Average churn rates for subscription services are estimated at around 6-8%.
So, one way to become more competitive is to get your churn rate down below this figure.
But how can you learn why customers end their subscriptions, and understand the calculations behind your current churn rate?
Let’s take a closer look at how churn rates are calculated, how to lower yours, and how to dominate your corner of the subscription-based market with customer-centric strategies.
Your subscription churn rate is the percentage of customers who cancel their subscription to your services within a certain time period. To calculate subscription churn rate, divide the number of lost subscriptions by the number of subscribers who were enrolled at the start of a certain time period. For example, you could divide the number of people who had canceled a subscription during the month of September 2018 by the number of subscribers you had on September 1st, 2018.
Lost Subscriptions — During Time Period X
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Subscriptions at Start of Time Period X
Subscription churn shows how satisfied your customers are with your product or service. And in a crowded market, there’s always a competitor ready to snatch up your dissatisfied customer. Also, keep in mind the fact that subscription churn rate does not reflect newly onboarded customers. Luckily, there are two other KPIs we can turn to as well to get a more complete picture of the health of your enterprise.
Your company’s gross revenue churn rate is the percentage of revenue that is lost when customers cancel or downgrade, versus your total number of customers. To make this calculation, divide the revenue lost over a certain time period by the projected revenue at the start of that period.
Lost Revenue — During Time Period X
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Projected Revenue During Time Period X If No Customers Churn
Let’s examine the link between subscription churn rates and gross revenue churn rates. Customers who spend less money on your brand are more likely to churn than those who spend a lot. They may have less financial flexibility, may be less engaged with your brand, or may not be as dedicated to your offerings. So, look at customers who have churned, and see how much they spent before their cancellation. You may notice the bulk is lower-spend customers who do not have as great an impact on your revenue. If so, rest assured that this is not uncommon in the subscription-based industry.
Net revenue churn is the percentage of revenue you have lost from existing customers in a given time period. To calculate net revenue churn, divide the revenue lost from existing customers within a certain time period by the total revenue you had at the start of that time period.
Lost Revenue — Revenue Gained Over Time Period X
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Subscriptions at Start of Time Period X
With this figure in hand, the state and health of your profit margins will quickly become clear. If you have negative net revenue churn, it means your revenue would have increased even if you had no new sales. If your net revenue churn is positive, however, it cancels out any growth gained from upsells. So, net revenue churn means your existing customers are spending less and your sales team is working harder to make up the difference.