One (if not the most) agonizing problem for business owners—especially if your product or service follows the subscription model— is customer churn. Every time a customer stops/cancels their subscription with you, their lifetime value or profitability declines. Even the most in-demand industries don’t get perfect retention stats. This leads to the often-asked question: is reduced churn even possible?

Do check out the following research findings:

  • The media industry has the highest average retention rate at 84%.
  • Among US services, the financial/credit industry’s average churn rate is about 25%.
  • Telecommunications average customer retention rate is 78%.

So, yes—experiencing customer churn is normal. But though this is really part of the game, there are ways for you to reduce your customer churn rate. Dive into our blog to get free advice on customer churn reduction and what you can do to mitigate churn.

Understanding the churn game

Understanding the churn game

To put it simply, customer churn is the loss of customers or subscribers.

Often expressed as a percentage, the churn rate depicts the customers lost per period by businesses with ongoing customer relationships.

Examples of businesses that have ongoing and continuous customer relationships are SaaS, subscription box businesses, and media streaming sites. For them, churn is a health indicator metric that directly affects their recurring revenue. So they prevent customer churn from increasing to dangerous levels.

Here’s a quick step-by-step guide of how subscription-based businesses calculate customer churn rate:

  1. Choose a timeframe (usually monthly or annually) that makes sense for your business model.
  2. Get the number of customers at the beginning of the period.
  3. Also, get the number of customers who canceled or unsubscribed during that period.
  4. Find the net change in customer count for that period.
  5. Divide the number of cancellations by the initial number of customers and multiply the result by 100 to convert to a percentage.

For instance, if you have 1000 customers at the start of the month and 50 of them cancel their subscriptions a month later, 50/1000 = 0.05. Your churn rate is 5%.

2 types of customer churn

For a more thorough understanding of a churn rate’s impact, it’s essential to delve deeper into the different types of customer churn that businesses encounter. Broadly speaking, churn can be categorized into two main types: voluntary churn and involuntary churn.

Voluntary churn

This occurs when existing customers actively choose to discontinue their relationship with a company. When it hits, its effects can be twofold.

First, it represents a loss of revenue from the lost customers. Second, it reveals that there are most probably underlying issues with your product, service, or customer experience.

To tackle this, it’s important to figure out the causes of customer churn. That way, you know where to put your focus on.

Involuntary churn

This type of churn happens when existing customers are involuntarily disconnected or discontinued from the service due to factors outside their control. This means they did not unsubscribe on purpose. Rather, something else caused it.

While its impact is primarily financial, it can still damage customer relationships and customer lifetime value. Involuntary churn is usually caused by failed payments—expired credit cards, maxed out credit limits, outdated information, or technical bugs. In fact, Recover Payments estimates that failed payments can cost businesses around 10% of their revenue.

In a nutshell, high churn rates hinder revenue predictability. A high churn rate also tends to use up your resources as you put in more effort to replace your lost customers with new acquisitions. The closer your churn rate is to zero, the more manageable it is.

Common reasons for customer churn

A business owner worrying about the increasing number of customers leaving and thinking of strategies to reduce customer churn

Before you fully invest in techniques and strategies to reduce customer churn, it’s important to determine the real reasons why your subscribers and customers leave you. So, what are the common underlying reasons behind churn? Let’s explore some of them:

Customers are disappointed with your support.

It’s disheartening if you find out that feeling undervalued and unsupported is one of the main reasons why customers churn.

If existing customers or subscribers encounter indifference, incompetence, or unavailability, they can list it down as a negative experience. Having a number of poor experiences can then drive them to explore solutions where their concerns are taken more seriously. The primary driver behind churned customers, accounting for nearly 70% of cases, is attributed to subpar service quality rather than product-related issues in most companies.

Also, let’s talk about your technical support. While all products have hiccups, if customers perceive these bugs as symptoms of deeper systemic issues, they may be quick to look for alternatives that offer a smoother and more reliable experience.

Your product isn’t fulfilling its promises.

The most probable reason why a customer purchases something or signs up for a subscription service is because they found it valuable—whether driven by their preference, pain point, or need. But once the product or service starts failing to meet their needs fully, customers are bound to feel let down and look for alternatives elsewhere.

Your subscribers have already outgrown your product/service.

Frustrated subscriber using a SaaS service on a computer or laptop

As customers grow, so do their needs. If your product or service fails to evolve alongside their needs, they may feel it’s outdated. Then even your most valuable customers may be compelled to look for alternatives that better cater to their current requirements.

Small businesses can easily grow and scale. That’s why you’ll notice some subscription SaaS businesses have various pricing tiers that are recommended for individuals, small teams, and enterprises. If you don’t have these options or plan options, there’s a big chance that your subscribers will eventually need to find an alternative that fits their business better.

You had a price hike.

Price increases are often necessary for business sustainability. But there’s no need to be aggressive about it. It’s essential to approach this change with sensitivity to customer concerns. Implementing price hikes too fast might rub them the wrong way.

If and when you plan to increase your prices, make sure to send out advanced notices and be open to receiving inquiries or feedback about the planned changes.

Customers are now shifting priorities.

Every milestone in life brings a reshuffle of priorities. For example, a new parent may find themselves with less free time and more limited income as they adjust to the demands of parenthood. During such times, non-essential expenses like subscription services might get cut first as they reprioritize their spending to fit their new lifestyles. While this is something you cannot control, it’s still a valid reason for customer churn.

It may be involuntary—payments just didn’t get through.

Involuntary churn as a result of failed payments

Failed payments are a major friction point for subscription businesses. After all, when the payment fails, it often leads to the forced churn of that subscriber plus a decline in recurring revenue.

Important note: This is involuntary churn in the sense that customers don’t necessarily want to cancel. However, they still end up getting cut off when their payments don’t go through. It’s recommended to hire your very own payment recovery team that will proactively implement strategies to recover your monthly lost revenue.

Check out this article to learn more about the concept: Involuntary Churn: Main Reasons And How To Prevent It.

Can you predict customer churn?

Marketers trying to analyze churn and customer attrition by looking at data on customer churn, customer loyalty, and customer base.

The answer is both a yes and a no.

It’s a yes because there are various indicators and tools to help you predict customer churn. There are Customer Satisfaction (CSAT) and Net Promoter Score (NPS) indices, which gauge overall satisfaction and the chances of recommending a product or service, respectively.

Additionally, there are specialized churn prediction tools that use deep algorithms and machine learning models to analyze historical data and customer behavior for forecasting churn. Monitoring customers’ payment patterns and assessing their Lifetime Value (LTV) also provide valuable insights into their customer engagement, and tendency to churn.

But here’s why it’s a no. Accurately predicting which customers will actually leave is extremely challenging. It’s because churn often results from customers’ subjective perceptions and emotions. In reality, there are just too many unpredictable variables that affect each individual.

While it’s definitely possible for companies to spot trends and patterns, this doesn’t predict how each customer evaluates the perceived value of your product or service. Two customers who appear identical on paper can make completely different decisions about loyalty. While businesses can access churn data, it’s still up to them how to make use of these insights and what strategies to implement.

In essence, here’s what you need to remember: While advanced analytics provides insights into churn risk patterns, ultimately, churn prediction is rarely 100% reliable. However, reducing churn is very much possible and realistic.

8 ways to reduce churn

Marketers brainstorming on how to reduce customer churn

Even though churn rate is 100% unpredictable, the fact remains that subscription businesses must proactively act to reduce customer churn. Presented below are some highly effective methods companies can employ to prioritize proactive customer service and lower churn rates.

1. Optimize customer onboarding 

Onboarding is still part of the customer journey. However, a poor onboarding process can leave new customers and subscribers confused, overwhelmed, and more prone to churn. That’s your potential subscribers leaving even before realizing the full benefits of your product.

Optimizing the customer onboarding process and experience makes it easier for customers to become proficient with the product and understand how it can help them. More than half of customers would actually stop using a product or service if they have a hard time understanding it. On the other hand, well-onboarded customers can be the next champions of your brand and most valuable customers over time.

2. Improve customer service

For the nth time, you’ll hear this—providing exceptional customer service is key for striving businesses that want to focus on customer retention and customer loyalty.

In fact, more than seventy percent of business leaders emphasize the importance of personalized support experiences when it comes to customer retention. This is primarily because good customer service or employing a customer success team is a smart strategy for churn rate reduction. If there are service problems, quick problem resolution can turn frustrated customers into loyal supporters.

Key takeaway: It’s important to deliver outstanding customer support to further strengthen your subscribers’ emotional connections to your brand. When service is a competitive differentiator, churn becomes much rarer.

3. Create specialized offerings for key customer segments.

Here’s the thing—you can’t be everything to everyone. As with most things, there’s no one-size-fits-all type of solution, or product, or service.

So what should you do? Learn to prioritize. A good churn rate reduction strategy is to tailor products, loyalty programs, and pricing to target customer segments. The goal is to fit the value proposition as closely as possible to what the most profitable groups want. 83% of consumers say loyalty programs influence their buying decisions. For instance, enterprises with lengthy purchasing cycles may prefer extended contract options. 

4. Constantly enhance your offering.

One of the most effective ways to lower and prevent customer churn is to continuously expand on your core products and services—like introducing new features or improving the user experience. Stagnant product lines fall behind changing customer needs plus competition that constantly innovates—but frequently upgrading and adding capabilities will continue to keep customers engaged.

You can even include your customers in this process by conducting surveys or regularly asking for customer feedback, on their experience so far.

5. Make leaving difficult.

A little and thoughtful friction to increase the difficulty of leaving can also be an effective tactic.

Here’s what I mean—implement multi-year contracts, early termination fees, and minor complexities in the cancellation process. The psychology is to give customers a pause before totally abandoning long-standing relationships. 

6. Remove friction from billing.

Abandoned carts average 69.57 Percent. One reason could be confusing billing systems. When the invoicing and payment process feels complex, it makes it hard to trust the provider.

Streamlining and simplifying billing helps mitigate churn that occurs specifically because of this reason. Tactics could be as simple as making it easy for customers to update billing info. Additionally, enabling seamless plan upgrades and downgrades optimizing the overall billing experience.

7. Hold regular success check-ins.

Often customers won’t take the initiative to reach out about frustrations until they are already seriously considering leaving.

So, proactively communicating with customers doubles a good strategy to reduce churn rate. You get opportunities to assess their satisfaction rate, and you also get early visibility into issues that could cause churn. When followed consistently, they encourage open dialog so problems surface before churn triggers. 

8. Avoid failed payments.

Payment failures are a major cause of involuntary churn—but it’s not the be-all and end-all.

When recurring subscriptions or installments cannot be successfully processed, it directly results in subscriber cancellations. Adopting an automated dunning management software solution can help mitigate this form of churn and recover both failed payments and the churned customers. The key is to complement the software with a failed online payment recovery specialist (like from the Recover Payments team) to streamline revenue recovery and thus minimize churn.

Don’t let customer churn take over your business

Today, where customer retention is non-negotiable, churn mitigation has become a critical priority for subscription-based businesses. Yes, customer churn will always be part of the subscription business cycle, but there are many ways of both reducing customer churn and its likelihood as well as retaining customers.

The eight actionable ways we presented here can help you minimize this specific metric impacting revenue and growth. If you notice that a large percentage of your customer churn is due to failed payments, then it’s time to take action before this fully jeopardizes your business growth. Talk to the Recover Payments team so you can start taking control of your revenue and retention efforts today.

We take the time to understand your unique business needs and tailor our strategies accordingly. Book a free consultation, and together let’s turn failed payments into opportunities to ensure the long-term success of your business.