Why You Need to Keep an Eye on Churn Rates – Part 1
Subscribe ProJuly 19, 2016
When you’re running a subscription commerce business, your attrition rate is one of the top metrics that you need to keep an eye on. Churn can be caused by a variety of factors, which we’re going to explore in this two-part series.
In this first part, our focus is on explaining why this is important. In part two, we will discuss how to identify common problems that lead to growing churn, and how to fix them.
In subscription commerce, your attrition rate is the rate at which customers end subscriptions. Also called churn, attrition can simply be calculated by the number of total active customers in a month divided by the number of customers lost. Churn is a natural part of the customer lifecycle, of course, but small changes in the rate—either positive or negative—can have a huge, compounding impact on revenues.
For example, let’s say your average subscription value is $100/month and the average length of a subscription is three months. That means that your lifetime value of a single subscriber is $300. Let’s also say that you get 13 new subscriptions, but lose three each month, for a net of 10 subscriptions each month, or $3,000 in revenue and a 30% churn rate.
Now, let’s say you run a promotion one month that’s better than the value your subscription offers. That promotion causes five customers to cancel for that month and buying the other promotion, leaving you with only eight customers and a 62% churn rate. Not only are you losing revenue that month, but you’ve also effectively cut your average subscription length AND revenues by at least 1/3 (because those customers may not come back). A promotion like that can cause drastic drop in revenues, and can also result in a higher acquisition cost because you’ll need to spend more that month to replace the customers who unexpectedly dropped off.
Conversely, let’s say in another month, you run a promotion for current subscribers that keeps one of the three canceling subscribers, meaning only two cancel that month. That means your churn rate has dropped to 20%, and your monthly revenues will go up by 10% (an additional $100 for that month). And you’ve also managed to lengthen your average subscription rate by a month, meaning that the lifetime value of a subscriber is now $400.
These numbers are intended to highlight the affects churn rate can have on your revenues. You can imagine the affect this has when you’re dealing with much larger numbers of subscribers. For many of our clients, keeping a close watch on this metric is a make-or-break activity.
In our next post, we’ll explore some of the reasons that can cause your churn rate to grow, and how you can keep it from getting out of control.
For now, feel free to reach out to us to discuss how Subscribe Pro can help you manage (or even cut) churn rate, or how to set up your own subscription business.