What is Subscription Churn?
Subscription churn is the number of active subscribers who stop paying for your product over a given period of time. How churn is calculated can vary from one business to another based on what the business considers to be relevant.
What is Subscription Churn Rate?
Subscription churn rate is derived by calculating the number of customers who cancel their subscription over a given period of time. The basic formula for calculating churn is:
What are Physical Product Subscriptions?
These days there are different kinds of subscriptions on the market.
There are digital subscriptions (like Netflix and Spotify), SaaS subscriptions (HubSpot, Canva, Google Analytics), membership subscriptions (like Gym and other wellness clubs), box subscription (like HelloFresh, Dollar Shave Club) and product-as-a-service (like car, e-bikes, scooter, baby strollers, equipments etc). Needless to say, physical product subscriptions are vastly different from other subscription business models mainly because of two reasons:
- There is an actual exchange of and access to a physical/tangible product.
- The product has a longer duration of use and lasts a while (durability aspect)
What Leads to Churn in Subscriptions?
Why are your customers going away from you? When it comes to subscription churn it’s important to identify the reasons why a subscriber leaves aka churns. Once you know what are some of the reasons why your subscribers leave you can act up with strategies to reduce your churn rate.
Additionally, identifying subscriber churn reasons can help you identify whether or not you should do something about the churning subscribers. When it comes to churn, it's important to know where you should be putting your focus and where not or in other words what kind of churn is worth the attention and what is not.
Three major categories of churn
Churned subscribers can be easily put into three major categories - voluntary churn, involuntary churn and seasonal churn. While there may be other broad categories specific to different types of product subscriptions the majority of subscription churn can be placed into voluntary, involuntary and seasonal churn.
As the name suggests, voluntary churn is when the customer decides to leave actively and as a result of their own free will. Voluntary churn often (not always) indicates towards an underlying problem
Involuntary churn can be rather complex to figure out and understand especially when the customer doesn’t communicate or fill out a survey at a later point to help you understand why they are living. Involuntary churn is mostly a result of payment failure but there are also other reasons like Ahem!! Cough!! Cough!! Laziness of the customer.
Nonetheless, when it comes to involuntary churn, making yourself aware of some of the reasons for involuntary churn can help you prevent some of it better. Additionally 20-40% churn is usually from involuntary churn and the striking truth is that most of it is avoidable and is in fact easy to deal with.
People tend to rent products instead of buying them when they need them for a shorter duration of time. While that’s a big plus for companies who have a subscription products it also means that when the product is not needed anymore the same customer might want to get rid of the product for the same reason that the customer decided to rent it in the first place - that is to free up space occupied by products that are not needed year round.
Let’s understand the reasons for churning subscribers with some examples.
Let’s assume a prospect subscribed to a Baby Stroller on a monthly basis for the duration of 1 year and becomes a customer. At the end of the subscription period the customer does not renew the subscription and hence ends up churning. What do you think are some of the reasons that could have lead to this:
- Voluntary churn - The customer doesn't need the baby stroller anymore because the baby grew up and doesn’t use a stroller.
- Voluntary churn - The customer is not actively using the stroller anymore and doesn't want to keep paying for it anymore.
- Voluntary churn - The customer is not using the stroller anymore because of lack of knowledge on how to use it. (i know it’s a bit strange to think that a customer doesn't know how to use a baby stroller but your subscription product may be complicated to use and hence result in churn from lack of knowledge on how to use the product best)
- Voluntary churn - The customer is not satisfied with the product and wants to end the subscription as a result of dissatisfaction.
- Seasonal churn - it’s cold outside and a stroller is not required anymore.
- Involuntary churn - The customer saw a charge of their payment detail (credit card or bank account) and couldn't associate it to anything (basically the customer forgot that they had a subscription running)
- Involuntary churn - The customer doesnt remember that the subscription period ended and therefore did not extend it.
- Involuntary churn - The customer doesn't like the subscription extension process because there is way too much back and forth communication between the vendor and the customer and the customer just doesnt have the time to go through the extension process.
- Involuntary churn - Payment details of the customer changed over time and as a result the customer doesnt want to extend the subscription as it requires time and effort from their side to extend the subscription.
Bottom line as you can guess, the reasons why customers churn can be as many as there are languages in this world.
Overall what you need to remember is a customer will churn for whatever reasons plus anything that makes the customer put in effort that they think is unnecessary and takes up too much time
Susbcription Churn Solutions: How to Prevent Churn in Subscription
The biggest problem when it comes to subscription churn is knowing which reason is responsible for which churning customer. If customers don't fill out a post-purchase survey (which they of course don't because it takes too much time and effort and mostly depends on the mood and circumstances that the customer is in when they receive such requests from the vendor) the vendor is mostly left to guesswork.
Nonetheless, despite all the guesswork, there are a few guiding principles for subscription churn that can be leveraged to counter at least some of the reasons.
1. Subscription Renewal and Auto Renewal
Subscription renewal looks something like this:
- Customer orders a product on your website
- You get the order and create a subscription for it by setting a subscription start date and the subscription end date is set, based on the minimum subscription duration
- A record is generated within the payment service provider to charge the customer on a set date every month.
- An invoice is generated automatically every month and sent to the customer. The payment is collected automatically.
- When the minimum subscription duration is over, the customer is sent a “subscription is ending” email.
- If the customer doesn't send the product back, doesn’t actively cancels the subscriptions or agrees to extend the subscription, auto renewal kicks in.
- The customer is then charged every month until the customer cancels the subscription.
A way to counter customer churn is auto renewal. But it is crucial to approach auto-renewal from both a legal and ethical perspective. Auto renewal or automatic renewal is when a paid subscription of your product or service is automatically renewed at the end of a definite term for a subsequent term.
In other words it is a billing model where the customer’s payment details (bank account, credit card, payment account) are automatically charged without or with minimum action from the customer.
Important aspect here is, WITHOUT ANY ACTION OR MINIMUM ACTION FROM THE CUSTOMER.
Common practice when it comes to subscription auto-renewal is to send a transactional email to the customer before the end of the subscription period. Let your customers know that their subscription is ending soon and if they would like to continue it, they don't have to do anything and if they want to cancel it then they can easily do so, by pressing a button.
Now, it’s of course up to you how the email looks and what it says to make sure that when a customer is put in a position where they actively have to think about whether or not they want to extend, they decide with the outcome that’s in your favor i.e. extending the subscription.
2. Transactional communication
Most customers agree that they like to be kept informed about their purchases and subscriptions and appreciate a transparent flow of communication between them and the vendor. With automated transactional communication you can keep the customers informed about various aspects of their subscription such as billing, any additional charges, invoicing, ending subscription dates and so on.
One major reason for involuntary subscription churn is when the customer can't recall the reason for a charge on their credit card and they treat it as fraudulent activity. The hassle of sorting that mess out is a tedious process and mostly ends in the vendor losing the subscriber. Therefore it is important that before the charge takes place, your customer knows that a charge is going to happen soon or has happened. This can be easily achieved through a dedicated communication process for transactional communication.
In the circuly operations backend, transactional communication takes place as a result of certain activity triggers and are completely automated.
3. Customer Login Area
Most digital subscription companies offer a dedicated login area to the customers where they can manage their subscriptions. This also helps the customer to be in control and incharge of their own purchases and subscriptions and not feel vulnerable at the hands of the vendor. Needless to say complete transparency builds trust and adds value to the experience that the customer has with your product. Since majority of involuntary churn results from changed or outdated payment info, a dedicated customer login area prevents churn by providing an opportunity and area to the customer where they can freely update their payment info whenever they want and don't have to communicate with your customer support for such small things.
Believe it or not, giving more control to your customers is a good thing. It not only takes the burden off of your shoulders but builds trust. One thing everyone hates about subscriptions is the inability to leave and the unethical practices of vendors in regard to cancelling subscriptions. Make it easy for your customers to leave when they want to. If your customers want to leave, that doesn't necessarily mean that they did not enjoy using your product. Most likely their circumstances changed
4. Flexible Subscription Operations
Preventing subscription churn mostly boils down to having flexible subscription operations. There’s always a new situation arising left and right when it comes to B2C subscription business models. Even though subscriptions business models are vastly different from e-commerce business models in terms of operations and processes involved, the customer still expects a certain level of quickness and standard. Common subscription operations that can help tackle churn as a result of operational hassle are the following:
4.1 Swap/Replace broken products with minimum effort
The thing about physical products is that they can break down. And most of the time customers are not monsters and understand that things like that can happen. If they still want to use the product, chances are that they are most likely to ask you for a replacement product. Now it’s one thing to say that “i want to replace a product” and a completely different process when it comes to actually making the swap. Picture this:
Product is broken > Customer contacts you for product replacement > You process the swap > customer gets the new product > customer sends the broken product back > You deal with the broken product
That would be a perfect flow. But what could lead to subscription churn is when the customer has to create a new order to get a new product because your subscription operations process doesn't allow you to simply retain all the customer data and just swap the broken product with a new replacement product.
When a product breaks down it should be easy for the customer to get a replacement plus it should be easy for you as a vendor to replace the product.
4.2 Adjust Subscription Duration
Subscription products often have a minimum subscription duration to cover the cost of goods sold plus any other logistics costs of top. After the minimum subscription duration is over the customer is basically free to either cancel the subscription or extend it.
When a customer wants to extend their subscription, typically subscription companies tend to create a new order because they don't have a system in place that can extend a subscription, and retain existing customer data. In short, the system is not smart enough to recognise that this is the same customer with the same customer data (address, contact details etc), payment data (credit card and/or bank details) and product data (products under subscription, serial number, name SKU etc). And specially for subscription companies its crucial to retain such data because of important KPI measurements like customer lifetime value, Average Revenue per User, Customer Acquisition Cost and so on. Moreover asking the customer to just order again for a new subscription is a sure way of fueling the fire of subscription churn.
4.3 Adjust Recurring payments
A typical situation in subscription products is upgrading or downgrading a product and sometimes even adjusting the amount of a recurring payment. It is common to do so to avoid seasonal churn. Customers tend to subscribe to products instead of buying them because they can return the product when they do not need it and subscribe again if/when they need it. Incentivising your customers during non season periods is a common practice in product subscription business models. Even though this practice results in revenue churn, it helps to avoid customer churn and revenue churn which would happen if the customer returns the product during a non season period.
4.4 Charge One-Time Transaction
Many subscription based business models (mobility, equipment etc) have to often charge one-time transactions to their customers. For example car subscription companies often have to charge speeding tickets or parking tickets to their customers. Another example would be when a customer reports something broken as a result of their own negligence and wants you to fix it so that they can continue using the product. Running after your customer to pay up their invoices, sending multiple reminder emails leads to nothing but the customer being annoyed and having a bad experience. To avoid that, you should have the possibility to charge one-time transactions automatically without annoying your customers.
Understanding churn is crucial. As a vendor it is important to keep an eye on it actively. The reasons for churning customers will vary from one business type to another and therefore the actionable solutions will also be different. Bottomline is that you need to have some starting point or some lens to look at churn. Once you have that, it’s trial, error and learn.