Churn rate is how quickly you’re losing customers, so it’s super important to know this number. We’re going to show you how to plug in these hidden money leaks and skyrocket your company’s revenue.
Here’s a fact of life. Your customers will come and go.
That’s just the nature of the game. You win some, you lose some.
It would be an amazing perfect world in which everyone who signed up for a subscription stayed on and paid you forever. But that’s just not gonna happen. Maybe one of your customers never updated an expired credit card, and “pouf!” just like that, they dropped off your subscription just like that.
This is to be expected. That’s not to say you shouldn’t scrutinize over trying to maintain long term relationships with your customers, that’s still super important. We’re just saying customers might stop using your subscription.
In this article, we’ll cover everything you need to know about churn rate. We’ll explain why it’s the single most important metric you should focus on when running a subscription company.
We’ll cover customer & revenue churn rate, so stay tuned for how to calculate these and figure out where you stand.
- What is Churn Rate?
- How Quickly are you Losing Customers?
- Customer Churn Rate Calculation
- Revenue Churn Rate Calculation
- Know Your Annual Churn Rate
- What is a decent churn rate?
- Impact on Subscription Business
- How can I monitor my churn rate?
- Why is churn rate important?
- Why do Customers Unsubscribe?
- How to Reduce Churn Rate with Customer Retention
- Are you tracking churn?
What is churn rate?
Churn Rate is when customers cancel, leave or stop using your service.
This is the percentage at which customers are leaving/cancelling.
Are you losing 5% or 15% of customers? Big difference.
If you run a subscription business, this means customers are canceling their subscription for a given period.
This ends their recurring payments which results in less profit for the subscription company.
Customers who “churn” mean they are no longer your customer. They are inactive. All of your cancelled subscriptions are churned customers.
Keeping an eye on churn makes the difference between a thriving or failing subscription company.
You can monitor churn rate to keep track of your progress and see if there are any spikes or declines in revenue or users.
For example, let’s say a company was making $10,000 MRR (monthly Recurring revenue) and they experienced 5% churn. This would mean a loss of $500 per month or $5000 annually.
If you’re trying desperately to keep users on and stay subscribed, churn can negatively impact your subscription business more than anything else.
Reducing your churn rate can help you subscription business grow and earn more revenue.
How Quickly are you Losing customers?
There are two ways to calculate churn rate, one is a percentage and the other is revenue.
Ever heard of the leaky bucket analogy?
Imagine a bucket with holes in the bottom. Even if you pour lots of water into this bucket, the water is just going to fall out the bottom.
The same applies to churn.
Losing customers are the holes in your bucket.
Losing customers is normal and to be expected, but the goal is to lower this number as much as possible.
The goal is to reduce churn, limit the amount of holes in your bucket. It’s hard to make money if you are constantly losing paying customers.
Customer Churn Rate Calculation
If you predict what your churn rate is currently, this will give you a good idea of what it will be for the following month.
Churn rate prediction helps you stay in control of your finances and customer stats.
You can figure this out with a simple calculation.
(# Subscribers Cancelled Last 30 days / # Active Subscribers 30 Days Ago) x 100 = Customer Churn Rate
For example, let’s say we started out with 300 active subscribers, and 50 subscribers cancelled.
(20 / 300) x 100 = 6%
The customer churn churn would be 6% .
This means that 6% of your total customers which you had one month ago cancelled their subscriptions in the last 30 days.
Revenue Churn Rate Calculation
Revenue churn lets you know how much revenue you are losing during a set period.
Revenue churn is similar to customer churn rate, but instead of looking at the amount of users lost — it shows you lost revenue.
In fact, revenue churn is actually arguably more important. Seeing where you could potentially be losing money is crucial for scaling your business.
Focusing in on revenue churn enables you to grow your profit from recurring payments made by selling subscriptions.
Revenue churn also can uncover any issues you have with customers cancelling frequently or downgrading their plan which all contribute to loss of revenue.
(MRR Lost Last 30 Days / MRR Last 30 Days Ago) x 100 = Revenue Churn
For example, let’s say my MRR (monthly recurring revenue) was $20,000 and I lost $500 in the last month.
(500 / 20,000) x 100 = 2.5 %
The revenue churn would be 2.5% .
Know Your Annual Churn Rate
If you have an annual subscription plan, you’ll want to calculate the annual churn rate.
Annual churn rate is similar to the regular customer churn rate formula except you just replace the 30 days with 365 days.
(Customers Lost Last 365 Days/ Customers You Had 365 Days Ago) x 100 = Annual Customer Churn Rate
For Annual Revenue Churn, again you would just replace 30 days with 365.
(Annual Recurring Revenue Lost in Last 365 Days/ Revenue Earned 365 Days Ago) x 100 = Annual Revenue Churn
This would give you the annual revenue churn for your subscription business.
What is a decent churn rate?
According to Bare Metrics, a decent churn rate is between 4 to 7 %.
This means you will be able to make a “come back” and turn your company around if your churn rate is somewhere in this range.
User churn is different than revenue churn.
Bare Metrics did some studies on churn rate and uncovered the average user churn rate is between 5-8% while revenue churn is between 6-9%.
These averages are acceptable and are common.
The goal is to to get your churn rate as low as possible.
Having it as close to 0% helps you earn more revenue.
✅ GREAT! Up to 7%
🔶 OKAY: 8-10%
‼️ BAD: 11 -15 %
🚨 TERRIBLE! 16-20%
Impact on Subscription Business
Churn rate is an excellent performance indicator, and reveals the true health of your subscription business.
A high churn rate eats away at your profits and equals lower revenue. This means your high churn rate can negatively impact your MRR (monthly recurring revenue). If your customers are leaving your service, you are losing money.
Since subscriptions generate recurring revenue, when you lose a subscriber, you aren’t just losing a one time sale, you’re losing a life-time customer. You are missing out on years and years of automatic repeat orders.
A high churn rate indicates an issue with customer retention.
Customer retention is how well you are able to keep a customer a paying customer.
If your company has poor customer retention, then you’re going to suffer from high churn rate.
It can also lower the customers’ LTV (life time value).
If you are losing customers quickly, this means you have to replace them which increases your acquisition costs. Acquisition costs is how much money you have to spend to get a new customer through paid advertising.
How can I monitor churn rate?
Knowing your churn rate is useful for having your pulse on the business.
Your first inclination might be to monitor it everyday but that’s a bit overkill.
It’s best to look at longer stretches of time to notice any patterns. It’s a good idea to monitor it on a monthly, quarterly and annual basis. This helps you detect any patterns in wins with customer retention campaigns. If you see a spike in customer retention and a dip in customers lost, this means you’re doing something right.
Why is churn rate important?
Your churn rate is not just a number. It signals quite a lot about the health of your business.
You can use your churn rate calculation for deeper insights.
A customer who signs up as a subscriber is committing to being a paying customer forever. This is a long-term relationship which needs to be nourished. This person is going to be loyal to your company and is easier to up-sell to. Your current customers are a great source of potential for upgrading their plans, or cross-selling other products to them. They can also tell their family and friends about your service if they are happy with the product.
However, a customer who cancels their subscription quickly signals an issue. The issue might be in the on-boarding process, or in the product itself. Either way, it needs your attention. How can you improve?
When a customer leaves, that means they “churned”. This means somewhere in their subscription journey, something didn’t go right. Just remember, sometimes people leave for reasons outside of your control. We’ll cover some reasons why customers churn.
Why do customers unsubscribe?
You need to know why your customers are cancelling their subscription.
We’ll cover the most common reasons why customers might unsubscribe.
It’s good to take a peak under the hood and see customers cancel so you can overcome these challenges.
- Need a break – Customer needs a little time off from the subscription, but they plan on coming back later. They can pause or cancel the subscription with the idea of reactivating later.
- Switching to competitor – They saw a better deal elsewhere or better product and want to try that out.
- Price is too Expensive – Your price point is too high to stay on for an extended time (especially true during economic recessions for non-essential subscription products).
- Didn’t See Value – If your customers aren’t seeing value in your subscription they aren’t going to want to subscribe anymore. If they had high hopes, and the subscription product didn’t meet their expectations, they are going to leave.
- Just wanted a taste – Customers sometimes just want to try out one month of your subscription product or subscription box and aren’t going to commit long term. These type of customers will usually cancel after one month.
- Billing Issues – A huge aspect of running a subscription business is handling subscription billing. If your subscription management app bills customers improperly or too many times they are going to cancel.
How to Reduce Churn Rate with Customer Retention
Sam Walton once said, “The goal as a company is to have customer service that is not just the best, but legendary.” We agree with Sam.
There are so many wonderful subscription companies out there, so how will you stand out? The idea is to go above and beyond. Customer retention means customers are staying on as paying customers and earning you more revenue.
✅ Customers are Family – If you own a subscription business, focus all of your attention on making your customers happy. If customers are happy, everything else will work out just fine. If your customers are dissatisfied, you will have problems.
✅ Legendary Customer Service – One way to increase customer satisfaction is by having amazing customer service. We recommend offering a personalized approach. Whenever possible, if you know your customers name, use it in emails and welcome messages.
✅ Drive Down Resolution Time – Customers are more likely to stick around if you answer questions and resolve issues. Answer emails with 24 hours. Create a FAQ answering top 10 most common questions. Customers will churn if they can’t get in touch, or if problems aren’t handled properly.
✅ Offer Best Pricing – We also recommend checking your pricing to make sure that it is still a great value in comparison to competitors. If you have new competitors offering the same subscription product or service for much less, you might be losing customers this way.
✅ Look at Competitors – Forget the advice of ignore your competitors. We recommend always knowing what your competitors are up to, any new products they are launching and what their pricing strategy is.
Use this information as fuel to make beneficial changes to your subscription company.
✅ Quality Does Matter – Make sure your products are top notch and of the highest quality. If your customers feel like it’s cheap or they aren’t getting enough value, they’ll cancel their subscriptions.
✅ Don’t Forget about Marketing – You have to tell as many people as you can about your subscription product. Get the word out anyway you can. When done right, Subscription marketing can help you sell more.
Let’s recap. Offer competitive pricing, legendary customer service, and valuable products your customers can’t say resist.
Are you tracking churn rate?
We hope you see all our reasons why it’s important to track your churn rate. There is a real connection between your MRR and churn rate.
You will make more recurring revenue every month if you aren’t losing a bunch of customers to churn. Tracking this key metric of your subscription business helps you monitor performance. Keeping a finger on the pulse of your finances and overall customers stats can help you scale up and grow.
Make sure to check out the Shopify app Ongoing for subscription management and analytics.