Introduction
In today’s market, countless companies have embraced the subscription model, while many traditional businesses are incorporating subscriptions into their operations. The subscription model’s appeal lies in the substantial value it can generate through consistent customer relationships.
Unlike one-time transactions, subscription customers provide ongoing revenue streams, which can significantly boost profits over time. This is particularly advantageous when considering the high cost of customer acquisition, a common expense across both subscription and traditional business models. The recurring nature of subscription purchases allows companies to recoup these acquisition costs and reach higher profit margins more quickly.
Given that customer acquisition costs are similar across both models, the importance of focusing on customer retention in subscription businesses becomes evident. Enhanced retention directly translates to increased revenue and profitability, making it a critical focus for any subscription-based company.
Despite the well-known link between retention and profitability, our research shows that many subscription companies fail to optimize their operations and management structures to fully capitalize on retention opportunities.
In January 2023, there was a comprehensive industry benchmark study involving 200 subscription executives. The study identified key operational and organizational factors that drive company performance. It revealed that many companies continue to operate with structures designed for transactional models, rather than optimizing their approach for the subscription economy.
This article distills key findings from that study and offers actionable recommendations for subscription companies looking to enhance their customer retention strategies and, in turn, improve their financial performance.
Understanding the Different Causes of Churn
To maximize customer retention, it’s essential to understand the various causes of churn, which can be broadly categorized into two types: voluntary and involuntary churn.
- Voluntary Churn:
Voluntary churn occurs when customers choose to cancel their subscriptions. Common drivers include pricing issues, dissatisfaction with product quality, better offers from competitors, or poor customer service. Identifying these factors allows companies to implement targeted feedback tools—such as surveys, customer reviews, and data analysis—to mitigate cancellations. - Involuntary Churn:
Involuntary churn, or passive churn, happens when a customer’s payment fails—often due to issues like card declines—without the customer intending to cancel. The key to addressing involuntary churn lies in deploying specialized payment recovery solutions that can automatically recover failed transactions, minimizing customer loss.
Recognizing the multiple sources of churn is crucial for subscription companies. Our research confirms that companies investing in reducing churn have translated these efforts into superior financial outcomes.
Measuring and Managing Subscription KPIs
Our study uncovered critical insights into how subscription companies track performance metrics and identified gaps that may leave them vulnerable to churn.
While many companies focus on “outcome” metrics like churn rates, retention rates, and recurring revenue, they often overlook the “input” metrics that drive these outcomes. For instance, involuntary churn due to failed payments is a significant factor, yet only 16% of companies track this metric. This lack of tracking leaves businesses blind to key areas where improvement efforts could have a significant impact.
Top-performing companies, however, understand the link between failed payments and churn, and they actively work to minimize involuntary churn. This attention to detail in tracking and managing metrics is what sets them apart.
Interestingly, while some metrics are undoubtedly tracked by all subscription companies, our data shows that 64% of executives surveyed reported not tracking customer churn at the executive level. This suggests that critical performance-related metrics are not being shared or managed across the leadership team, potentially hindering overall company performance.
Improvement Accountability
Organizational Alignment for Success
Our research found that many subscription companies still use traditional organizational structures, dividing their operations into functional departments like finance, IT, marketing, and customer support. However, this approach can limit the effectiveness of a subscription business, where customer retention should be a primary focus.
Customer retention is often siloed within operations or marketing, under the assumption that churn is mostly voluntary. However, since a significant portion of churn—up to 50%—is involuntary and linked to payment issues, it raises the question of who truly owns customer retention when churn is driven by payment failures.
7 Key Questions to Evaluate Your Organizational Structure:
- Is the connection between failed payments and customer churn well understood?
- Is involuntary churn measured separately from voluntary churn?
- Who is ultimately responsible for customer retention, and does their role encompass the scope needed to address involuntary churn?
- Does the owner of customer retention receive comprehensive reports on all sources of churn?
- Is the payment tech stack optimized for billing success and minimizing involuntary churn?
- Where are churn and retention metrics reported, and who has access to these reports?
- Are these metrics shared broadly across the organization to ensure alignment?
Responsibility for improving retention is frequently siloed, lacking coordination across teams.
Best Practices for Organizational Design
Leading subscription companies have begun to create a new executive role—the Chief Subscription Officer (CSO). This role centralizes ownership of the customer experience, ensuring a unified approach to maximizing customer lifetime value (LTV) and overseeing product experience, customer satisfaction, acquisition, and retention.
Whether or not a formal CSO role is established, it’s critical to designate a person or team with the responsibility and authority to manage the metrics that drive company performance. When this role is clearly defined, it facilitates cross-functional collaboration, enhances customer retention, and ultimately drives business success.
A subscription business's success depends not just on processes that improve the customer experience but also on an organizational structure that aligns all functions toward a common goal of improving customer relationships and retention.
Conclusion
This article highlights the challenges subscription companies face when operating with structures built for transactional models rather than subscription-focused ones. The good news is that by adopting organizational structures and reporting systems optimized for customer retention, companies can gain better visibility into the drivers of churn and take proactive steps to reduce it.
Top-performing companies have embraced the role of a Chief Subscription Officer, aligning their operations around customer profitability. This approach is recommended as a best practice for any subscription company aiming to strengthen its operational controls, boost retention, and enhance profitability.
If you want to learn more about organizational best practices or reducing failed payments—the largest source of customer churn—contact us today. We can provide additional insights to help you improve customer retention and accelerate your company’s growth.
