In month one of the quarter, you lost 14 subscribers. In month two, you only lost three. It looks like your numbers are improving, right?
Not so fast!
What if those 14 subscribers only paid $10 a month while the other three gave you $50? The 14 churned subscribers caused a loss of $140, while the three caused a loss of $150. Month two is suddenly looking a lot less rosy.
Most ecommerce subscription sellers are very familiar with their churn rate, which is the percentage of their customer base they lose each month. But unless you also know your revenue churn rate, you’re only getting half the picture.
Calculate both customer churn and revenue churn every subscription period to get a full and honest idea of how your company is doing. Together, these metrics will help you focus your retention efforts on the customer cohorts that matter most for your business.
What Is Revenue Churn?
Put simply, revenue churn is the percentage of recurring revenue you lose each month. Every subscription commerce merchant who offers products in different price tiers needs to track their revenue churn each billing period. Subscription-first businesses rely on recurring revenue and therefore need a reliable way to monitor changes in this revenue stream.
Your gross revenue churn is the percentage of monthly recurring revenue (MRR) you lose in a month.
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Gross revenue churn = (Churned MRR + Downgrade MRR)/MRR from the start of the month
Churned MRR refers to money lost from cancellations, and downgrade MRR is money lost to customers who change to a lower pricing tier or remove add-ons from their accounts.
You’ll notice this formula only asks for the revenue you’ve lost. You want to avoid including new sales in your revenue churn calculations, as the goal here is to see how fast customers are leaving your subscription.
Net revenue churn is the percent change in MRR among your existing customers.
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Net revenue churn = (Churned MRR + Downgrade MRR - Expansion MRR)/MRR from the start of the month
Expansion MRR refers to subscription revenue gained from upsells, cross-sells and price increases. Again, this number shouldn’t include income from new customers — just changes made by current customers.
Because your net revenue churn rate includes income gains, it’s possible to end up with a negative percentage here. If you see that, it means you gained MRR from your existing customer base, which is a great place to be!
Once you have your revenue churn rate, it’s time to use this metric to guide your business decisions. Compare your customer churn rate to your revenue churn rate to learn who is leaving and how to retain that demographic.
If your revenue churn rate is lower than your customer churn rate, you’re mainly losing low-paying customers. You’ll want to ask how you can ensure you’re providing good value for budget shoppers or whether it’s worth continuing to court this demographic.
A revenue churn rate that’s higher than your customer churn rate means your high-paying customers are leaving. This situation is potentially dangerous for your company, as each loss will be a big hit to your bottom line. You’ll want to focus on this customer segment to see how you can better serve them.
Your revenue churn rate also directly correlates to your company’s required growth rate, as you need to bring in enough new customers each month to make up for losses due to churn. Companies that lose more income to churn than they can recover with their marketing and sales efforts aren’t sustainable in the long term.
That’s not news anyone wants to hear — but if it’s true, you need to know it now, so you have the time to make changes. Thankfully, there are multiple moves you can make to keep customers around.
Your customer retention strategy should account for the multiple reasons a buyer might churn. Your first step should be to ask yourself what is causing the churn:
Armed with this information, you can now choose from the tactics below that address the specific problem you’re facing.
For: Involuntary churn
Almost one in three customer cancellations is caused by a failed payment. Often, a customer’s card gets declined because it’s past its expiration date. Let’s be honest — most shoppers won’t remember to update their card’s expiration date and CVV when the card they have on file expires.
Instead of relying on dunning emails to get the correct card info from your customers, add a credit card updater to automate the work. This tool won’t help when a customer closes their account and asks for a new card to be issued, but it will update the information so there aren’t expired cards lurking in your system. Credit card declines impact both high and low-paying shoppers, so it's worth investing in a credit card updater to lower churn.
For: Involuntary churn
Transactions that are declined due to insufficient funds, an account that’s reached its limits or another payment error will often succeed upon a retry. Most ecommerce businesses have a dunning strategy that drives their rebill attempts. Replace your manual efforts with Smart Dunning, which is the most efficient way to turn failed payments into successful charges.
Smart Dunning offers a custom strategy that’s specific to each buyer’s account. It can recover 25 to 50% of declined transactions without eating into your team’s time. Smart Dunning is one of the best answers to involuntary churn, but only some subscription management platforms offer this capability. Invest in a tool like sticky.io to have this option at your fingertips.
For: Voluntary churn in the form of downgrades and cancellations
Voluntary churn is harder to combat, but customer data can help you plan to reduce it. Look at when customers leave to understand why they left. Do you see a big drop-off after your introductory offer expires? Does a large percentage of churn happen after month four of a subscription?
You can use this data to build “churn profiles” that detail customer segments by churn circumstance. Even if you can’t get every churned customer to explain why they left, a few good responses can help you build churn profiles.
Then, you can use what you’ve learned to make custom retention tactics for each segment. For instance, customers who only stick around through the intro offer period might continue their subscription if you introduce another perk or coupon right as their discount runs out.
Once you decide what perk you’ll offer to keep subscribers around, set up your system to automatically make the offer during the cancellation or downgrade process. Doing so will show customers you understand their needs, thus making them more likely to stick around.
For: Voluntary churn in the form of cancellations
Subscriptions are about returning control to the consumer. Whether you’re giving them better prices or more convenience, deliver on your promise by making it easy for customers to shape their shopping experience.
A flexible subscription allows customers to:
It should be as easy for a consumer to adjust their shipment as it would be for them to cancel, and your customers should know they have these options. During the cancellation process, you might present a screen that asks whether a customer would rather pause or skip a subscription. Additionally, you might group the cancellation option with all the subscription settings, so a customer can’t help but see them.
Ecommerce merchants must stay on top of their metrics to succeed, but it’s worth remembering that every number comes with context. Knowing the direction of a trend line is only helpful when you know why it’s headed that way.
Don’t let yourself be satisfied if you see a line heading down. Take the time to investigate your revenue churn data to understand when and why customers are leaving. Even if you’re not worried about your churn rate, you can still work to decrease it further.
Your churn prevention efforts may seem invisible, but they’ll pay off when you don’t experience high rates of customer turnover. You’ll know exactly who you need to keep around and have no trouble doing it.
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