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Key Factors That Actually Impact Churn Rate for Subscription Services

November 21, 2022
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1
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Key Factors That Actually Impact Churn Rate for Subscription Services

As an executive or merchant of a subscription-based business, you probably already understand the importance of customer churn. Failing to monitor customer retention rates can have a devastating impact on your company's bottom line.

Nevertheless, subscription businesses face challenges when attempting to reduce their churn rates. One potential problem is determining how to calculate churn rate subscription. There are several different methods to calculate the average churn rate, which makes it complicated to calculate.

Another difficulty for subscription companies is figuring out which factors impact customer churn. Knowing these factors is essential to improving your annual churn rate.

This article will explore the key factors that affect the average churn rate for subscription services and how to address them.

What Most Subscription Businesses Get Wrong About Customer Churn Rate

Churn is the rate at which your subscription business loses customers due to subscription cancellations or lapses.

Customer churn results in lost revenue for your company. It also impacts the customer lifetime value (LTV) of your subscription service. Therefore, churn rates are significant indicators of business vitality.

Despite its importance, many subscription businesses have a misguided understanding of an acceptable churn rate. The result is an ineffective or inefficient attempt at customer attrition reduction. In particular, there are three main misconceptions about customer churn.

MYTH: Involuntary Churn Is Truly Involuntary and Unavoidable
TRUTH: Involuntary Churn is often related to payment processing issues that are avoidable.

Involuntary churn occurs when subscribers lose access to subscription services. This type of churn can occur regardless of service quality or customer satisfaction, which makes it difficult to rectify.

Some examples of involuntary churn include:

  • When a customer fails to update their payment information
  • When a customer loses their credit card or debit card
  • When a customer has their credit card or debit card stolen
  • When banks decline a customer's payment because of a network error or credit limit exceedance

As demonstrated above, most involuntary churn is related to payment processing issues.

Involuntary churn can negatively impact customer satisfaction. If subscribers are unaware that their payment failed and no longer have access to your services, they will be dissatisfied and may cancel their subscription. In these situations, involuntary churn can become voluntary churn.

Fortunately, your subscription company is not powerless against involuntary churn. There are many ways to reduce this type of churn. However, the best solution is to use a dedicated software as a service (SaaS) payment platform that orchestrates and optimizes credit card authorizations.

MYTH: A Dissatisfied Customer Is Impossible to Make Happy Again
TRUTH: Dissatisfaction is not a loss cause, utilize strategy to improve retention and foster customer loyalty

For subscription businesses, dissatisfied customers are an inevitability. Customer dissatisfaction can occur for many reasons, from disappointment in service quality to a perceived lack of value for the price. These customers may cancel their subscriptions and contribute to your average churn rate.

Nevertheless, a dissatisfied customer is not necessarily a lost cause. Businesses that properly address customer complaints stand a much better chance of reviving unhappy customers. Consider deploying the following strategies to improve customer base retention and foster customer loyalty:

  • Provide excellent customer support
  • Personalize the customer experience
  • Incentivize customer loyalty
  • Solicit and incorporate customer feedback
  • Implement a payment processing strategy that minimizes the need for a customer to manage their payment account. A lot of voluntary customer churn results from a customer finding it easier to cancel their service than to have to re-provide payment information or details.

MYTH: Voluntary Churn Is Always the Fault of the Subscription Company

TRUTH: Voluntary churn sometimes occurs for reasons beyond the subscription company’s control

Voluntary churn involves a customer actively canceling a subscription to your SaaS service. The main reason for this type of churn is customer dissatisfaction. As a result, many businesses with a subscription model focus on improving customer satisfaction to reduce voluntary churn.

Your subscription business needs to provide consistent value to your customers. Otherwise, they may cancel their subscription and join a competitor that offers a better service.

However, there are situations where voluntary churn is not the fault of your subscription company. A customer could be happy and receive value from your service and still decide to end their subscription. Some examples of these situations include:

  • A competitor offers an attractive promotional offer.
  • A customer did not consider the purchase carefully before subscribing (a common phenomenon for less expensive subscriptions).
  • A customer views subscription services as a novelty and frequently switches companies regardless of satisfaction.

Positive Influences on Your Subscription Churn Rate

Every SaaS business wants to reduce its subscription churn rate. Nevertheless, most of them struggle with customer retention because they fail to understand which factors affect actual customer churn.

To positively influence your churn rate, ensure that your subscription service utilizes the following three strategies:

Limiting Failed Credit Card Payments With Dynamic Routing

Payment issues are a significant contributor to churn rate, particularly involuntary churn. Failed credit card payments are difficult to resolve and can wreak havoc on your bottom line.

Credit card payments can fail for a variety of reasons. Some of the most common causes include:

  • The credit card is expired.
  • The bank suspects fraud and declines the transaction.
  • There are insufficient funds to cover the charge.
  • Dunning processes to recover payment failures often cause voluntary churn.

Limiting failed payments is crucial for your subscription business. The results will be improved customer relationships and increased revenues.

There are several ways SaaS businesses can limit failed credit card transactions. However, one of the most effective methods is dynamic routing. Using a payment platform that offers dynamic routing through platform integrations helps prevent failed payments and reduces customer churn.

Considering and Applying Real Customer Feedback

Whether praise or complaints, most customers do not hesitate to voice their opinions about subscription services. Customers can express their feedback directly to the business or through third-party review platforms like Yelp.

Your subscription business can gain valuable insight by paying attention to customer feedback. For example, you can determine whether you are meeting, exceeding, or falling short of customer expectations.

Applying your customer's feedback can help you improve your services, customer support, and customer retention rate.

Identifying the Causes of Both Voluntary and Involuntary Customer Churn

To effectively reduce the subscription churn rate, your business has to understand the difference between voluntary and involuntary churn. The causes of these types of churn are different, as are the remedies.

Customer dissatisfaction is the primary cause of voluntary churn. On the other hand, payment issues are the main contributor to involuntary churn.

The best way to address voluntary churn is to improve customer satisfaction. Reducing involuntary churn involves incorporating decline management techniques and using a SaaS payment optimization platform.

Your subscription company can effectively lower its overall churn rate by identifying the different causes of churn.

Negative Impacts on Your Current Churn Rate

Unfortunately, certain factors can also negatively affect a business's churn rate. Without identifying and addressing them, your SaaS company is in danger of losing customers and market share to competitors.

The following three factors are common contributors to subscription service churn rates:

Invasive Dunning Process After a Failed Payment

Many subscription businesses use dunning software to recover failed payments. Dunning usually involves sending repeated, automated emails to customers. The messages inform them of their failed payment and request action to continue their subscription.

The problem with the dunning process is that it is invasive and ineffective. Most of these messages end up in junk folders or do not convince customers to renew their subscriptions. In some cases, the dunning emails cause annoyance or frustration and lead to more lost customers.

If your company uses dunning software, consider switching to more effective and less invasive payment recovery methods.

Poor Customer Experience and Customer Engagement

Poor customer service is a significant contributor to churn. A customer may churn if they experience:

  • Miscommunications about services
  • Unexpected charges
  • Long hold times
  • Unhelpful or unfriendly support members
  • Limited or delayed email support

An unimpressive customer experience can sabotage customer relationships and decrease customer retention. Your subscription business can avoid this by providing attentive customer support and effectively communicating company policies.

A lack of engagement can also lead to customers canceling their subscription to your services. A subscription company that fails to provide consistent value or incentivizes engagement will not cultivate loyal customers. To encourage customer engagement, consider creating a loyalty program or content that will increase the use of your service (welcome video, guides, templates, etc.).

Failing To Calculate Total Churn and Focusing on a Singular Type of Churn

Total churn consists of adding involuntary churn and voluntary churn. To effectively reduce total churn, a subscription business needs to address both types of churn.

Unfortunately, many companies do not consider calculating total churn. Instead, they choose to focus on voluntary churn or involuntary churn. The neglect of the other type of churn can lead to an increase that cancels out or surpasses any potential reductions.

Some SaaS businesses also fail to consider revenue churn. Revenue churn is the percentage of revenue lost in a specific period. The formula for revenue churn is:

Revenue canceled/lapsed during the period divided by the total subject to renewal during the period

Turn To a Payment Optimization Platform You Can Trust

Failed payments are a consistent problem for subscription merchants. They result in lost revenue, increased customer churn, and additional expenses.

To improve your customer retention, look no further than Revolv3. Revolv3 is a payment optimization platform that can help your business manage subscription billing. With features like dynamic routing and the ability to scale, your business can grow confidently while getting the highest approval rates.

To see how your business can improve your revenues and retain more clients, set up a demo with us.

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