Last modified: February 9, 2018
Subscription churn can sink an online retailer’s profits
This was originally posted on TotalRetail.
While the digital world continues to evolve, subscription-based online retail services are growing and becoming highly competitive and lucrative. This opportunity, however, isn’t free of challenges, especially when it comes to acquiring and retaining subscribers. Often, online retailers make the strategic mistake of putting greater emphasis on attaining new subscribers over retaining existing ones — and then go on to dismiss subscriber churn to “the cost of doing business.” However, the price tag on this approach is higher than you might think. In fact, it can cost up to five times more to acquire a new subscriber than to keep an existing one — a luxury most brands can’t afford. It’s more critical now than ever before for brands to understand that an acquisition-focused strategy, without a renewal strategy, is a set up for profit loss.
The Churn Challenge
Churn — voluntary or involuntary — happens when customers drop out of a subscription service. Voluntary churn refers to those customers who choose proactively to end their subscription. Involuntary churn refers to customers whose services drop off unintentionally because of profile changes or processing issues like an expired credit card, a declined charge or a changed mailing address.
The Avoidable Costs of Churn
In early 2017, Forrester Consulting was commissioned by Digital River to conduct an online survey of 204 senior-level executives throughout the U.S. and Europe who were responsible for their organizations’ subscription and recurring payment customer retention strategy. According to that study, on average, 62 percent of subscription revenue comes from renewals, with organizations losing 34 percent of customers to churn. Considering involuntary churn accounts for as much as 34 percent of the total churn, driving down these rates can have significant impact on revenue.
While some businesses have historically placed a greater emphasis on sales efforts that produce new, organic growth, Forrester’s study suggests that retaining an existing customer is the key to subscription profitability. After all, it takes time to recoup acquisition costs and turn a profit with new customers.
Existing customers are already yours. The most important opportunity for growth is keeping them!
And although involuntary churn will impact profit, that’s not its only effect. Consider, for instance, how an increase in chargeback rates can result in missed revenue forecasts. Also, without proper renewal management, the costs to service at-risk customers can become increasingly burdensome and impact growth. Furthermore, the fear of actually causing churn can make companies more reluctant to introduce new subscription pricing and packaging models, which otherwise could make the business more competitive. Much of these costs can be avoided if investments are made to reduce churn.
Keeping Churn in Check
Addressing involuntary churn is challenging because it’s driven by unique customer circumstances that are nuanced and dynamic. It’s often the result of technology and communication failures that, with the right tools, can easily be avoided. Solutions like automated credit card updates, built-in expired card extensions, intelligent payment routing and sophisticated retry logic can dramatically improve retention and continuity in significant ways. In addition, since the pace of change in buyer behavior and technology will continue to accelerate, finding a partner with the right mix of scale, experience, insights and ongoing technology advancements to minimize involuntary churn can help lift profits.
Strategically managing a subscription-focused business requires a fundamental shift of focus from new customer acquisition to retention, and from selling products to selling experiences. This includes making the experience of having a subscription easier for customers by preventing payment disruptions they didn’t initiate, and by nurturing the relationship beyond the point of sale. To get the most out of your recurring payment business, challenge assumptions that involuntary churn rates are just a cost of doing business and know that small improvements in involuntary churn over time will translate into meaningful gains to the bottom line.
Use our Revenue Optimization Calculator to understand how churn is impacting your bottom line.