The world's largest study on churn
This episode might reference ProfitWell and ProfitWell Recur, which following the acquisition by Paddle is now Paddle Studios. Some information may be out of date.
Originally published: Jan 29th, 2018
Churn is one of the most painful aspects of building a subscription business. You work incredibly hard to acquire customers, prime them with the right value proposition, do everything you can to make them happy, only to be left with a non-descript reason as to why they're leaving and will never be seen again.
To help, here's the first episode of our new series, the PW Report, where each week we go into the subscription economy benchmarks that you can't get anywhere else. This week we heard from David Cancel, CEO and Founder of Drift who wanted to know the state of churn in the subscription economy.
To understand the current state of retention, we pulled data from over three thousand subscription companies of all shapes, sizes, and verticals. We'll initially break down where churn stands overall, and then dig into some actionable trends for you to take advantage of for your business.
But first, if you like this kind of content and want to learn more, subscribe to get in the know when we release new episodes.
Churn vs. MRR: Churn only loosely correlates with MRR
First up - While we love to click and retweet articles about lowering our churn, it turns out churn is actually much higher than most companies are willing to admit and only loosely correlates with a company’s size, meaning as a company gets bigger churn tends to get smaller, but only slightly. What's especially interesting is the wide interquartile range that fluctuates between 5% to 16% gross revenue churn on the low end, and 2% to 8% on the high end.
Churn vs. ARPU: Higher ARPU correlates to less churn
Perhaps most telling, there's a strong correlation when comparing ARPU (average revenue per user) and churn. Single and double digit ARPU correlated with churn between 3% and 15%, whereas four figure ARPU dropped to 1% to 5%. This is to be expected, because high ARPU tends to come with a more consultative sales team, more customer success, and more attention surface area per customer.
Churn vs. Age: Older company correlates to less churn
Interestingly enough, we saw a similarly strong correlation when it came to the age of the company with companies longer in the tooth seeing significantly lower churn than those who were younger. Of course there's survivor bias here, but you'd hope to see this when it comes to a growing company.
Let's dig into some truly actionable cuts answering what are the biggest influences on churn we could find.
Tip: Increase proportion of annual contracts
Along this axis, the first piece was really the proportion of annual contracts in the business. Regardless of ARPU, those companies with a higher percentage of annual contracts see significantly lower churn. This is because these customers have only one purchasing decision per year (albeit a larger one) whereas their monthly counterparts have 12 purchasing decisions per year.
Tip: Bring down your credit card failure rate
Delinquency rate also significantly correlated with high churn. Delinquencies are credit card failures, and it turns out 20-40% of churn is typically from delinquent churn. This churn is painful because it's completely mechanical with over 130 different reasons a credit card will fail, but most companies don't have a good solution for combatting this churn.
Churn vs. VC Funding: Churn 20-30% higher with funding
Finally, and likely most controversially, we found that those companies with funding saw 20-30% higher churn rates than those who didn't take on funding. There's likely a number of reasons for this, but through qualitative research we've found that a likely culprit is the false sense of security that comes with the moral hazard of being able to spend your way out of growth holes. Not saying don't raise funding, but be careful and ensure funding is a tool, not a crutch or a bandaid.
Check out our other episode about content marketing: is it dead? and subscribe to the show to get new episodes.
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You've got the questions
and we have the data.
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Each week, we dive deep on benchmarks
of the subscription economy that
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you just can't get anywhere
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else.
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This is the ProfitWell Report.
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Welcome to the ProfitWell
Report. I'm Patrick Campbell.
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And this week, we have a
question from the CEO of Drift,
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David Cancel.
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Yo, Patrick. It's the uncle,
uncle DC. What's going on?
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What's the latest state and
retention in the market today?
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I know you got the data.
Stop holding on on me.
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Send it to me. I wanna know.
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Let's get it.
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Love me some DC,
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and this is a phenomenal
question that I've been wanting
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to dig in on for
quite some time.
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To understand the current
state of retention,
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we pull data from over three
thousand different subscription
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companies of all shapes,
sizes, and verticals,
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and we'll initially break down
where churn stands overall and
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then dig into some actionable
trends for you to take
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advantage of in your business.
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First up, while we love to click and
retweet articles about lowering our churn,
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it turns out churn is actually
much higher than most companies
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are willing to admit and only loosely
correlates with a company's size.
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Meaning as a company gets
bigger from a revenue
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perspective, churn tends to
get smaller, but only slightly.
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What's really interesting is
the wide interquartile range
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that fluctuates between five
and sixteen percent revenue
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churn on the low end and two to
eight percent on the high end.
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Perhaps most telling,
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there's actually a strong correlation
when comparing ARPU and churn.
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Single and double digit ARPU
correlated with with churn
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between three and
fifteen percent,
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whereas four figure ARPU actually
dropped to one to five percent.
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This is to be expected because
high ARPU tends to come with
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things like consultative
sales, customer success,
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and simply just more surface
area per customer that you can
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give attention to.
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Interestingly enough,
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we saw a similarly strong
correlation when it came to the
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age of the company.
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With companies longer in the
tooth seeing significantly
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lower churn than those
who were younger.
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Of course, there's
survivor bias there,
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but you'd hope to see that when
it comes to a growing company.
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You can find more cuts on a benchmarking
basis in the show notes below,
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including things like b to b
versus b to c and a breakdown
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by customer target.
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But let's dig into some fully
actionable cuts answering
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what's the biggest influences
on churn that we could find.
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Along this axis, the first
piece that was really,
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really telling was the proportion
of annual contracts in a business.
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Regardless of ARPU,
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those companies with a higher
percentage of annual contracts
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saw significantly lower churn.
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This is because these customers
have only one purchasing
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decision per year,
albeit a larger one,
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whereas their monthly
counterparts have twelve
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purchasing decisions per year.
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Delinquency rate also significantly
correlated with higher churn.
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Delinquencies, for those
of you who don't know,
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are credit card failures,
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and it turns out that twenty to
forty percent of your churn is
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actually typically from
delinquent credit cards.
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This churn is painful because
it's completely mechanical with
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over a hundred and thirty different
reasons that a credit card will fail,
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but most companies don't
have something implemented to
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actually combat this churn.
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Finally, and likely
most controversially,
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we found that those companies
with funding saw twenty to
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thirty percent higher churn rates
than those who didn't take on funding.
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There's likely a number
of reasons for this,
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but through some
qualitative research,
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we found that a likely culprit
is the false sense of security
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that comes with the moral
hazard of being able to spend
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your way out of growth holes.
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And we're not saying
don't raise funding,
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but make sure you're using
funding for what it's made for
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which is a tool and not a
crutch that you need to rely on.
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Well, that's all for now.
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Thank you, David,
for the question,
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and I trust everything is
going amazingly well at Drift.
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If you want us to research
further into this dataset or
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research an entirely
different dataset,
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feel free to reach out to me
with a video at p c at profit
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well dot com, and we'll
have more for you next week.
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This week's episode is
brought to you by Crazy Egg.
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