missed. If they have hit a usage milestone, congratulate them and show them what's next. These timely, behaviour-triggered emails can re-engage customers at key moments.

• Strategic account management for high-value customers: Identify your highest-value customers and assign dedicated account managers to them. These managers should be responsible for understanding these customers' business goals and making sure that your service helps to meet these goals. This bespoke attention can drastically reduce churn in your most important customer segment.

• Transparent feature road-mapping: Involve customers in your product-development process by letting them suggest and vote on new features. Share your product roadmap openly and demonstrate how it is shaped by customer feedback. This collaborative approach can create a sense of ownership among users, reducing their likelihood of churn.

• Dynamic pricing models: Explore pricing models that adjust based on usage or other customer milestones. For instance, a customer who derives more value from the service could move into a different pricing tier, whereas one who uses it less could benefit from a temporary discount or pause in billing, thereby preventing churn because of financial constraints.

• Customer support escalation paths: Create a structured escalation path for customers who experience issues so that any problem that can't be resolved at the first point of contact is escalated quickly to more specialised teams. This timely response can prevent a build-up of frustration, a common reason for churn.

• Community building: Generate a community around your product or service. This could involve user groups, online forums or user conferences. A strong community can provide peer-to-peer support and strengthen the relationship between your customers and your brand.

Churn-reduction strategies demand regular data analysis, careful management of customer relationships and flexible service improvement. These aren't one-off fixes – they involve ongoing tuning and review to keep pace with the changing needs of customers and the market. If you use these methods carefully, you can turn your churn rate into an asset, strengthening the core of your customer base.

How Stripe can help

Stripe's suite of features can be particularly effective in managing and reducing churn, including:

• Smart Retries with Stripe Billing: Stripe's Smart Retries feature uses machine learning to determine the optimal time to retry failed payments, which can reduce involuntary churn because of payment issues. By analysing the best days and times for transactions based on industry data, Stripe tailors the retry schedule to maximise the likelihood of collecting revenue.

• Dunning management: Stripe provides automatic email notifications to customers when a payment fails and before the service is cancelled. This dunning process gives customers a heads-up to update their payment information, which can prevent service interruptions and reduce involuntary churn.

• Subscription pause: Businesses using Stripe can give customers the option to pause their subscriptions instead of cancelling them outright. This feature is particularly useful for customers who may be considering leaving because of temporary financial constraints or those who won't need the service for a short period of time.

• Customised billing cycles: With Stripe, businesses can be flexible within billing cycles. This means that customers can choose a billing schedule that suits them, which can improve satisfaction and decrease the likelihood of churn because of rigid billing practices.

• Prorated charges: Stripe supports prorated charges, which allows businesses to offer changes in subscription levels mid-cycle. This feature means that customers feel as though they are being billed fairly, improving their overall experience and potentially reducing churn.

• Trial periods and discounts: Businesses can easily set up trial periods and discounts with Stripe, and this can be a pathway to acquiring customers and retaining existing ones. By giving customers the opportunity to try before they buy or receive a discount for continued service, businesses can increase perceived value and reduce churn.

• Revenue recovery tools: Stripe's revenue recovery tools help businesses to recover more revenue automatically with a variety of features, such as card account updater, which updates expired or renewed card details automatically.

• Analytics and reporting: Stripe provides detailed analytics and reporting that can help businesses track revenue and assess the reasons behind churn. These insights can be used to develop targeted strategies for reducing churn.

• Integration with third-party services: Stripe's extensive application programming interface (API) and integrations with third-party services, such as customer relationship management (CRM) and customer support platforms, can help businesses to manage customer relationships, as well as take a proactive approach to prevent or address churn.

Businesses should integrate each of these features thoughtfully with their existing customer-experience strategy. This type of integration requires a sense of the customer lifecycle and where these features can make the biggest impact in preventing churn. Stripe's platform provides the data and the tools for powering a comprehensive churn mitigation strategy, but it's up to the business to apply them in a way that resonates with its customer base and addresses the specific factors contributing to churn.