User churn is the bane of every subscription business. In this post we explore the impact of reducing churn on revenue by examining the impact of churn on customer lifetime value (LTV).
Defining LTV
LTV (also known as CLV, or Customer Lifetime Value) for each customer is defined as the projected profit that a customer will generate for your business over their entire lifetime. There are several ways to define and calculate LTV (see, for instance, our infographic on measuring and maximizing the lifetime value of your customers).
First, let’s define Retention Rate, an important part of any LTV equation. As most know, it’s simply: 1 – Churn Rate. As user retention increases, the churn rate decreases.
In the context of user churn for subscription companies LTV can be simplified and calculated relatively easily as: Lifetime Value (LTV) = Subscription Cost per Month / Churn Rate
This means as the subscription cost increases, i.e. as one charges more per month for a subscription, the LTV for each user will go up. In addition, we can see that as the churn rate increases, the LTV will decrease. It’s also easy to see that halving the churn rate will double your customer LTV.
The Impact of Churn Reduction on LTV
Given the LTV equation above, we can begin to look at how reducing churn impacts a company’s top line. As we see below, due to the compounding nature of LTV for subscription companies, a small change in churn can lead to substantive changes in revenue.
Let’s take a hypothetical company which has 500,000 customers paying $10 per month for a subscription. This company currently has an average monthly retention rate of 95% (i.e. 5% of their customers churn each month).
In this case, reducing churn by 5% can result in $5,000,000+ in incremental revenue!
Let’s take one more example of a subscription company with 100,000 users, 10% churn, and a $5 subscription package.
Again, reducing churn by just 5% has huge benefits for this company – generating over $250,000 in new revenue.
There is a good reason that churn reduction is top of mind for most subscription companies – it’s impact can be significant to your business. Due to the compounding nature of LTV for subscription companies, a small increase in retention can result in a big increase in revenues. In addition, we all know the common adage that acquiring new users is 5x more expensive than retaining or upselling existing users. This further proves that focusing on changes in churn can have huge benefits.
