How many of your customers cancelled their subscriptions last month? What were their reasons? Learn why you should know in this deep dive on the attrition rate vs. churn rate topic.
When running a subscription business, it is natural to focus on the rate at which you add new customers. Ideally, you aim for your customer acquisition rate to consistently trend upwards.
However, equally essential to know is the rate at which you are losing customers, known as the customer churn rate. Naturally, you want that to be below the industry average.
To make the right decisions about your customer acquisition and ensure long-term success, you must also know why and how you are losing customers:
- Is it a poor product/market fit?
- Is your product or service quality not up to customers' expectations?
- Does your pricing match the value your product delivers?
- Are your customers moving away?
Answers to these questions point to different types of customer churn, some of which are often misunderstood. Another type, customer attrition, is routinely mistaken for customer churn, hence the common attrition rate vs churn rate questions.
But what is customer attrition, how is it different from customer churn, and why is separating the two crucial for recurring revenue businesses?
Let's find out.
What is a subscription churn rate?
The subscription churn rate is a metric that indicates the percentage of customers who cease using or paying for your subscription product within a given period. It is the number of subscribers lost during a specific period, expressed as a percentage of the number of customers you had at the beginning of the period under review.
The subscription churn rate is a metric that indicates the percentage of customers who stop using or paying for your subscription product within a specified period. Therefore, churn rate measures the rate of revenue loss due to subscription cancellations and non-renewals.
In business, churn means customer loss, also called customer turnover. Customer defection is the more appropriate term for when you have lost subscribers to your direct competitor.
You can calculate your churn rate for different periods, usually expressed in monthly, quarterly, and annual terms. Hence, your monthly churn rate will be the number of customers your subscription business has lost over a month.
Types of subscription churn.
There are different types of churn, categorised according to the underlying reasons for its occurrence. . The types of customer churn that may impact a subscription business include:
- Voluntary churn - when a customer voluntarily cancels their subscription, typically because they are unhappy with the quality or value your product delivers. It is also known as active churn.
- Involuntary churn - also called passive churn, it is when a subscription does not renew because of a failed payment. Payment failures can be caused by expired payment cards, processing errors, or insufficient funds.
- Negative churn - also called downgrade churn, the metric measures revenue lost because subscribers downgraded to a lower-value subscription.
- Positive churn - shows revenue gain from customers who upgraded to a higher-value subscription plan. It is also called upgrade churn.
What about customers who churn voluntarily but not because they are unhappy with the product or its perceived value or affordability concerns? Where do they fit?
What is customer attrition rate?
Customer attrition rate indicates the percentage of customers lost due to to natural reasons, like death or migration. These are reasons other than displeasure at the quality or value offered, affordability, or failure to make payment and renew one's subscription.
You measure attrition rate the same way as churn rate, but you factor in customers lost specifically to attrition, not those lost to churn generally.
Customer attrition is a form of churn; the number of customers lost in a given period. That is why the two terms are often used interchangeably.
Attrition identifies customers who cancelled their subscriptions or let them lapse because they could no longer use or access them.
For instance, a Disney+ subscriber will have to cancel their subscription if they move to a country where the video streaming service is unavailable. They can't continue paying for something they can't enjoy.
Similarly, a deceased person can't renew their subscription, which will lapse when the current subscription expires. In both cases, these are people perfectly happy with the subscription experience but will be lost as customers because they either can't access your product or aren't around to renew their subscription.
Why is it important to measure your subscription attrition rate?
People who regard customer attrition and churn as the same thing can argue that there is no reliable way to track attrition.
While you can add a questionnaire to your Unsubscribe page that asks for reasons why a customer has cancelled their subscription, you can't be sure the reasons they give are true.
So, what difference is there between attrition and involuntary churn?
Again, there is a subtle but essential difference. Attrition separates customers who cancel because they can no longer access or enjoy your product from those who do not want, can no longer afford, or can't pay for it.
Customer attrition rate is an important metric to track if you can measure it accurately. It reflects the quality of the subscription experience you have created and recognises the effect of cancellations you could never prevent.
Your attrition rate provides insight into the true quality of your subscription product. It identifies a distinct subset of inactive customers who may still be receptive to marketing efforts, particularly if their circumstances change, such as when they return from a relocation.
Attrition rate vs churn rate: what are the differences?
The difference between churn and attrition rates is that the former measures the percentage of subscribers who cancel for natural reasons, while the latter accounts for all cancellations.
Customer attrition highlights the fact that churn is sometimes unavoidable. It's an undeniable reality of the subscription business that must be acknowledged.
You can do nothing with your pricing or marketing to prevent a subscriber from cancelling if they can no longer access your product. Therefore, although attrition is a subset of churn, both are critical metrics to track.
How to calculate subscription churn rate.
To calculate your churn rate, you essentially express the number of subscribers lost as a percentage of your total customers at the beginning of the period under review.
The churn rate formula looks like this:
(Number of cancelled and unrenewed subscriptions/Total subscribers at the beginning of the period under review) X 100.
Let's apply that formula to a subscription business example. If your milk subscription business had 80 subscribers at the start of the month, and of those, only 60 paid their subscription for the new month, your business will have lost 20 subscribers. Your churn rate would be 25%.
Churn rate = (20/80)X100
= 25%.
Your business has effectively lost 25% of its customers, meaning revenue will be down 25% unless you add more customers or some of your remaining customers upgrade to a higher-value subscription.
Speaking of upgrades and downgrades, do those constitute churn?
Churn rate vs survival rate. Are they different?
Survival rate measures the average length of time between customer sign-up and subscription cancellation. It helps to estimate your average customer lifetime value or how much an individual customer is worth to your business over time.
Churn rate measures customer loss over a specific period, so it is not necessarily the opposite of the survival rate. In other words, the customer survival rate indicates the average time it takes for a customer to cancel their subscription.
Survival rate also differs from the customer retention rate, which is the percentage of customers who have renewed their subscriptions. Retention rate is calculated by subtracting your churn rate from 100.
Knowing your survival rate helps to estimate the longevity of your business. Meanwhile, by understanding the reasons for your churn rate you unlock insights that improve your renewal rates, refine your assumptions for revenue forecasting, and help achieve negative churn.
What is a good churn rate for subscription businesses?
Your subscription business is healthy if your annual churn rate is in the 4% to 6% ballpark and your retention rate is within the industry average of 40% to 45% per month.
Your objective should prioritise retaining the majority of your customers while acquiring more new customers than those you are losing. Failing to do so will hinder the growth of your subscription business.
Is attrition rate the same as churn rate?
Though they are related, attrition rate is not the same as churn rate. Attrition is a subset of churn that indicates the number of customers who churned due to natural reasons like death and migration.
Attrition represents unavoidable churn. It indicates the number of customers who would have maintained their subscriptions if it weren't for certain personal circumstances.
Calculating your churn rate does not give you all the insight you need to ascertain the quality of your subscription experience. By basing your decisions on your churn rate, you miss the bigger picture perspective that considers all the reasons customers churn.
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