Subscription Churn: What Is It and Why Does It Matter?

Many companies rely on subscriptions to generate revenue. As subscription-based services become more popular, even more companies have pivoted to be subscription-led.

As a result, companies that never considered metrics like monthly recurring revenue (MRR), annually recurring revenue (ARR), customer lifetime value (CLV) or subscription churn increasingly track these critical subscription KPIs.

For businesses that depend on subscriptions as a primary source of revenue, losing subscribers can, over time and in sufficient numbers, have a devastating effect. Lapsed or canceled subscriptions translate into the loss of recurring sources of revenue. This idea of subscriber loss is subscription or subscriber churn.

So, in terms of business impact, what is subscriber churn? As a key performance indicator, subscription churn indicates the return on the investments made to keep existing customers. And those investments can be significant.

One study found that it’s 5 to 25 times more expensive to gain a new customer than to keep an existing one. But holding onto existing customers doesn’t just maintain revenue streams. In addition, it also helps to attract new customers, as satisfied customers advocate for the business through word of mouth.

Clearly, reducing subscriber churn is critical to an organization’s overall success. But to find a solution, you have to understand the problem.

How is Subscriber Churn Calculated and Measured?

Some degree of subscriber churn is inevitable. But understanding what should be considered a reasonable baseline starts with a company being able to calculate churn. At its simplest, subscription churn can be calculated by dividing the number of lost subscribers over a certain time frame — usually one month — by the total number of subscribers.

It’s important to use the same calculation over the course of months and years for the sake of consistency. However, if a single month of volatility threatens the success of the business, there are likely bigger problems than just subscription churn.

So, what is a good subscriber churn rate? Of course, determining acceptable limits for subscription churn depends on the nature of the business. According to data from Recurly, churn rate varies significantly by industry:

  • Streaming Video — 10.01%
  • Education — 5.06%
  • Box of the Month — 10.54%
  • Consumer Goods — 9.62%
  • Consumer Services — 7.49%

High-Value Subscribers and Revenue Churn

Subscriber churn is a primary performance indicator, but it doesn’t tell the whole story. Specifically, it doesn’t indicate the value of lost subscriptions.

Some subscribers spend the bare minimum needed to maintain their subscriptions. In the meantime, others spend much more, such as through premium subscriptions or subscription add-ons. Indeed, when addressing subscription churn, it’s critical to identify high-value customers so they can be prioritized for retention.

With customer data and predictive analytics, companies identify high-value customers, assess their purchase-related behaviors, and predict churn within that group. Then, business teams can use all of this customer attrition analysis to ensure high-value customers don’t churn.

Based on net revenue lost over a specific time period, a key metric called revenue churn strongly indicates how effectively a company keeps its high-value customers. When revenue churn is high but subscription churn is low, the company may be bleeding high-value subscribers, such as those who signed up for a premium tier.

Reduce Subscriber Churn with Predictive Analytics

One highly effective weapon in the battle of customer retention vs. churn is predictive analytics.

Predictive analytics leverages customer data to provide key insights for marketing and customer retention efforts.

In particular, predictive analytics can identify which customers are likely to churn, why they’re likely to churn, and how the business can retain those most likely to churn.

Many companies find that predictive analytics can help them anticipate how many subscribers are likely to leave in the near future. In addition, generating predictions frequently captures new behavior trends and ensures prompt responses to changes in customers’ status. Although predicting churn on a short-term basis may seem unnecessary, users who take just one week off from a subscription are at greater risk for churn.

Predictive analytics also reveals what’s driving customer attrition. For instance, a dropoff in engagement, increased customer friction, and seasonality are all major factors in predicting likely churn.

Finally, once the reasons behind potential churn have been identified, predictive analytics can help identify the right steps to retain at-risk subscribers. For example, push notifications, email campaigns, personal outreach, and relevant promotions can be used to retain subscribers with decreased engagement.

Slash Subscription Churn with Pecan AI

Offering a cutting-edge predictive analytics platform, Pecan has helped subscription-based companies in many different industries, from direct-to-consumer products to consumer packaged goods to mobile gaming.

Contact us today to find out how we can help your company reduce subscription churn.

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