Customer churn is one of the most important metrics for any subscription business.
Churn rate impacts key metrics such as retention and lifetime value (LTV) and is vital to understanding growth.
What is customer churn?
Customer churn, also known as customer attrition, occurs when a customer cancels their subscription. Churn rate is the measure of churn by percent of lost customers over a period of time. The simplest form of churn rate is calculated by dividing the number of customers that canceled in a period of time by the number of customers you started that period with.
For example, to calculate your churn rate for a month in which you started with 100 customers but had 7 cancel by the end, the formula would be
7 / 100 = 7% churn rate for that month.
Voluntary and involuntary churn
When evaluating churn, you’ll want to look at two different types: voluntary and involuntary. Voluntary churn, also known as active churn, is when a customer makes a conscious choice to stop paying for your service. Involuntary churn, also known as passive churn, is when a customer stops paying for your service without intention.
Reduce involuntary churn with dunning
Involuntary churn most commonly comes from payment issues. Cards expire, get lost, stolen and so on. In the subscription world, the process of handling and ultimately recovering this lost revenue is called dunning.
To combat this, choose a payment processor that offers options to automatically retry failed payments and send repeated emails to customers that are in the dunning process. Include links to payment forms in these emails so that customers can easily update their credit card information.
Getting a customer to input credit card information is a difficult thing to do — make that process as painless for existing customers as you do for new ones. Learn more about dunning solutions in our software guide.
Understand voluntary churn with exit surveys
Because the reasons customers voluntarily churn aren’t always as clear, use a customer exit survey at the time of cancellation to collect useful information.
The questions you ask depend on your business, but we recommend most services ask two basic questions:
a multiple choice question that captures the customer’s primary reason for leaving
an open-ended question asking for additional feedback
The first question should be multiple choice to make it easy for customers to answer and easily reported on in aggregate. Include the most common reasons for cancellation, such as price, service, leaving for a competitor, lack of certain features and so on.
When asking for additional feedback, use a multi-line text box to convey to the customer that you’re looking for as much feedback as they’re willing to provide and not just two-word answers. If you start seeing recurring feedback in the open-ended field, consider adding it to your predefined list above.
Acting on feedback
Feedback captured from exit surveys can be instrumental in many ways:
Product - If you’re finding that customers are leaving for another competitor and/or from a lack of features, you’ll be able to adjust your roadmap accordingly.
Pricing - If you’re finding that customers are leaving because your service is too expensive, you might consider lowering your price. If you never lose customers because of price, perhaps you’re not charging enough!
Marketing - You know which customers have churned. You now know the reasons why. Use this information to intelligently remarket to lost customers with the goal of recapturing the revenue lost when they churned. If it was due to a feature that you now have, pull up a list of those customers and let them know you now have it and entice them back. If it was purely a pricing decision, consider offering them a discount, whether permanent or temporary to continue using your services.
Churn analysis is critical
An in-depth customer churn analysis allows your business to learn from and improve the customer experience.
Knowing key metrics like churn rate and getting feedback from customers that cancel is a great start for any churn analysis.
Once you understand those numbers, you will have a better idea of how much revenue you’ve lost to churn throughout the lifecycle of your business and can start implementing strategies to recover it.