Looking for Subscription Retail Success? Cut Your Churn Rate
While meal kit subscription giant Blue Apron might have seen customer numbers decline in 2018, company CFO Tim Bensley isn't worried. In fact, he said, he expects those numbers to continue dropping this year because the company is shifting its focus to customers who will stick around longer -- hopefully decreasing the company's churn rate in the long run.
In brief, churn rate refers to the number of customers a company loses in a given period relative to the number it had to start. For example, if a company loses 50 customers one month out of a total of 500, the churn rate for that month is 10 percent.
Churn is an important metric to consider when determining how to run a subscription business -- physical or digital -- because it informs many other decisions. The price of a product or service, the customer acquisition budget, the lifetime value, the lifetime value to customer acquisition cost ratio, and the degree to which customer experience is a focus are all influenced by the churn rate.
While a zero percent churn rate would be ideal, subscription businesses shipping physical products should realistically aim to keep churn below 10 percent. You will have higher churn in the first or second month of your relationship, especially with trial or promotional offers, but over a longer time frame, you should hope to keep it below 10 percent. If customers are leaving at a faster rate, it’s worth investigating the cause.
Make churn a choice
In some cases, subscriber churn is intentional and unavoidable. Maybe a BarkBox member decides that her dog has enough toys and cancels the subscription, or someone who regularly orders HelloFresh meals leaves town for the summer and cancels his deliveries. These instances are called voluntary churn -- the customer, for whatever reason, opts out. Most often, this occurs when the customer no longer finds the service valuable.
Companies can gain valuable insights by asking customers why they’re ending the relationship. Maybe it was a bad product experience or subpar service, or perhaps they signed up with a discount code and felt the subscription wasn’t worth the full price. By asking customers what prompted them to churn, subscription companies can avoid similar situations in the future. However, not all churn is intentional.
Other instances of churn are involuntary, occurring when customers leave a program without making the conscious decision to cancel. One of the most common causes is a problem with payment processing: cards expiring, cards being canceled, temporary insufficient funds, and so on. If a customer loses his wallet and has to cancel the credit card he uses to pay for your subscription box, for example, he'll churn out of your program unless he remembers to update his payment information with a new card. According to payment processing service Recurly, an average of 13 percent of recurring revenue transactions are declined each month.
For subscription businesses, each lost subscriber represents a substantial loss in revenue, so it’s critical to fight for every customer. Follow the steps below to fight voluntary and involuntary churn, build the right mindset and toolbox to do so, and improve your subscription membership numbers.
1. Prioritize problem-solving.
Figure out why customers are no longer satisfied and instill a save-the-sale mentality in your customer service personnel. Take a page from Dollar Shave Club's book: When its premium subscribers are looking to cancel, the company offers to downgrade them to a more affordable subscription instead. If customers decline, customer service expresses the hope that former users will remain part of the brand’s email subscriber base and give the company an opportunity to win them back in the future with deal, new products, content and offers.
When Dollar Shave Club was still in its infancy, a prospective customer pledged to subscribe to the service if an employee could solve a Rubik’s Cube in less than two minutes. The next day, the company posted a video of an employee doing just that. And that's just one example of the company going out of its way to win over and fight for customers. Considering that subscription customers can offer a significant lifetime value, it's important not to let customer service fall by the wayside.
2. Dive into the data.
By looking closely at your customer churn data and identifying trends, it’s possible to gain valuable insights into ways you can adjust the way your business runs. For example, if 50 percent of customers who contact your business end up canceling their subscriptions, it’s worth investigating how to improve customer service. Or, if a large segment of members who received a specific size of product end up canceling, perhaps you have a sizing issue.
Equipped with the right information, a customer service team can give subscribers what they really want, whether it’s discounts, surprises, or a chance to be part of an exclusive group. Educating your team might require time and resources, but because it costs more to acquire a new customer than to nurture an existing one, according to Forrester Research, that investment will be worth it in the long run. Plus, satisfied customers could spend more, be more engaged, and become advocates for your brand.
3. Execute transactions thoughtfully.
To address the most common types of involuntary churn, think carefully about how customers are charged. Most subscription businesses simply try to execute a failed transaction again, but this approach rarely works. Instead, a smart system would perhaps automatically reschedule a billing for someone with insufficient funds for Friday afternoon, when most people get a paycheck. By setting up smart, automated workflows, our clients are typically able to reduce involuntary churn by about 20 percent.
A few other measures can also improve your transactions. According to Vistr invoicing data, it's better to bill customers at the beginning of the month instead of the end. You should also work to ensure your list of email and physical addresses are correct, whether you do it yourself or use an address hygiene program. That way, customers stay informed about billing and shipping and products make it to the right addresses.
For subscription businesses, acquiring customers is important, but keeping them aboard is vital. Cutting down churn by even a small amount can have big impacts on your company's bottom line. The above three steps are a great start, but don’t stop there -- make it your mission to reduce churn in every way possible, then watch as revenue and profit take off.