What is the Churn Rate?
“The customer’s perception is your reality.” – Kate Zabriskie.
This is exactly correct, and somehow, customer perception of your brand leads to churn. Churn is defined as the dip in the number of customers using your services over a fixed period of time. This customer attrition can be defined mathematically as follows, which is known as churn rate.
Churn Rate = (Number of customers who have unsubscribed from the services / Total number of customers) x 100
For a company that had 500 customers at the beginning of the month and 450 at the end of the month, the churn for that business will be (50/500) x 100 = 10%
Note: The churn rate is calculated for a fixed time period. It can either be weekly, monthly, or yearly.
There are a number of reasons for churn, including.
- Poor customer experience
- Payment failures
- Improper cash flow
- Market competition
- Lack of content
- The product is not of value
Based on the type of industry and product, churn can primarily be of two types.
- Voluntary churn
- Involuntary churn
Evaluating The Types of Churn Rates!
The churn rate is an essential component of a business. While some volume of churn is unavoidable, the brand needs to strive hard to keep it within acceptable limits. As per stats, the average churn rate for a subscription-based business is 5-7%. However, a churn rate of 4% is considered good.
Well, there are two types of churn!
- Voluntary
Voluntary churn is the brand’s responsibility. In voluntary churn, a customer leaves or exits from taking services of the brand for several reasons, such as a bad or invaluable product, dissatisfaction with the product, switching to a new provider, etc.
There are both bad and good sides to voluntary churn. Let me help you understand both!
The bad side of voluntary churn
The bad side of voluntary churn is that you have to plan and implement a lot of customer retention strategies to decrease customer churn, and it may still not be effective.
The good side of voluntary churn
The good thing about this is that you get to know what is causing issues for the customers. You can learn a lot from voluntary churn and make your product better.
Know more about the role of customer churn in user success here!
- Involuntary churn
In involuntary churn, the subscription business is not at fault. Here, the churn happens due to an issue on the customer’s side. It can be due to failed payment, invalid card, wrong billing address, insufficient funds, etc.
Unlike voluntary churn, it is easier for a business to manage involuntary churn.
The bad side of involuntary churn
Sometimes, the customer may forget to update their latest card information. And during the auto-renewal process, the brand may analyze your card or financial details. If found incorrect, they can cancel the subscription. This is where the churn happens.
The good side of involuntary churn
There is a term called Customer Lifetime Value or CLV. The good side of involuntary churn is that it is easy to manage. As the customer hasn't left intentionally, you can put some simple subscription management methods in place to retain them. These methods help in increasing the customer’s lifetime value.
Key Note: Customer Lifetime Value or CLV is the revenue generated from a customer over an entire business period.
A Study
I found a study that said that voluntary churn is more as compared to involuntary churn. As per the study, the average churn across all the industries is around 5.57%.
In this, voluntary churn accounts for 3.95%, whereas involuntary churn is 1.38%. The study also unveils that the average churn for a B2B business is less than B2C.
Exploring Involuntary Churn and How It May Creep You?
Well, as we already know, the definition of involuntary churn, let’s understand how it can creep or affect your business negatively.
I am sure of one thing: whether it is involuntary churn or voluntary churn, the loss to the business is equivalent. Moreover, there is a need for proactive customer engagement methods to have them on board. In the case of involuntary churn, customer communication is paramount.
Here are some primary aspects that define the need to check involuntary churn!
- It may ruin unit economics.
Unit economics is a term that can help you analyze your business revenue and customer lifetime value easily. It is defined as the ratio of capital earned to capital invested in a customer in a fixed period. In the picture of a subscription business, it will be the ratio of MRR and CAC, i.e., monthly recurring revenue and customer acquisition cost.
For example, if you are aiming for a unit economic ratio of 2:1, you need to have an MRR of, let’s say, 1000 to the CAC of 500. Taking this example, if there are ten customers and involuntary churn happens, the MRR will decrease while the CAC won’t, leading to ruining unit economics.
Whether it is due to an outdated credit card or a failed payment, unit economics will be affected in the same way. It is not just unit economics; it can also destroy your customer experience.
- Affects customer relationships
I believe that customer relationships hold a higher ground than revenue and other business counterparts. It is easy to earn money, but if your business does not have enough customers, there will be nothing at all.
Now, involuntary churn is always silent and steady. It happens slowly, and it could be too late before you know it. For example, let’s say you make a marketing tool, and the automated payment gets canceled one day due to the customer's old credit card. After a few days, the customer found out, called your support team, and got in.
But, in the off time, the customer’s automated ads didn’t run, the data collection was stopped, and the customer communication stopped. Moreover, there were no measures to inform the customer about the situation. In the case of a bigger business, the loss can be high, and the brand could lose more customers.
Note: Based on the type of business, acquiring a new customer can cost a business 5-25x more than retaining the existing one.
- It does not discriminate.
One thing to note here is involuntary churn is not biased. It will neither target your top best customers nor your lower-end customers. For involuntary churn, all are the same, and the effect of it will be seen in your revenue.
Strategies to Reduce Involuntary Churn
Well, I have talked enough about the effects of involuntary churn. Now, let me help you comprehend how you can reduce this involuntary churn. Well, first of all, you will need a tool to determine and reduce churn.
There are several tools that you can use to reduce involuntary churn. The best one that you can use is from Qwary. Here are some effective strategies to reduce customer churn.
- Pre-dunning messages
One of the easiest ways to reduce involuntary churn and boost customer experience is by targeting in-app messages to the customers. These messages are known as pre-dunning messages that are sent to customers as reminders of their expired credit cards, failed payments, or any other issues.
You can also probe the customers to add new credit card information in the app. An example of this can be Spotify. Spotify provides its customers with timely reminders for adding or updating payment details. Netflix can be another worthy example!
- Post-dunning emails
Besides pre-dunning messages, post-dunning emails are also an effective way to inform your customers about failed payments. You see, it may not be possible to know about a failed payment until it happens, as it can be due to server glitches. Hence, by preparing a series of post-dunning emails, you can nudge your customers to complete the payment.
To make it easier, add a link to the payment page.
Note: Most customers fail to respond to dunning emails. These customers account for 85% of the total customers.
- In-app lockout notifications
It was a common practice to lock the user out of the app after they had entered the wrong information. Most of the time, this practice has led to users being pushed away permanently. But, in the case of involuntary churn, you can provide users with in-app notifications about updating their new payment details while specifying a grace period.
If the user does not update their details within the grace period, allow them to add details while keeping them from using the app. This will lead them to share their new information.
- Optimizing payment gateways
As the trend of making digital payments is a new normal, the issue with payment processing at payment gateways can sometimes be normal. I sometimes face issues while paying with Google Pay one minute, and the other minute, it works, maybe because of the traffic congestion at the gateway.
Anyway, keeping the payment gateways up to date and functioning smoothly can help reduce transaction failures. Thereby leading to a reduction in customer churn.
Here is more about reducing churn!
- Periodic testing of the payment process
As each app receives regular updates from time to time, it is necessary for the app makers to test the payment process with each update. I think it will be great to test it with multiple payment gateways from different service providers and different locations.
This can help in ensuring a smooth payment process.
- Implement smart retry logic.
There can be several reasons for payment failures that can be classified as hard and soft declines. Based on the type of decline and the data from the payment gateway, varying smart retry logic can be implemented.
For example, if there is a temporary issue like congestion in the network or payment gateway, the retry logic should probe you for a retry just at that moment. This is similar to the Google Pay example that I mentioned earlier.
However, if the issue is with insufficient funds or an expired card, it can probe a retry in weeks or months. Another possible scenario can be a time of retry. For example, in some scenarios, it can be ideal to retry a payment at night as the congestion is less.
- Real-time transaction monitoring
A real-time transaction monitoring system can be a great investment to fight off involuntary churn. As a subscription brand, you know in what period of time, people tend to pay for the services and how much. Therefore, a real-time transaction monitoring system can be programmed to sense any irregularities in the received data.
If a certain amount of money is not received in a particular time, you can further investigate the stats to learn about any involuntary churn. The use of AI in this system can further enhance it and allow it to make smarter decisions.
- Maintaining payment security standards
Winning your customer’s trust is all you need to reduce involuntary churn, and one way to build it is by ensuring that every bit of information you have about your customer is safe.
By complying with established payment security standards, such as the Payment Card Industry Data Security Standard (PCI DSS), you can garner customers' trust in your brand, which keeps them dedicated to doing business with you.
- Introduce multiple payment methods.
Today, there are a lot of ways to pay your subscription provider. And I think that it is actually good. With multiple ways to pay your subscription provider, you can significantly reduce the chances of involuntary churn.
An example of this can be Netflix. The streaming service provider offers its subscribers a number of ways to make payments, including UPI, Prepaid Cards, Virtual Cards, and local Debit and Credit cards.
- Use ML to flag risks.
Machine learning and AI algorithms are powerful and faster ways to analyze high volumes of data. Therefore, by implementing ML algorithms, businesses can analyze vast amounts of user data to look for patterns indicating the risk of churn. It can be changes in purchasing behavior, service usage drop-offs, and irregularities in payments.
Based on the analysis, the algorithms can indicate risk factors to plan for counteracting measures to reduce customer involuntary churn.
Bonus Methods
- Flash detailed payment error messages.
If you want to reduce churn, you have to be clear in your communication with the customers. For example, if a subscription billing gets canceled, there needs to be a detailed payment error message indicating the exact issue, such as insufficient balance, transaction limit, or changing the payment method.
- Communicate clearly about billing issues.
Just like banks send their customers instant messages about their transactions, businesses also need to keep their customers in the loop. For example, businesses should send messages to customers regarding billing issues via several channels, including emails, SMS, in-app messages, etc.
This is to ensure that customers stay in the loop of communication. Further, offer them steps to proceed with fixing the issue.
How to Reduce Voluntary Churn?
Though it is a bit off-topic, let’s have a quick look at the ways to reduce voluntary churn.
- Analyze and act on feedback.
Keep this thing in mind that a subscription business is successful only when it adapts to market dynamics. Nothing can give you a better view of the market than your customers. Therefore, carefully analyze their feedback and act upon it to improve your app.
Acting on customer feedback can help you introduce new features, leading to enhanced customer acquisition and retention. The best way to capture customer feedback is via surveys, whether they are in-product surveys, email surveys, or others.
You can use an AI survey generator to further streamline your job.
- Focus on customer success.
No matter what kind of business you have, if you offer value, you will definitely succeed. For example, if you want higher customer acquisition and retention, focus on building healthy relationships with your customers via communication.
Provide your customers with details to use the product and explain how it can solve their problems. After all, if the customer is successful in achieving their goals, they are surefire to stay with you for a long time.
- Align your strategy to customer segments.
There can be several reasons why customers choose to leave your business. Therefore, when formulating strategies for churn reduction strategies, it is important to align those strategies with the specific customer segment.
For example, if a customer exited the services due to a lack of product features, the strategy will be different. If the customer leaves due to an issue or bug in the app or product, the strategy will be different.
Businesses can undertake methods like heatmap analysis, session analysis, and website feedback to pinpoint issues in the product.
Common Causes of Involuntary Churn
While the mentions of these causes are scattered across the blog, let’s have a comprehensive look at them!
- Expired credit cards
Expired cards are one of the primary reasons involuntary churn happens. Every financial institution has a card expiration date. Hence, once every three or five years, a customer's credit card gets changed (the period can vary). This means that the customer has to update the new details (card number, CVV, etc.) on the service app, and if this is not done on time, involuntary churn arises.
- Insufficient funds
If you have set your services on auto-renewal, this issue can arise frequently. It can be rare, but if your account runs out of balance, the auto-debit feature will not pay for the services due to insufficient funds. Therefore, without you knowing, your subscription will be canceled, leading to involuntary churn for the business.
- Credit card limits
For the customers who shop using their credit card, their card may run out of limit by the time of subscription renewal. This will unintentionally cause churn in your business.
- Technical failures
Server issues like congestion, network congestion, outdated gateway functionality, etc., are some of the reasons that can cause involuntary churn. These issues are usually temporary and can be solved with the help of smart retry logic.
Conclusion
A bad thing about involuntary churn is that it is silent. Without the reduction measures in place, you may not know that it is happening, but after some time, you will. But, till then, the damage would be done. This is one of the needs for counteracting measures to be in place. Moreover, as there can be some issues on your side, it is crucial to keep them in check.
While involuntary churn is a bit challenging to detect, there are some aspects that indicate it, such as the number of retries, repeat clicks, etc. These aspects can be precisely analyzed using heatmap software, session replay software, etc. You can leverage the best of this software with Qwary.
So, get in touch now!
