3 Effective strategies for churn reduction in subscription businesses

Churn is what happens when a customer cancels their subscription. Churn rate then, is the rate at which customers discontinue their subscription to a service, and can be looked at across varying time frames (it’s actually recommended to review churn rate across different cohorts and customer segments). Your churn rate directly reflects the health of your subscription business, from success of offers to your payments processes: every lost subscriber represents lost revenue and a missed opportunity for revenue growth and sustainability. Understanding churn and implementing effective strategies to mitigate it are paramount for success in our current landscape—and is your single biggest lever to drive growth this year.

You can minimize churn, the impacts of churn on your top and bottom line, and increase customer loyalty. Let's delve deeper into churn and explore actionable strategies you can use to combat it effectively.

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Understanding churn

There are two main types of churn: 

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Active churn

Also known as voluntary churn, active churn occurs when a customer consciously chooses to cancel their subscription. There are many reasons why someone might choose to cancel, i.e. cost, preferences, or lack of functionality. 

Active Churn requires continual testing and optimization to offers, product(s), packaging, and pricing to mitigate—a complicated and ongoing battle. However, active churn is often the most common place for many businesses to start when it comes to efforts to reduce churn rates. Yet, it might not be the best or most immediate solution.

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Passive churn

Also known as involuntary churn, passive churn occurs when a subscription is canceled not due to an action from the subscriber. This most often happens due to a failed payment, including chargebacks and disputes. (Did you know that typically, every 90 seconds a payment fails?). Passive churn requires an effective payment retry strategy, and understanding the right levers. Addressing failed payments to end involuntary churn could be your fastest path towards driving 5-15% revenue growth. 

Many subscription brands consider this type of churn a cost of doing business - a “business tax” you could call it. But failed payments, involuntary churn can be solved.  Addressing it requires a deeper understanding of payment processes and may involve technical complexities. This is where payments optimization platforms like Butter step in, creating recovery strategies that recover failed payments—and subscribers—as quickly as possible in as few retries as possible, making sure you don’t lose customers due to technical glitches in your payment processes.

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Why is churn reduction important?

Effective churn reduction directly impacts your bottom line. Every time you retain a subscriber you retain that revenue, but you also gain the revenue from every payment post recovery. This compounding effect means that by focusing on minimizing churn, you can protect and increase customer lifetime value (CLV or LTV). And because retaining existing customers is more cost-effective than acquiring new ones, you’re optimizing for key metrics like LTV:CAC ratio, maximizing revenue and profitability.

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Churn reduction strategies

Understanding the reasons behind customer churn is essential for boosting retention and minimizing cancellations. Though drop off causes vary, certain strategies stand out for addressing high churn rates. Achieving minimal churn demands careful analysis of metrics and deliberate planning to craft an experience that keeps customers committed over the long term.

Here are three key strategies to reduce churn: 

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1. Understand and analyze churn 

By gaining insights into why customers churn and identifying patterns associated with attribution, you can implement targeted strategies to reduce churn rates and enhance customer retention. There are a few reasons to why understanding churn is important: 

• Identify pain points: Analyzing churn helps you identify pain points in the customer journey that may be contributing to attrition. Are there usability issues with your product or service? Are your payment processes or payment processors causing declines and failed payments?
• Predictive insights: Churn analysis can help you identify churn indicators, providing valuable predictive insights. If you know where there’s drop off or who is most likely to drop off (are they using a specific payment method?) you can take actions to preemptively address. This proactive approach enables you to intervene before you lose that customer, minimizing attrition, helping you maximize revenue. 
• Optimize resources: By understanding which customer segments are most prone to churn and why, you can allocate resources more effectively. Proper churn analysis can deliver insights into which acquisition channels or offers may be driving the least successful customer cohorts, or identify common breakpoints within your payments processes or check out flows. Instead of implementing broad, one-size-fits-all retention strategies, you can tailor efforts to target specific customer segments, maximizing the impact of their retention initiatives.

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To understand churn, it’s important to gather data on customer interactions, engagement metrics, purchase behavior, and other relevant factors. Analyzing this data using advanced analytics tools can uncover patterns and trends associated with churn, providing valuable insights into its drivers. By gathering this data, you can also gain valuable insights into the root causes, whether it’s active or passive churn, allowing you to tailor strategies more effectively.

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2. Addressing active churn 

After understanding the root cause of your churn, the next step is to understand which levers you want to pull. Active and passive churn require different strategies.

To reduce active churn, you should focus on proactive measures aimed at retaining customers and enhancing their overall satisfaction. Active churn can be more complex to solve, and the end goal of addressing active churn should be supporting better customer value. This may involve:

• Improving the product or service: Enhancing product features, usability, and performance can make the service more valuable and appealing to customers, reducing the likelihood of them canceling.
• Providing exceptional customer service: Offering responsive and personalized customer support can address customer issues promptly and demonstrate a commitment to their satisfaction, increasing loyalty and reducing churn.
• Offering incentives or discounts: Providing incentives such as discounts, loyalty rewards, or special offers can incentivize customers to continue their subscriptions and discourage them from leaving.

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3. Leveraging machine learning (ML) to address passive churn 

Leveraging machine learning can effectively address passive churn by optimizing payment retry strategies and minimizing payment failures. Machine learning algorithms analyze historical payment data, customer behavior, and transaction patterns to identify trends and predict the likelihood of payment failures. By understanding the root causes of failed payments, you can develop targeted strategies to reduce involuntary churn and improve payment success rates.

At Butter, we understand the importance of addressing passive churn caused by payment failures. That's why we've developed a patented unique approach that harnesses the power of machine learning to tackle this challenge head-on. Our advanced dynamic machine-learning platform analyzes each failed payment individually, uncovering the underlying reasons for the failure. Whether it's expired credit cards, insufficient funds, or technical glitches, our machine learning-powered system can pinpoint the root cause with unparalleled accuracy, and a nuanced approach that drives optimal recovery for your business. 

The result? A significantly higher success rate in eliminating payment failures and stopping involuntary churn. Our machine learning-driven payment retry solution acts like a scalpel, precisely addressing the root causes of payment failures, rather than resorting to blunt, ineffective methods. With Butter's custom ML payment retry strategy, you can achieve improved payment health, ensuring smoother transactions, increased revenue retention and revenue capture, and improved customer retention rates.

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Key metrics to measure the impact of churn reduction

Measuring the impact of churn reduction through metrics like revenue recovery rate and invoice cure rate provides valuable insights into the effectiveness of retention strategies and their impact on business outcomes.

Revenue recovery rate measures the percentage of lost revenue that is recovered through retention efforts. This metric quantifies the effectiveness of churn reduction strategies in preserving and recapturing revenue that would otherwise have been lost due to failed payments. A high revenue recovery rate indicates that retention efforts are successful in retaining valuable customers and minimizing revenue loss. Calculating the revenue recovery rate involves comparing the revenue lost due to churn with the revenue retained or recovered through retention initiatives over a specific period.

Invoice cure rate measures the percentage of failed invoices that are successfully resolved or cured through payment recovery efforts. This metric is particularly relevant for subscription-based businesses that rely on recurring revenue streams. A high invoice cure rate indicates that payment recovery strategies, such as automated payment retries or targeted customer outreach, are effective in resolving payment failures and preventing involuntary churn. Calculating the invoice cure rate involves comparing the number of failed invoices with the number of invoices successfully resolved or cured within a given timeframe.

These metrics provide actionable insights into the success of retention strategies and enable you to make data-driven decisions to optimize their churn reduction initiatives and drive long-term growth.

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Why choose Butter for effective churn reduction

Butter stands out as a game-changer in churn reduction, offering a competitive advantage that goes beyond mere recovery. By serving as a holistic payment health solution, we specialize in helping you boost revenue and profitability. This approach not only minimizes churn but also fosters long-term relationships with customers, bolstering reputation and trust.

We recognize that payment recovery is not a one-size-fits-all problem. That's why Butter offers tailored solutions designed to optimize payment health for each individual business. Our sophisticated machine learning algorithms continually analyze payment data to identify patterns and trends, allowing us to customize payment recovery processes and maximize success rates.

At Butter, we believe in fostering riskless, transparent, and collaborative partnerships with our clients. We work closely with you to understand your unique requirements, challenges, and objectives. By aligning our goals with yours and maintaining open communication throughout the process, we ensure that you achieve optimal results and maximize the value of their investment in Butter.

Book a consult with Butter for further information on churn reduction in subscription businesses.