Churn is one of the key metrics in subscription commerce, tracked closely in niche start-ups and industry juggernauts. It is one of the most sensitive indicators for subscription businesses as slight differences in churn rates can have significant impact on revenue growth and the overall health of the business.
Every subscription business has churn, but the ranges of churn rates can mean the difference between success and failure. Broad-based comparative data, while difficult to find, can provide critical intelligence to assess business performance on a relative basis. Once that is understood, businesses can re-evaluate the underlying factors contributing to overall customer retention and churn metrics.
Recently, Recurly examined a sample of more than 1,200 subscription businesses to determine churn benchmarks, concentrating on churn rates by industry type and price points. Our 12-month study found the median monthly churn rate across all data points was 6.73%. However, when examining median churn rates by industry, we found notable differences.
In general, B2C companies tend to experience higher churn rates than B2B companies. Seasonality, target audience and whether the goods or services are essentials or nice-to-haves, affect these rates. For example, B2B categories like SaaS/Cloud Computing include products and services that are crucial components to business workflows and processes, chosen after highly-considered purchase processes and, thus, less likely to churn.
The education market is one where we see seasonality at play—customers may cancel a subscription at the close of the school year. And, consumer goods and services reflect a varied market, from must-haves like shaving products or pet food to nice-to-haves, like fashion, toys, or gourmet food.
Churn rate based on Average Revenue per Customer
When looking at churn rates segmented by Average Revenue per Customer (ARPC), we found lower price points experienced higher churn rates. Purchase consideration plays a role in this analysis, too, as subscription products and services with higher price points are usually more considered purchases. Businesses with higher price points may also invest more heavily in customer retention, assigning account managers, customer success managers or personal stylists to customers with higher spending levels.
What it all means
In the world of subscription commerce, purchase conversions are critical, but to retain subscribers for a long enough period of time to ensure profitability, the brand promise MUST exceed the subscriber’s expectations over time.
Subscription businesses ultimately live or die by acquiring subscribers at a cost that is surpassed (over time) by their ability to earn recurring revenue that exceeds not only the Customer Acquisition Cost (CAC), but also the cost of delivering the service, or cost of goods sold (COGS). It is a common mistake to assume that Customer Lifetime Value (LTV) is simply the sum total of revenue earned over time. It is not. Customer LTV is the sum total of revenue earned over time, less the cost of delivering the service to your customers. (Think Customer Support, Shipping, Returns, Hosting, Fixed and Variable Costs).
Ultimately, the ability for any subscription business to succeed depends on its ability to create a ‘repeatable engine’ which can deliver a product/app/service/media experience to loyal customers that are worth far more than their cost to acquire. In most industries, this ratio is referred to as the ‘CAC:LTV’ ratio. CAC:LTV ratios primarily depend on customer acquisition costs and churn rates, the ultimate arbiter of the overall health of a subscription business. However, it is always critical to ‘unpack’ the underlying drivers of churn.
While every company is different, every team—Product, Operations, Support, Billing, and Marketing—needs to work in concert to keep high levels of satisfaction and perception of value to retain subscribers well into the zone of profitability. Customer perceptions are important. As soon as a loyal subscriber has a negative experience, their perception of the overall value of the service changes; not only are they more likely to churn, but worse yet, their perceptions will determine whether they will be inclined to recommend or disparage the service.
Ultimately, relative churn rates determine the winners and losers in any category. Many categories are defined by the efficiency with which any particular company can outperform their competition. Lower churn rates typically reflect better user experiences, higher customer satisfaction, and ultimately much more attractive CAC:LTV ratios. Companies that are exceptional performers on this efficiency metric alone ultimately attract far more investment capital and create much greater value for their investors and stockholders.
By focusing on performance relative to competition, businesses can tune their overall efficiency to outperform those competitors and ultimately own their categories!
Recurly provides a subscription-management platform for companies in such industries as software, publishing, media and consumer goods.