Average Churn Rate for Subscription Services
The average churn rate for subscription services differs across industries. Knowing this rate is key for business growth in 2024. You can lower subscription churn by using effective retention strategies. Churn rate measures the percentage of users who stop their subscriptions in a set time period. It's often tracked using MRR or monthly recurring revenue and ARR or annual recurring revenue (ARR), which are important financial indicators for subscription businesses.
For subscription companies, the average yearly churn rate usually falls between 5-7%. The monthly average is about 4%. These numbers can change based on industry factors. You can use these benchmark average churn rates to see how your business compares.
Subscription Churn: What is it and How Can You Reduce it?
Subscription churn refers to the speed at which a subscription-based company loses its subscribers. It can happen for different reasons. Voluntary churn occurs when customers cancel because the service doesn't meet their needs. Involuntary churn can happen due to payment issues, like insufficient funds in the customer's account.
Churn is also a key financial indicator. Revenue churn tracks the percentage of subscription revenue lost during a specific period or the contract value of customers a company manages to retain.
Calculating and minimizing churn rate is crucial for subscription companies. Getting new customers costs more than keeping existing ones. For SaaS companies, acquiring new customers can be five times more expensive than retaining existing ones. This makes customer retention vital for your growth strategy. In case, you’re losing customers at the same rate you're gaining new ones, the operating costs of your business will rise in proportion to your monthly revenue by the end of the year.
By keeping churn rates low through excellent customer satisfaction and managing accounts well, you can boost profitability and drive growth.
What's The Impact of Subscription Churn?
Subscriber churn significantly affects monthly recurring revenue, making it a crucial metric for subscription businesses to monitor. Even small changes in churn rate can greatly impact revenue growth and overall business health. Churn can quickly undo the effort, resources and money invested gaining and retaining new subscribers.
Studies show acquiring a new customer costs about 5 times more than retaining an existing one. Long-term subscribers tend to be more satisfied and likely to recommend your service, which is a powerful way to gain new customers.
What are Acceptable Subscriber Churn Rates?
In order to maintain revenue levels, you need to replace churned subscribers, requiring more investment in sales and marketing. In reality, some churn can be expected. But, you must understand how much your business can handle. This involves knowing your monthly and annual churn rates, and the maximum time you can afford to make up for your losses.
Each business is unique, but experts suggest an acceptable average subscriber churn rate for businesses like SaaS is between 5 and 7%. So, you can’t afford to lose more than 7% or 70 customers out of 1000
Knowing when your churn rate becomes dangerous is critical. Churn rate is a practical indicator that can help you achieve success. Combined with other metrics, it provides insights on:
What went wrong
Where the problem lies
Why customers are leaving
What should you do to retain customers
How to use subscriber churn rate for your SaaS business growth?
Churn rate is a crucial metric for subscription businesses. Calculate your current churn rate to find how you compare to industry competitors. Tracking churn rate over time is also important. Even slight changes can signal customers are leaving, prompting quick action to find root causes.
If the involuntary churn rate of your business is rising, consider implementing systems like automatic account updaters to keep your payment card data up to date and reduce declined transactions.
Top Factors that Can Influence Subscriber Churn Rate
When customers choose to leave, you need to understand why and make improvements to reduce churn. Subscribers can leave a business or service for various reasons:
Quality of service
Your churn rate often directly relates to your service quality. Look at your performance in areas like wait times and issue resolution. This helps ensure you're doing everything possible to keep customers happy and retain them.
Pricing
A price increase can lead to higher monthly churn if your customers are sensitive to cost changes. Keep track of revenue churn to see if customers find value in your services at its current price.
Competition
Sometimes, external factors cause churn. This could be a competitor releasing a similar or better product or a campaign against your brand. Pay attention to all factors, both internal and external, that can affect churn.
How to Calculate Churn rate for Subscription Services
To calculate your customer churn rate, follow these steps:
Determine the starting value for the period = A
Identify the amount lost during the period = B
Use this simple formula:
Churn rate = (B/A) x 100%
You can calculate churn using Monthly Recurring Revenue (MRR) or customer retention. Both methods are crucial
MRR Churn rate with example
To calculate the MRR churn rate, you’ll need:
MRR at the start of the period = $20,000
MRR lost during the period = $500
($500 / $20,000) x 100% = 2.5%
In this example, the MRR churn rate would be 2.5%.
Customer retention churn
This shows how fast subscribers are leaving. It doesn't show monetary impact but helps identify areas to improve retention.
Example:
Subscribers at the start of the year = 3,000
Subscribers lost during the year = 300
(300 / 3,000) x 100% = 10%
So, the annual churn rate is 10%, and the monthly churn rate is around 0.83%.
Voluntary and involuntary churn
Voluntary churn happens when a customer decides to leave due to:
Product dissatisfaction
No longer needing the product
Not getting expected value
Involuntary churn occurs due to payment failures like outdated information or insufficient funds. You can manage this proactively.
Reducing voluntary churn is harder and requires more intensive strategies.
Customer segmentation
Analyzing churn by customer segments gives deeper insights. A SaaS company might compare churn for "basic" vs "enterprise" users. You could also look at age or location-based churn to spot trends and improve stats for specific groups.
Average Churn Rates for Subscription Services by Industry
After calculating your churn rate, you'll want to compare it with industry standards. Here are some benchmarks:
Software as a Service (SaaS)
Recurly reports average churn rates for B2B software at 3.36% (voluntary) and 1.19% (involuntary). B2C SaaS businesses have slightly higher rates at 4% (voluntary) and 1.70% (involuntary).
Streaming services
Statista notes the average U.S. churn rate for streaming services was 37% in late 2022. Younger consumers tend to churn more often.
Mobile applications
Business of Apps highlights the complex customer lifecycles of mobile apps. Across 31 app categories, the average retention was 25.3% on the first day, dropping to 5.7% by day 30, showing high churn rates.
E-commerce subscriptions
Shopify states the average churn rate for subscription services in e-commerce is about 5%.
Wrapping Up
To wrap up, understanding and managing churn rate is crucial for subscription-based businesses. By tracking your churn rate and comparing it to industry benchmarks, you can identify areas for improvement and implement strategies to boost customer retention. Remember, reducing churn isn't just about keeping customers—it's about growing your business and increasing your revenue.
Want to optimize your subscription service and reduce churn?
Our AI design agency can help you create seamless user experiences that keep customers engaged and satisfied. We use cutting-edge AI technology to analyze user behavior and design interfaces that drive retention. Get in touch today to learn how we can help your business thrive in the competitive subscription market.
FAQ’s:
1. What's subscriber churn rate all about?
Think of churn rate as your customer leak detector. It shows how fast you're losing customers over time. Usually, we express it as a percentage of subscribers who wave goodbye within a specific period. It's like keeping score of how well you're keeping your customers happy and on board.
2. What's a healthy churn rate for memberships?
Aim for the gold standard: a churn rate under 5% for online memberships. That's top-notch retention! If you're sitting between 5-10%, you're in the common range, but there's room to grow. Seeing 10% or more? Time to roll up your sleeves and dig into what's pushing members away. Your goal? Turn those goodbyes into "glad I stayed"s.
3. How do you crunch the numbers for membership churn?
Calculating churn is simpler than you might think. Let's say you started the month with 500 members and ended with 450. That's 50 members lost. Divide 50 by 500, multiply by 100, and voila! Your churn rate is 10%. This quick math can reveal a lot about your membership's health.
4. What's the churn rate to beat in SaaS?
For established SaaS companies targeting big fish, shoot for 5-7% annual churn. That's the sweet spot. If you're newer or chasing smaller businesses, brace for about 5% monthly churn. Remember, these are benchmarks - your mileage may vary depending on your unique business landscape.
5. How do apps measure their churn?
In the app world, churn rate tracks how many users say "see ya" to your app over time. It's the percentage of folks who uninstall or ghost your app after downloading. App makers often check this at key milestones - 1 day, 7 days, and 30 days after install. It's like taking your app's pulse to see how well it's keeping users hooked.
