Subscription business models have spread through an ever-expanding range of commercial sectors in recent years. The subscription market is expected to hit $1.5 trillion by 2025, a 435% increase over just nine years. But significant challenges accompany this growth. Chief among them: subscription churn. In 2022, KBCM Technology Group reported that private software-as-a-service (SaaS) companies lose a median of 14% of their revenue and 13% of their customers annually, and they also experience a median 10% nonrenewal rate.

Subscription churn can be a major problem for businesses. Churn directly impacts a business’s recurring revenue, threatening financial stability for those that don’t address it head-on. As more businesses adopt subscription models, addressing churn becomes more complex, with competition raising the stakes around customer retention. In this article, we’ll explore subscription churn in depth, giving you the insights your business needs to fight this challenge and maintain a competitive edge.

What’s in this article?

• What is churn?
  
• Why churn matters for subscription businesses
  
• Types of churn
  
• How to calculate churn
  
• Ways to reduce subscription churn
  

What is churn?

In the context of subscription businesses, churn refers to the rate at which customers or subscribers discontinue their subscription within a given time frame. It quantifies the percentage of subscribers who stop using a service relative to the overall customer base.

Why churn matters for subscription businesses

Churn matters for subscription businesses for several reasons:

• Revenue predictability
  Subscription businesses operate on the premise of recurring revenue. Predictable, steady income allows for better planning, investment, and growth strategies. High churn rates undermine this predictability, making it difficult for businesses to forecast revenue and allocate resources effectively.

• Customer acquisition costs (CAC)
  Acquiring new customers often costs more than retaining existing customers. When a business faces high churn, it means the business must incur expenses to replace the customers it loses. This can eat into the business’s profits, especially if the churn rate surpasses the rate of new customer acquisition.

• Lifetime value (LTV)
  LTV represents the total revenue a business can reasonably expect from a single customer account. High churn decreases LTV because customers aren’t sticking around long enough to make subsequent purchases or renew their subscriptions, thereby reducing the total revenue potential per customer.

• Compounded growth impact
  Retained customers often contribute to growth in two ways: through their own subscription maintenance and through referrals. Losing a customer doesn’t mean only losing their subscription—it also means losing out on potential new customers they could have referred.

• Product and service feedback
  Consistent churn can be a symptom of deeper issues with a product or service. If customers are leaving regularly, it might indicate unaddressed concerns, unmet needs, or areas that require improvement. Monitoring churn continuously can serve as an important feedback mechanism.

• Brand reputation
  High churn rates can damage a brand’s reputation. In the ecommerce environment—where online reviews and word-of-mouth play a significant role in customers’ purchasing decisions—consistent negative feedback or the perception that many customers are leaving the service can deter potential new subscribers.

• Operational efficiency
  Constantly onboarding new customers due to high churn requires resources, whether that’s staffing, training, or technology. This increases costs for the business and also diverts resources from other potential growth or innovation initiatives.

• Investor confidence
  For businesses seeking external investment, a low churn rate can be a marker of business health and sustainability, while a high churn rate can raise red flags for investors—potentially making it harder for the business to secure funding.

Types of churn

Understanding churn is key to mitigating it. Different types of churn can provide distinct insights into customer behavior and the health of a business—and require their own distinct tactics to prevent and combat.

Here are the primary types of churn that subscription businesses encounter:

• Voluntary churn
  Voluntary churn is when customers decide to end their relationship with a service or product. They might have found a better alternative, feel dissatisfied with the product or service, or simply no longer need the offering.

• Involuntary churn
  This type of churn occurs when customers don’t end their subscription intentionally, but it terminates due to reasons outside of their control. Common causes include expired credit cards, bank declines, or other payment issues.

• Active churn
  Active churn refers to customers who intentionally and proactively cancel their subscription. They might call customer service, send an email, or click an “unsubscribe” button.

• Passive churn
  This happens when a subscription ends not because the customer actively chose to cancel, but because they failed to renew or update payment details. It’s often linked with involuntary churn, but it can occur when a customer simply forgets or overlooks renewal.

• Gross churn
  This measures the total number of customers or the total revenue lost within a specific period—without considering new acquisitions. It gives a holistic view of how many existing customers or how much revenue a business is losing.

• Net churn
  Net churn considers both the lost customers or revenue and the new ones acquired during a specific period. It provides a balanced view of the company’s growth or decline by factoring in both losses and gains.

• Product churn
  This type of churn is specific to businesses that offer multiple products or services. Product churn occurs when a customer discontinues using one product but continues or starts using another product from the same company.

• Contractual churn
  This applies to businesses that operate with contracts, such as annual SaaS subscriptions or mobile phone contracts. It refers to customers who decide not to renew once their contract ends.

• Noncontractual churn
  For businesses that don’t use a fixed-term contract, such as monthly streaming services or ecommerce subscriptions, noncontractual churn refers to customers who can leave at any time without breach of agreement.

Understanding different types of churn allows businesses to diagnose specific problems, refine their strategies, and develop tailored retention initiatives. It helps pinpoint whether issues lie in the product, service, customer support, billing processes, or other areas—and it helps address these issues more effectively.

How to calculate churn

Calculating churn accurately is important for understanding customer retention and identifying areas of concern. Here’s a step-by-step guide to computing churn for your subscription business:

• Choose a time frame: Decide on the period for which you want to measure churn. It could be monthly, quarterly, or annually. The choice often depends on your business cycle and how often you want to assess your performance.

• Identify the start count: Determine the number of active subscribers or customers at the beginning of your chosen time frame. This is your starting point and will serve as your baseline.

• Identify the end count: At the end of your chosen time frame, note the number of active subscribers or customers that remain. This number should exclude any new customers you’ve acquired within the time frame.

• Calculate the difference: Subtract the end count from the start count. This gives you the number of customers who have churned during the period.

• Determine the churn rate: Divide the number of churned customers by the start count. Multiply the result by 100 to get a percentage. This is your churn rate. For example, if you began the month with 1,000 customers and ended with 950 (excluding new customers), you’ve lost 50 customers. Hence, your monthly churn rate would be:
  50 ÷ 1,000 = 0.05
  0.05 x 100 = 5%

• Consider variations: Note that this is the basic formula. Depending on your business model or specific setup, you might need variations of this formula. For example, if you’re more concerned with the revenue lost, you’d replace the customer counts with revenue figures to calculate a revenue churn rate.

• Set a calculation frequency: While the formula remains the same, businesses often calculate churn monthly for a more granular view and then roll these figures up quarterly or annually for broader insights and trends.

• Refine data: As you gather more data over time, consider segmenting your churn rate by different customer groups, product lines, or acquisition channels. This can provide more specific insights into which areas of your business are seeing higher or lower retention.

Understanding and regularly calculating churn is imperative for subscription businesses. It provides a clear picture of customer retention and can serve as an early warning system for potential issues, allowing businesses to put in place proactive measures to enhance customer satisfaction and reduce losses.

Ways to reduce subscription churn

Reducing subscription churn is key for the longevity and profitability of any subscription-based business. Here are some important strategies for tackling subscription churn:

• Enhance onboarding experience
  The first few days after a customer subscribes are significant. An effective onboarding process helps customers understand the value of your service, reducing early churn. Quick tutorials, walkthroughs, and checklists can be effective tools.

• Provide exceptional customer support
  Timely, helpful, and friendly support can make the difference between a customer’s decision to stay or leave. Investing in training and ensuring 24/7 availability can make a big difference.

• Update and improve your offering regularly
  Stagnation can lead to churn. By regularly adding features, content, or other updates, you can make sure that customers see continued value in your service.

• Engage proactively
  Use email campaigns, push notifications, or even phone calls to engage inactive customers. Inform them about features they might not be aware of, or offer help if they’re facing issues.

• Administer a feedback loop
  Seek feedback from churned customers to understand their reasons for leaving. This is invaluable data that can offer insights into areas of improvement.

• Set flexible pricing plans
  Sometimes, customers leave because they can’t afford the service. Consider offering discounts, or introducing a tiered pricing model or a “lite” version of your service.

• Minimize involuntary churn
  You can minimize involuntary churn by sending reminders about upcoming renewals, offering multiple payment methods, or automatically updating expired credit card details using services such as Stripe’s card updater.

• Introduce loyalty programs or perks
  Rewarding long-term subscribers can foster a sense of loyalty. Rewards can come in the form of discounts, exclusive content, or other perks.

• Monitor churn metrics
  By monitoring churn metrics, you can spot and address issues before they become major problems. Working with a provider such as Stripe, which offers detailed visibility into churn and helps businesses respond to it proactively, can help you monitor and act on these metrics.

• Invest in personalization
  Tailoring experiences to individual preferences or usage patterns can boost engagement. If customers feel that the service is tailored for them, they’re more likely to stay.

• Set clear expectations
  Ensure that marketing materials, onboarding processes, and customer communications clearly convey what the subscriber should expect from your service.

• Engage in community building
  Fostering a sense of community among your customers can create an emotional connection that improves customer loyalty. Businesses can achieve this through forums, webinars, and social media groups.

• Conduct exit surveys
  When customers do decide to leave, ask them to fill out an exit survey so you can understand their reasons. Then use this feedback to fine-tune your strategies.

• Implement win-back campaigns
  Target churned customers with special offers or new features to entice them back. Because they’re already familiar with your service, the acquisition cost is often lower than that of acquiring a new customer.

Whichever tactics you choose to use for your business, reducing subscription churn requires a combination of preemptive and reactive strategies. By refining these strategies based on feedback and data, businesses can fight churn—generating sustained growth and profitability in the subscription space.