For subscription-based businesses, it’s challenging to determine how to win and retain customers to grow revenue. Before you map out a strategy, you first need to understand how you’re performing with your current customers. This includes looking closely at customer churn rate.

Churn rate is an important business metric that indicates which customers are leaving and why. Here’s what subscription-based businesses of all stages need to know about churn rate: types of churn, the connection between churn rate and business health, the difference between voluntary and involuntary churn, and a comprehensive set of tactics you can use to retain as many customers as possible.

What’s in this article?

• What is churn rate?
  
• Types of churn
  
• How to calculate churn rate
  
• Churn benchmarks
  
• Why churn rate matters
  
• How to reduce churn
  
  • Voluntary churn
    
  • Involuntary churn
    

What is churn rate?

Churn rate, also known as attrition rate, is tracked across multiple industries. It’s typically expressed as the percentage of total customers who discontinue using a product or service during a given period of time. For subscription businesses, churn rate is the rate at which customers cancel or stop paying for a subscription service.

Types of churn

Because a customer might end their relationship with a business for a variety of reasons, churn is categorized in different ways. There are several types of churn that can affect subscription businesses, including:

• Voluntary churn
  Voluntary churn occurs when a customer chooses to cancel their subscription. This type of churn can be caused by low perceived value, poor customer service, or a lack of functionality.

• Involuntary churn
  Involuntary churn occurs when a customer’s subscription is canceled due to a failure to pay, such as a credit card expiration or a change in billing information.

• Downgrade churn
  Downgrade churn occurs when a customer chooses to downgrade their subscription, moving from a more expensive plan to a less expensive one, or from a more feature-rich plan to a less feature-rich one.

• Upgrade churn
  Upgrade churn happens when a customer cancels their current subscription and moves to a more expensive or feature-rich plan with another company.

• Seasonal churn
  Seasonal churn is customer attrition that occurs due to seasonal factors such as holidays, weather patterns, or other regular events. For subscription businesses, seasonal churn can majorly impact their customer base and overall revenue.

Because different types of churn are connected to different business issues, and often completely different customer segments, it’s important for businesses to understand which types of churn are occurring, and at what volumes, within their customer base. This information could significantly impact their strategy for mitigating customer churn.

How to calculate churn rate

There are different ways to calculate churn for subscription businesses, including monthly vs. annual churn or gross vs. net churn.

Gross churn measures the number of customers lost during a specific period of time—usually a month or a quarter—due to subscription cancellations or nonrenewals. Some businesses prefer to use net churn, which measures the overall change in revenue during a period of time as a result of customer cancellations (churn) and upsells or expansions within the existing customer base. Net churn demonstrates the financial impact of churn, while gross churn focuses more on churn as a customer behavior.

Additionally, churn rate can be calculated for various types of customers, such as subscription-based customers, mobile app users, or even employees in a company.

There are several ways to calculate the churn rate for a subscription business, but a common method uses the following formula:

Churn rate = (Number of canceled subscriptions in a given period / Total number of subscriptions) x 100

For example, if a business had 100 total subscriptions and 10 of them were canceled in a given period, the churn rate would be 10%.

Another common formula for calculating churn rate involves the total number of customers at the beginning of the period, rather than the total number of customers overall—which might be different:

Churn rate = (Number of canceled subscriptions in a given period / Number of subscriptions at the beginning of the period) x 100

Whichever churn rate formula you choose to use for your business, it’s important to measure churn rate for a consistent time period—whether that’s monthly, quarterly, or annually.

Churn benchmarks

Tracking how your own business’s churn rate changes over time is typically the most actionable approach. However, it can also be helpful to compare your company’s churn rate with churn benchmarks for your particular industry, especially if your business is an early-stage company or is scaling its operations—which can change how your business functions, what you sell, how you approach customer acquisition and retention, and what the customer experience looks like. Tweaks in any of these areas can affect churn, so it’s important to watch churn benchmarks closely during times of growth.

Focus on churn benchmarks for your specific industry or business model, since churn rates can vary widely depending on who the customers are and which goods or services are offered. And sometimes it’s most useful to limit the comparison to just your direct competitors. For example, a subscription service for a SaaS product that affects how a whole category of businesses operates is likely to have a lower churn rate than, say, a meal prep subscription service.

Here are some general churn rate benchmarks for different types of industries, expressed as monthly percentages:

• Media and entertainment: 20%–30%
  
• Online retail subscriptions: 15%–20%
  
• Fitness and wellness: 10%–15%
  
• SaaS (software-as-a-service): 5%–7%
  
• Telecommunications: 2%–5%
  

Different types of churn—voluntary, involuntary, downgrade, upgrade, or seasonal—might also have different benchmarks.

Deciding which churn goals to set and benchmarks to compare might be as important—and as complicated—as deciding how your business will reduce churn. You have to consider multiple variables before agreeing on a set of churn benchmarks, and it isn’t a simple process.

Why churn rate matters

Churn rate is an important metric for subscription businesses to monitor and manage, as it can inform data-driven decision-making and have a significant impact on revenue, growth, and forecasting. The extent of this impact depends on three things for any given business:

• Which aspects of churn it tracks
  
• How diligently it looks for trends over time
  
• How consistently it acts on insights gleaned from the churn data
  

For example, a sudden increase in churn rate could indicate a problem, like a product bug or an automated billing error. A high churn rate might be a sign of deeper issues with the customer experience, such as low perceived value, poor customer service, or missing functionality. High churn can also make it more difficult and expensive to acquire new customers to replace those that have canceled.

By identifying the underlying causes of churn, a business can take action to improve retention and reduce the rate of customer cancellations, which we’ll explain further below.

A high churn rate can also make it difficult to forecast future revenue, which can make it challenging for the business to make strategic decisions. Subscription-based businesses rely heavily on predictable revenue streams, and forecasting is important for financial planning and budgeting.

In contrast, a low churn rate is a positive indicator of customer satisfaction and loyalty, which can boost revenue and lead to growth. If you have a low churn rate, you can feel reasonably confident that you are attracting the right customers and delivering a satisfactory experience.

A low churn rate makes it easier to anticipate your business’s financial prospects and plan for future growth. While a high churn rate demonstrates volatility, a low churn rate means you can more reliably count on recurring revenue and have confidence in your current set of growth tactics.

How to reduce churn

Identifying the root causes of churn can help businesses take action to improve retention and reduce the rate of customer cancellations. While there are many possible root causes—with each one requiring a different set of solutions—there are a few strategies and tactics that most businesses struggling with high churn should invest in.

At a high level, businesses should improve the customer experience by providing exceptional customer service, regularly updating and improving their service offerings, and offering incentives or rewards to encourage customers to continue their subscriptions. It’s challenging to create a customer experience that results in minimal churn, but it’s doable with thoughtful planning and by examining key metrics.

Other tactics are relevant for all types of churn, like having a well-thought-out pricing model or building an analytics practice to identify patterns in customer behavior. Businesses should be doing those things, no matter what their churn rate is. But different types of churn might require different strategies to improve the churn rate. For example, businesses could address voluntary churn by improving the customer experience, while they could decrease involuntary churn by implementing better billing and payment processes.

Voluntary churn

Here are strategies that businesses can use to reduce voluntary churn, which occurs when a customer chooses to cancel their subscription:

• Provide exceptional customer service
  Responding quickly and effectively to customer inquiries and complaints can improve customer satisfaction and reduce the likelihood of cancellations.

• Improve the product or service
  Regularly updating and improving product or service offerings, adding new features or functionality, and responding to customer feedback can increase the perceived value and improve retention.

• Create a customized customer experience
  Personalized recommendations and communications tailored to specific customer segments or buying behaviors contribute to a more personally relevant and fulfilling customer experience, which can increase customer engagement and loyalty.

• Conduct customer surveys
  The most direct way to find out how to keep your customers happily engaged is to ask them. Surveys can produce valuable qualitative and quantitative data that complements other analysis from your customer metrics–tracking operation. Customer feedback can provide insight into what they like, what they dislike, and which changes they would like to see.

• Provide incentives or rewards
  By offering incentives or rewards for continued use, such as discounts or other special offers, businesses can encourage customers to stay with their service.

• Implement a win-back program
  Losing a customer doesn’t have to be permanent. In addition to rewards for loyal customers, businesses can create targeted campaigns to reach out to lost customers, offering them incentives or discounts to reactivate their subscriptions.

• Offer free trials
  Your customer retention strategy should be fully end-to-end—not just aimed at staving off churn. Make sure the beginning of their relationship with your company is as positive as possible. Giving potential customers the opportunity to try the service before committing to a subscription can increase their likelihood of becoming a paying customer.

• Consider seasonality
  If your churn rate is heavily affected by seasonal trends in how your products or services are used, you can take steps to minimize the negative impact on your customer retention and annual revenue. To mitigate the impact of seasonal churn, fitness subscription businesses could offer special promotions or incentives during the winter months to encourage customers to continue their subscription. They might also adjust their marketing strategies to emphasize the convenience and comfort of working out at home during the winter months.

Involuntary churn

Involuntary churn, which occurs when a customer’s subscription is canceled due to a failure to pay, can be reduced by implementing better billing and payment processes:

• Set up automatic billing and payment
  By automatically charging customers on a recurring basis, businesses can reduce the likelihood of missed payments and cancellations. Solutions like Stripe Billing reduce churn using Smart Retries, automated failed payment emails, and an automatic card updater, helping businesses recover 38% of failed payments on average.

• Address failed payments quickly
  When failed payments do happen, Stripe has flows built in to quickly remedy the situation. However you’re handling billing for your business, it’s important to address failed payments as quickly as possible for the best chance of resolving the issue and reducing cancellations.

• Offer flexible billing options
  Dynamic billing models are an incredible asset to subscription-based businesses, with particular advantages in reducing churn. By offering flexible recurring billing options, such as annual or semi-annual payments, businesses can reduce the likelihood of involuntary churn. Stripe Billing offers flexible billing logic for everything from per-seat pricing to metered billing, including support for coupons, free trials, prorations, add-ons, and overages.

• Send payment reminders
  Sending customers payment reminders can increase the likelihood of on-time payments and reduce the likelihood of cancellations. Stripe Billing offers automatic payment reminders, so your team doesn’t have to manually set them up.

• Accept as many payment methods as possible
  Ensure you can accept a diverse range of payment methods, especially those preferred by your key customer segments. Stripe’s payment solutions are widely customizable to minimize billing-related churn.

• Give customers a self-service portal
  By providing a self-service portal, you can enable customers to update their billing information and make payments easily, reducing the likelihood of involuntary churn.

• Implement a churn prediction model
  Churn prediction models enable businesses to identify and target customers who are at risk of involuntary churn and then take steps proactively to retain them.

Churn rate constantly shifts due to numerous aspects of the business and the market in which it operates. Businesses should regularly review their churn rate, analyze customer feedback, and test different strategies to find the most effective ways to reduce churn—and part of that includes supporting their team’s internal efforts with the right resources. Learn more about Stripe Billing and how it reduces churn for subscription-based businesses.