This is Why You Should Never Ignore Involuntary Churn
It's easy to notice when customers are canceling their subscriptions. Voluntary churn is noisy and calls for your attention between a rise in customer complaints and an increase in cancellations. It forces you to pay attention and actively engage in ending it.
While these active cancellations are far the most obvious case of churn, they aren't often the most significant. However, it has the potential to blind you to another potentially fatal situation businesses easily overlook. This fatal situation creeps into businesses unnoticed; it works slowly in the background to cut down your subscriber base, growth, and revenue. Involuntary Churn is that much of a threat.
Involuntary churn isn't unavoidable, even if it's quiet. You can easily dispatch the threat if you detect it early and put the necessary systems in place to deal with it. Allowing high involuntary churn at your customer base is a bad idea.
Voluntary and Involuntary Churn - The Difference
Voluntary and involuntary churn are the two types of churn that concern subscription merchants.
When a consumer decides to cancel their subscription on their own, this is known as voluntary churn. Voluntary Churn could be due to dissatisfaction with a product, realization that they are not receiving the value they expected, or no longer have use for that product (nursing mothers subscribed to baby diapers are a great example in this category), and a range of other reasons can contribute to this.
When a customer churns for an unavoidable reason, such as payment failure due to outdated payment information, server issues, or insufficient cash, it is known as involuntary churn.
Why You Shouldn’t Ignore Involuntary Churn
Although active cancellations are by far the most obvious case of churn, they aren't often the most impactful. Customer delinquencies are all too common, and they can be fatal to your company's success for the following reasons:
1. Involuntary churn is a common occurrence, and its likely creeping into your Subscription Business already
Involuntary churn affects both big businesses and small ones alike. It doesn't just affect your dissatisfied customers; it affects everyone, including your most loyal customers who wish to remain.
Credit card failures are one of the leading reasons for involuntary churn. Sadly, credit card expiration dates and fraud prevention are not often a top priority in mind while balancing everything that goes into running a successful business. Your most satisfied and highest-value customer can be just as forgetful as your lowest-value customer. Customer size or plan don't count either. It goes for every one of your customers and strikes your revenue slowly.
2. Involuntary churn can wreak havoc on your unit economics
Unit economics is essential for business growth in the long run -every order matters; and if you want to achieve a 3:1 ratio between customer lifetime value (LTV) and customer acquisition costs for each customer (CAC), then you should know that involuntary churn has a disastrous impact on this ratio.
Even if your product is a runaway success, and you have zero active churns, your rapid growth still conceals a threat lurking in the shadows as involuntary churn
Involuntary churn does not happen overnight; it takes its time to creep in gently without calling for attention.
Here's a clue: Let's say your customer's life cycle is 18 months.
Generally, credit cards expire every three years, right?
So over your customers' 18-month lifecycle, around half of them will need to update their payment information, or you'll lose them to involuntary churn.
This means if you've 100 customers, that will amount to 50 involuntary churners, including your most loyal customers. These delinquencies start to take a severe toll on your revenue if they are spread out over the course of 18 months.
Involuntary churn will appear as a patient deterioration of your growth over time, rather than a downward burst. It's never loud and doesn't add up quickly until the end of your customer lifetime.
Before you know it, you've lost a million dollars in sales in just 18 months without notice.
However, the issue extends beyond lost money. With customer delinquencies considered, let's say your LTV is $2,650. If your CAC is $1,200, you've got an LTV:CAC ratio of just 2.2; which is below the threshold for sustainable growth.
Your customer acquisition cost and pricing should be influenced by the nature of your customers, and not by churn. Sadly, if involuntary churn is uncontrolled, it won't stop after killing your unit economics, it will also kill your customer experience too.
3. Involuntary Churn Affects Customer Relationship
In addition to reducing your revenue, involuntary churn can erode your customers' faith in you and your product.
Assume you're a selling Subscription product and an automated charge fails on the due date of one of your customer's payments due to an expired card. Your customer will not receive their recurring order if you don't have a method in place to notify them of their payment failure.
Without customers realizing the problem, they call your customer service team in a rage asking why they didn't receive your product. And even though those who wish to continue with you might request a new payment method, avoidable damage has been done already.
Subscription companies who do not aggressively control their involuntary churn experience this predicament regularly. Customers will rapidly find someone else if they can't trust you to consistently render a service or product (even if it's because their payment method fails).
And sometimes when failed payments continue, it turns customers who churn involuntarily into voluntary churners.
Conclusion
In the next article, we will discuss a few things you can do to reduce or end involuntary churn. One approach I’ve found very useful for subscription businesses over the years is using a Subscription management solution with churn bursting algorithm that automatically sends your customers notices or reminders before their credit card expiry date. Subscription management solution like Chargzen has proven effective in stopping involuntary churn and saved many businesses millions in potential losses.