If you’ve been in the subscription business for a while, you’re no stranger to involuntary churn — or the desire to reduce it. Even as a new business owner, you probably know churn is something you’ll deal with regularly, voluntary or not.
Luckily, there are steps you can take to reduce involuntary churn. However, you can’t set a goal to reduce involuntary churn until you know where you’re starting from.
After all, “what gets measured gets improved,” as Peter Drucker, author of The Effective Executive, famously said. In other words, step one to reducing churn is to track it. How else can you know whether you’ve improved?
Churn comes in two flavors: voluntary and involuntary.
Voluntary churn occurs when an unsatisfied customer cancels their subscription. Reducing this type of churn is where most businesses focus the most effort. And for good reason: of the average 5-7% average churn rate for a subscription business, and of that, 60-80% is voluntary.
If you did nothing to improve customer retention or win new business, that means you’d lose over 56% of your subscribers within a year. As it turns out, involuntary churn is expensive.
The remaining nearly 20-40% of churn is involuntary, which can happen even if the subscriber is a raving fan, and/or one of your biggest customers. (Involuntary churn doesn’t discriminate.) It occurs when a subscription is unintentionally interrupted because of scenarios like:
- A subscriber forgets to update their billing information and their credit card expires
- A customer’s credit card is lost or stolen
- A customer’s bank declines the subscription charge due to a network error or because the customer exceeded their credit limit
Any of these situations can lead to a lapsed subscription. That, in turn, can potentially cause problems for the customer, in addition to lost or disrupted revenue for your business.
Involuntary churn quietly erodes your profits and damages customer relationships. The involuntary churn average of about 1.8% (20-40% of an average 5-7% churn rate) of all transactions across industries may seem relatively harmless. However, those errors and delays can have a big impact on your business over time—over 20% in a year, if nothing is done to fix or prevent them.
If your subscription base represents $100K a year, involuntary churn could add up to $20K+ in lost revenue every year. If you did nothing to proactively reduce involuntary churn, your revenue would drop by half in less than 3 years.
In addition, involuntary churn can destroy customer trust, leading to account cancellation. Let’s say a card payment declines, and the customer only learns that something went wrong when the software they and their customers rely on suddenly stops working.
As their business grinds to a halt and customer service issues mount, they make an angry call to you and provide a new payment method. Their account is restored, but the damage has been done. Inconsistent service breaks customer trust, even if they are technically “at fault” due to a failed payment method.
If service interruption doesn’t cause catastrophic repercussions, a declined payment can still turn into an unplanned reevaluation of your service and its cost, paving the way for a customer’s potential defection to one of your competitors.
Do you know how many subscribers you’re losing to involuntary churn each month? How do you compare to industry benchmarks? And why is this important?
By tracking involuntary churn, you’ll get a clear picture of what normal levels are for your business. By comparing your business to your industry rates, you’ll get a sense of how you stack up — and whether you’re missing an opportunity to carve out a competitive advantage.
In general, B2C companies experience more churn than B2B companies, averaging 8.11% versus 6.22%. SaaS and cloud computing services include a higher proportion of B2B services which tend to experience less churn. As a result, involuntary churn rates are lower. Education churn rates are seasonal, dropping when school is out of session.
If you are in a growth stage, your business can tolerate a higher churn rate. For example, if you gain new subscribers at a rate of 10% per year, an annual churn rate (not to be confused with monthly churn rate) of 5% is manageable, as your revenue is still growing.
If you offer a more specialized service, you can expect a lower number of new subscribers. Churn, then, becomes much more significant, as renewed subscriptions will more directly determine your company’s sustainability.
Finally, pricing matters. The larger the size of your contract/subscription, the lower you can expect your churn rate to be.
You can make this data collection and analysis as simple or complex as you want. In a nutshell, you’ll want to get a sense of your overall monthly churn, then determine what portion of that churn is involuntary.
To calculate your overall churn rate, you can divide the number of subscribers who churn during the month by the number of subscribers at the beginning of the month. Easy-peasy, lemon-squeezy.
Or, you can calculate your churn rate by day, then extrapolate your results to calculate your monthly figures.
You can also calculate churn rates based on revenue, using monthly reoccurring revenue (MRR) as a baseline figure, where MRR at the end of the month is subtracted from MRR at the beginning of the month, less any customer upgrades. That figure is divided by the starting MRR.
To determine what portion of your churn is involuntary, measure how many of your lost customers were due to credit card declines versus account cancellations. To slice and dice this data even more, filter your credit card declines by their decline codes. That way, you can isolate whether your primary issue is:
- expired cards
- outdated billing info
- spendy customers who exceeded their credit limits
- or something else entirely
The more specific data you gather, the more strategic you can be in your approach to reducing involuntary churn.
The best way to reduce involuntary churn is by implementing automated decline management tools. Here are a few examples (using our tool of choice, Rebilly—but the strategies are the same no matter what you’re using):
- Remind your clients when their payment method will soon expire. You should be able to automate these email reminders to your customers. Chances are they don’t know when their expiration date is and will appreciate the follow-up to keep their service going. (Head here for more tips on how to do that.)
- Keep customer credit card information as current as possible, automatically. Rebilly’s Account Updater links up with card issuers to keep your customer’s card-on-file data updated automatically in the event of an expired card, lost or stolen cards, or account updates.
- Automate retries of declined charges, intelligently. If a payment is declined for whatever reason, you should be able to automatically and intelligently retry those payments based on decline code and timing. (There’s a whole strategy behind retries and how to get the most from them.)
- Predict new expiration dates and update cards before a decline occurs. Our expiration date guesser follows standard expiration date calculations and tests the new expiration date before running the card for the full subscription amount. And it does so before waiting for a declined charge.
Want a step-by-step strategy to decrease involuntary churn? Our Retry Strategy guide teaches you exactly how to use data like decline codes to reduce churn and increase your CLV: