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Analysing your subscription churn rate in GoCardless

Following on from the new Average Revenue Per Account or ARPA we launched last week, this week we have added another new chart to the Analytics pages which tracks your churn rate. Your churn rate is the percentage of your customers that leave your service over a given time period (these customers are said to have "churned") and it is absolutely critical to the health of your business.

An Example Churn Rate Chart

Churn Rate Data Table

What's included (and not included) in our Churn rate calculations?

The Churn Rate for each month is calculated by dividing the number of churned customers in a month by the total number of subscription customers at the start of that month. For example, if you had 100 subscription customers on the 1st June and lost 10 customers that month, your churn rate would be 10%.

Churn includes customers lost to cancellations, failed payments or cancelled bank mandates or any other reason for a customer subscription to end. Free trial accounts (if you offer them) which automatically expire after a certain time as elapsed are not included in the churn cancellation.

One other important thing to note is that we don't include customers who pay exclusively by invoice in the churn calculations, we only include those who have an active subscription.

Why is it important to measure and track your GoCardless churn rate?

Churn reflects the rate at which you are losing business due to customers cancelling subscriptions to your service so it is a negative factor. If your churn rate equals or exceeds the rate at which you are gaining new customers then your business growth will plateau or even decline.

Churn is also part of the calculation for working out your Customer Lifetime Value (LTV) which is the average amount of revenue you expect to earn over the lifetime of a customer. A larger churn rate means you'll have a correspondingly lower Customer Lifetime Value.

How does the churn rate affect my business?

Here's an example to help you think through the impact of your churn rate today on your business over the next five years:

Let's say that today you have monthly recurring revenue of £15,000, and that every month you add another £2,000 to that. However, you have a churn rate of 3%. If all of that persists for the next five years, you'll end up generating almost £2.6 million. Not bad at all.

However, let's say you're able decrease your churn rate by 10%, to 2.7%. That gives you an extra £100,000 in revenue. If you're able to reduce your churn by 30%, that's even better. Your revenue goes up to £3 million dollars! Reducing your churn rate dramatically accelerates your revenue growth.

Another way to look at it is in terms of the number of active customers that you have. For subscription businesses you'll always want this figure to increase on a month by month basis as adding new customers is one of the two ways that you can increase your business revenue (the other way being to increase the amount of revenue per customer).

Let's stay you start the year with 1,000 customers with active subscriptions. Thanks to your marketing team's efforts, you get 50 new customers subscribing each month. If you were lucky enough to have zero churn, then at the end of the year you would have 1,600 active customers.

Instead, if you have a constant churn rate of 2% you'll end the year with only 1,346 customers. Increase that figure to 4% churn and you'll only have 1,103 customers are year end. So as you can see, churn has a massive effect on the health of your GoCardless subscription business particularly as your subscriber numbers grow. Indeed, at some point in time if your losses due to churn match the number of new customers, your business could stop growing altogether.

How can I minimise the churn rate of my GoCardless business?

There's two distinct types of churn:

  • Involuntary - this is where the payment for the customer's subscription failed for some reason (for example, they changed bank) and the customer neglected to resolve the problem. This is also known as Delinquent churn.
  • Voluntary - this is where the customer deliberately cancelled their subscription to your service or cancelled their direct debit.
Involuntary Churn Reduction

Involuntary churn is a pain point for every subscription business although one of the great benefits of using GoCardless is that payments are taken via direct debit which requires no ongoing updates on behalf of the customer to ensure that their subscription payments keep being made on a regular basis. Contrast this with credit / debit card payment services such as Stripe where the customer must update their card details each time their card is lost, stolen or replaced by the bank. This contributes to a background churn rate of 0.5-1% for businesses taking payments in this way.

  1. As soon as you detect a payment problem, reach out to your customers, either through email, an app, or in-app notification with a polite message informing them of the issue and how to remediate it. If they don't respond, send follow up emails giving them every possible opportunity to resolve the problem.

  2. One other way to reduce involuntary churn is to implement an Annual Plan. Annual plans are already pretty compelling because a customer pays a full year of service upfront which improves your cashflow. As it turns out, annual plans are also beneficial for customer retention, too. The reason is that involuntary churn is reduced because of the reduction in the payment frequency and studies show that a higher number of annual contracts is correlated with lower user churn.

Why, you may ask? This is because of subtle differences between the way monthly and annual plans affect companies and customers: Customers are often more committed to the company with an annual plan because they have paid the money up front. Customers that are committing a year to your product want it to work. They are invested in your success because it makes them successful. They also only have one opportunity each year to churn because they only pay once per year - this sounds irrelevant but studies show that it is a big driver in reducing annual subscription churn.

Voluntary Churn Reduction

Reducing your voluntary churn rate is the art of improving customer retention so in most cases it is about driving excellent outcomes for your customers so that they perceive your service as providing excellent value. Here's a few ideas to get you started:

  1. Start customers off on the right foot You can work to prevent customer churn from the moment someone becomes a customer by creating a robust new onboarding process. Use a new customer welcome email, dedicated 1:1 and online customer onboarding, and create educational content on your blog, social media, and video channels to instruct customers and show them how to get optimal value from your product or service. A poorly onboarded customer is a future high churn risk.

  2. Ask for feedback at key moments – and respond promptly. Make sure you're consistently asking for customer feedback at key moments across the customer experience. If you've already identified that customers are likely to churn if they don't log into your tool every 15 days, ask them for feedback around day 10 and try to re-engage them. If they hit a milestone using your product or service, ask them for feedback after that moment. Figure out the key moments that make or break a happy customer and ask for feedback at those touchpoints to strengthen the relationship.

  3. Communicate proactively with customers. Build rapport with your customers by communicating with them proactively so they view you as a trusted partner. Periodically reach out with content you think they'll find interesting or helpful, connect and engage with them on social media, and reach out if issues or outages crop up on the product side so they know they can depend on you.

  4. Provide excellent ongoing support All manner of problems can crop-up during the day-to-day use of your GoCardless business, from mislaid invoices to confusion over in-app settings. To prevent these problems from becoming deal-breakers, and driving your customers away from your service, you need to offer fast, responsive customer support. If your fraught customer has to battle through dozens of phone menus to speak to a disinterested support rep, their chances of churning are likely to increase.

That's all for now - if you have any suggestions as to other strategies for reducing churn please let us know in the comments section below.