2015 INDUSTRY REPORT Recurly Subscription Snapshot€¦ · Customer retention metrics in recurring...
Transcript of 2015 INDUSTRY REPORT Recurly Subscription Snapshot€¦ · Customer retention metrics in recurring...
Powering Subscription Success
2015 INDUSTRY REPORT
Recurly Subscription Snapshot
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Table of Contents
What's Inside
Introduction
The Sample Set
The Role of Promotions
Factors Impacting Subscription Revenue
Churn
Credit Card Declines
Recovering Lost Revenue
Summary
Methodology
Glossary
About the Subscription Snapshot
Subscription businesses are focused
on customer retention and loyalty.
This report examines a sample set of
25 million transactions and identifies
key metrics. Through careful analysis
of these metrics, we reveal how they
can be used to provide guidance in
product, promotions, and operations
to support a subscription business'
growth and success.
Number of transactions in the sample setMILLION
From startups to global enterprises, today's fastest-growing businesses are harnessing the power of the subscription model. This business model delivers multiple benefits: predictable revenue, ongoing customer relationships that lead to critical customer insights, and the ability to automate revenue-optimizing decisions.
One of the keys to unlocking these benefits
is developing customer loyalty, forged from
the predictable delivery of great products and
services. As a result, subscription businesses
prioritize customer retention metrics to
understand loyalty trends.
Customer retention metrics in recurring revenue businesses are complex,
especially when transactions are weighted to credit cards. Securely handling
credit cards, managing failed transactions, or credit card declines, and
minimizing churn, or customer attrition, are vital areas of focus, and each
requires careful measurement.
This report investigates a sample set of 25 million transactions generated in 2015,
examining the role of promotions and emphasizing customer retention metrics.
Understanding metrics such as credit card declines and reasons for customer
churn are key factors to unlock ‘economic loyalty,’ providing guidance in product,
operational, and promotional arenas and keeping subscription businesses on the
path to healthy growth.
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Introduction
Benefits of a Subscription
Business Model
To the business:
⊲ Predictable revenue
⊲ Customer relationships
that lead to insights
⊲ Automation of revenue-
optimizing decisions
To the consumer:
⊲ Convenience
⊲ Flexibility to choose the
plan/product that best
meets their needs
⊲ Pay-as-you-go model
amortizes costs
The Sample Set
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The Sample Set
We categorized the 25 million transactions in our sample set by market—either business-to-business (B2B) or business-to-consumer (B2C)—and by whether the product or service was digital or physical.
Ninety percent of transactions involving physical goods fell in the B2C category,
a reflection of the popularity—and wide variety—of box-of-the month offerings, as
well as consumers embracing monthly deliveries of staples like shaving supplies
or pet food.
The digital goods category displayed more
variety, with 25 percent of transactions for digital
goods in our sample set originating with B2B
companies—underlining the rise of software-as-
a-service (SaaS) and cloud-based platforms.
B2C companies generated 72.9 percent of
the transactions for digital goods in our sample set. Considering the growth of the
Internet of Things (IoT) and digital delivery of entertainment as consumers ‘cut the
cord’ for over the top (OTT) content, this trend should continue.
Transaction Overview by Business Orientation
* Only recurring transactions included in sample set; initial transactions excluded.
72.9%
24.1%
Percentage of physical goods transactions in the B2C category
B2B B2C Both
The Role of Promotions
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The Role of Promotions
Sales promotions such as discounts, coupons and ‘specials’ play a big part in demand generation and are always a major factor in holiday shopping. Coupons are especially attractive to consumers, as Nielsen research discovered when consumers in their September 2015 survey cited coupons as the top influence in pre-purchase decisions.
Coupons are an attractive tool for encouraging sampling, trial and adoption for
subscription businesses, too. In our sample set, more than 15 percent of customers
redeemed coupons in the fourth quarter of 2015, with the highest number of
customer redemptions in November.
In fact, earlier Recurly research found that Cyber Monday, which fell on November
30th in 2015, experienced three times the rate of coupon redemptions than other
days in a two-week period that included Cyber Monday and Black Friday. Powering Promotions
With Coupons
Recurly’s coupon feature lets you
create percentage or fixed-amount
coupons and create bulk unique
coupons. Read our blog series to
learn more about how you can use
coupons to power the promotions for
your subscription business.
Coupon redemptions on Cyber Monday versus other days in our research periodTHE RATE
Average Monthly Coupon Redemptions
October November December0
6
12
1815.1%
16.1% 15.4%
Factors Impacting Subscription Revenue: Churn
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Factors Impacting Subscription Revenue: Churn
Churn, or customer attrition, is one of the most sensitive variables impacting the value of a subscription business. Customer retention rates ultimately determine whether a recurring revenue business is growing profitably or not, and small shifts in churn rates can have major impacts on future periods. In effect, churn reflects how well products and services satisfy customers over a period of time. Dissatisfied customers cancel their subscriptions, or ‘churn,’ negatively impacting revenue and overall growth.
However, churn isn’t always voluntary. If a subscription business is unable to
collect payment, even if the customer is satisfied with the product or service,
that customer is lost to involuntary churn. Credit card issues, such as outdated
information which leads to failed payments, are major reasons for involuntary
churn. Measuring both voluntary and involuntary churn rates is very important for
subscription businesses, as each rate requires different mitigation strategies.
Amount of overall churn in our sample set categorized as involuntary churn PERCENT
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Factors Impacting Subscription Revenue: Churn
In our sample, the overall churn rate peaked in Q1 of
2015 and declined by 8 percent throughout the year.
Voluntary churn, reflecting customer dissatisfaction as
customers cancel subscriptions or switch to different
providers, represented 80 percent of churn throughout
the year and mirrored the overall churn pattern. Mitigating
voluntary churn requires strategies that focus on customer
satisfaction, including product or service improvements.
Involuntary churn, which is often caused by credit card
declines or other non-payment reasons, remained steady in
each quarter and made up almost 20 percent of the overall
churn rate.
Q1 Q2 Q3 Q40
2
4
8
6
108.8% 8.5% 8.2% 8.2%
2015 Quarterly Churn Rates
* Only recurring transactions included in sample set; initial transactions excluded. * Includes churned and total customers for each month; Recurly averaged rates over
four quarters. See glossary for further details.
Involuntary and Voluntary Churn as Percentage of Total Churn
82.4%
Q1
81.7%
Q2
80.6%
Q3
79.9%
Q4
Measuring voluntary and involuntary churn rates
is important for subscription businesses, as each
rate requires different mitigation strategies.
Voluntary Involuntary
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Factors Impacting Subscription Revenue: Churn
Examining churn patterns for B2B and B2C categories
revealed that the churn rate declined for both categories
throughout the year. The B2C category, however, had a
higher churn rate than B2B and decreased by 5 percent
over the course of the year. As we saw in the overall churn
analysis, voluntary churn formed the largest component for
the B2C category.
* Only recurring transactions included in sample set; initial transactions excluded.
Given these findings, we believe that New Year’s resolutions
to rein in expenses and save money drove voluntary
churn in the first quarter of 2015. As with many New Year’s
resolutions, the effects tapered off throughout the year.
82.5%
82.0%
78.3%
77.9%
B2C
Q2
Q1 80.2%
80.3%
B2B
Q4
Q383.0%
81.5%
Q1 Q2 Q3 Q40
4
2
6
10
8
12
7.9%
10.2%
7.6%
10.2%
7.4%
9.8%
7.2%
9.8%
B2B vs. B2C Quarterly Churn Rates
Churn Type as Percentage of Total Churn by Business Orientation
B2B B2C
Voluntary Involuntary
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Factors Impacting Subscription Revenue: Churn
Comparing churn rates for digital and physical goods
showed that the physical goods category, with a 10.6 percent
churn rate, experienced a 23 percent higher churn rate than
that for digital goods, at 8.2 percent; voluntary churn drove
the majority for both categories.
Voluntary Involuntary
Higher churn rate of physical goods than that of digital goods
0
4
2
6
10
8
12
Q1
8.7%
10.5%
Q2 Q3 Q4
8.3%
10.2%
7.9%
11.1%
7.8%
10.4%
Digital vs. Physical Quarterly Churn Rates Churn Type as Percentage of Total Churn by Business Type
Digital Physical
Physical
Q2
Q1
Digital
Q4
Q380.8%
78.9%
84.5%
78.7%
82.3%
86.0%
81.4%
78.5%
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Factors Impacting Subscription Revenue: Churn
Measuring and Managing Churn
The first step to minimizing churn is to
understand the difference between voluntary
and involuntary churn. Voluntary churn is
when a customer does some action such as
canceling their subscription. Involuntary
churn happens from a passive customer
action, such as when a credit card problem
is never resolved.
In either case, churn is a critical issue for
any recurring revenue business. There are
different ways to measure and manage it to
ensure your business’ success. To learn more,
read our white paper on calculating churn.
Involuntary churn remained fairly constant throughout the year. As noted
earlier, involuntary churn is usually caused by credit card issues. It’s
important to remember that many commonly experienced credit card errors
can be successfully remediated with careful management, resulting in
consistent and low rates of involuntary churn.
Minimizing involuntary churn
leads to two important
results: capturing the value
of otherwise-lost transactions
which translates into increased
revenue for the business and,
more importantly, retaining satisfied customers who would otherwise have
been lost to recoverable credit card failures.
In our next section, we’ll examine another key metric for managing
customer retention, credit card declines, and how to analyze decline rates.
Managing involuntary churn results in higher customer retention and lifetime value.
Factors Impacting Subscription Revenue: Credit Card Declines
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Factors Impacting Subscription Revenue: Credit Card Declines
Credit Card Declines
Each billing cycle is an opportunity to minimize a subscription business’ involuntary churn. Predictable revenue streams are one of the great advantages of the subscription model, and to keep the stream flowing smoothly, subscriptions are often paid by credit cards, whether corporate cards for business services or personal credit cards for consumer products.
While most transactions are successful for Card Not Present (CNP) transactions
in e-commerce and subscription commerce, if there is a problem, the customer,
too, is not present to provide another payment method. Whenever a credit card
is used, the risk of failed transactions, or ‘declines,’ is present and needs careful
management in order to ensure the transaction is successful and the customer
is not lost.
Designing a proper checkout flow reduces the level of declines on initial
transactions, and most companies follow best practices for this critical function.
However, if credit card information changes after the customer’s initial sign-up,
subsequent transactions are at risk, as is the customer. ‘Repairing’ the situation
seamlessly is critical so the customer is not lost to involuntary churn. As such,
we focused our decline rates analysis solely on recurring transactions and
excluded initial transactions from the data set.
Success rate of the 25 million transactions in our samplePERCENT
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Factors Impacting Subscription Revenue: Credit Card Declines
With an average quarterly decline rate of 12.2 percent for recurring transactions, our
sample of 25 million transactions experienced a success rate of almost 88 percent.
Transactions may decline for a variety of reasons, from a temporary processing
glitch at a payment gateway to an overburdened credit card. Noting the small
increase in declines as the year progressed, we decided to investigate the role
of seasonality.
Q1 Q2 Q3 Q40
6
3
9
12
15
12.0% 12.1% 12.2% 12.5%
* Only recurring transactions included in sample set; initial transactions excluded.
Average Transaction Decline Rates by Volume
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Factors Impacting Subscription Revenue: Credit Card Declines
Does Seasonality Affect Decline Rates?
From a seasonality perspective, decline rates as measured by volumes of transaction were relatively stable, indicating valid credit cards on file. However, transaction decline rates based on the value of the transaction increased by 10 percent over the course of the year, from 14.4 percent in the first quarter of 2015 to 15.9 percent in the fourth quarter of the year.
The fourth quarter of any year is one of
increased retail activity as consumers
shop for holiday gifts and increase the
balances on their credit cards. However,
an additional factor was at play in the
latter part of 2015 as the credit card
industry continued to roll out EMV,
or chip-and-pin, cards. Card-holders
received new credit cards designed
with additional security measures to defeat point-of-sale fraud—cards which
included new expiration dates and, in many cases, new security codes. Unless
this information is updated, transactions can be declined. This information can be
updated smoothly and programmatically when merchants use ‘Account Updater’
services, such as those provided by credit card companies or Recurly.
Average Transaction Decline Rates by Value
Q1 Q2 Q3 Q40
6
12
16
14.4%15.1% 15.2%
15.9%
The fourth quarter of any year is one of increased retail activity as consumers shop for holiday gifts and increase the balances on their credit cards.
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Factors Impacting Subscription Revenue: Credit Card Declines
$0-18 $19-28 $29-48 $49-98 $99+0
7
14
21
8.1%
9.4%
7.6%
11.5%
8.5%
13.1%
9.5%
15.7%
11.9%
20.9%
How Do Price Points Affect Decline Rates?
Do price points play a role in transaction declines? To answer that question, we segmented our sample transactions into five clusters of price points and identified whether the transactions originated with a B2B or a B2C company.
Decline rates increased in step with
price points in both the B2B and B2C
categories. However, decline rates
for transactions in the B2C category
outstripped the average decline rate
for each price point, based on the
volume of transactions.
In the B2C category, decline rates
for transactions valued at $99+ and
$49-98 reached almost 21 percent
and 15 percent respectively. The B2B
category experienced much lower
decline rates at those same price
points—almost 12 percent for $99+
and 9 percent for $49-98.
* Price points were chosen to reflect the most common subscription fees throughout the sample set.
B2B vs. B2C Transaction Decline Rate by Price Point
Decline rates in the B2C category outstripped the average decline rate for each price point, based on the volume of transactions.
B2B B2C
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Factors Impacting Subscription Revenue: Credit Card Declines
As noted earlier, transactions can decline for a variety of reasons, including
fraud or temporarily overburdened credit cards. This factor appears to be at
work as we saw higher rates of declines with the B2C category, especially
when working with higher price points.
Credit cards can be declined for a variety of reasons, but higher ticket
transaction sizes are certainly weighted with increasing sensitivity by
payment gateway and card processing participants. We have observed a
distinct correlation between the transaction amount and the probability that
the card will result in a declined transaction.
Being able to identify these scenarios is crucial, as there are a variety of
tactics that subscription businesses can use to recoup revenue which would
otherwise have been lost. In our next section, we’ll analyze how to measure
revenue recovery and how it contributes to healthy growth.
Analyzing Decline Rates
To establish a baseline, compare your
average decline rate to industry rates. For
most businesses, a decline rate of 5-14
percent of monthly transactions for B2B and
6-18 percent for B2C is standard.
Then look for trends. Sometimes, viewing
month-over-month data can reveal interesting
trends. Your customer service team can also
be a great source of information on decline
reasons and trends.
Regular analysis will make clear what issues
are causing transaction declines and how you
can correct them.
Recovering Lost Revenue
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Recovering Lost Revenue
Unlike physical commerce, where a transaction can be ‘saved’ when the customer provides another credit card if the first card has a problem, card-not-present (CNP) transactions such as those in subscription businesses require specialized strategies if the transaction fails.
While most transactions are successful, the nature of subscription businesses
provides opportunities to ‘recover’ revenue that might otherwise have been lost
to credit card declines or churn. This is especially important at renewal time for
subscriptions. Recovering this revenue requires specialized logic which can vary
based upon why a transaction fails. This may include re-submitting the transaction
programmatically, or ‘re-trying’ the transaction, at defined intervals, to avoid
inconveniencing customers.
How Well Do Various Business Categories Recover Lost Revenue?
Using these programmatic techniques, the businesses in our sample were
able to recover almost 11 percent of revenue that would otherwise have been
lost during 2015.
The revenue recovery rate for B2C transactions was higher, at 12 percent. This is
noteworthy since the B2C category experienced a slightly higher rate of declines
and churn, too. Efficient revenue recovery can lead to significant upticks in
revenue for subscription businesses.
0
6
3
9
12
10.4%
12.0%
11.0%
Quarterly Average Recovered Revenue Rates
B2B B2C Overall Average
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Recovering Lost Revenue
How to Calculate the Recovered Revenue Rate
The Recovered Revenue Rate is calculated by taking the sum of revenue Recurly is able to recover that would have been lost otherwise and dividing that by the original revenue amount.
In general, there are three types of successful transactions, and the last two
cases contribute to the Total Recovered Revenue amount:
First attempt with existing and
up-to-date credit card information.
This is the bulk of most recurring
transactions, where the transaction
will just go through on the first
attempt with the existing credit
card information.
First attempt with updated credit
card information. This is a group
of transactions where Recurly’s
proprietary solution, including Account
Updater, will update the credit card
information before processing the
first transaction. Without the updated
information (e.g. new credit card
number), these transactions would
have failed and the revenue would
have been lost.
Subsequent attempts on initially
failed transactions. This group
of transactions are ones where
the initial attempt was declined,
due to credit card issues such as
insufficient available balance, but
were successfully re-submitted
programmatically at defined
intervals using our service.The effective recovered revenue rate is
calculated by dividing the total recovered
revenue by the total revenue amount.
Amount of revenue businesses in our sample were able to recover
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Recovering Lost Revenue
Let’s use a fictional company called Kale Krate to illustrate how this works.
In the month of April, Kale Krate generated $950,000 in revenue. Of the
$950,000, Recurly was able to successfully process $800,000 on the first
attempt without any updates (case #1). Recurly was also able to update the
credit information and successfully process $100,000 on first attempt (case
#2). Finally, $50,000 was declined initially but subsequent programmatic
attempts helped recover $10,000 of that amount (case #3) for Kale Krate.
As a result, Kale Krate collected $910,000 in the month of April, including
$110,000 that might have been lost.
Step-by-Step: Calculating Effective
Recovered Revenue Rate
Follow these three simple steps to calculate
your effective recovered revenue rate and
see how much you could save.
Calculate the total recovered
revenue (case #2 + case #3)
Calculate the total
possible revenue
Divide recovered revenue
by possible revenue
$100,000 + $10,000 = $110,000
$900,000 + $50,000 = $950,000
$110,000 ÷ $950,000 = 11.57%
There are over 2,000 ways a credit card transaction can fail. See how much revenue you can recover by preventing declines.
1
2
3
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Recovering Lost Revenue
The key to revenue recovery lies in identifying the reason for a transaction
decline so the appropriate action can be taken. There are scores of reasons why
transactions can be declined, or fail. Each reason has a different rate of revenue
recovery with some reasons generating high rates of revenue recovery and other
reasons very low rates.
Overall, our sample saw a revenue recovery rate of 11 percent, across all decline
reasons. This rate is attributable to proactive management and use of Recurly’s
proprietary retry logic and built-in Account Updater tools.
Quarterly Recovered Revenue Rates by Top Failure Types
Insufficient Funds Temporary Hold Exceeds Daily Limit
We further examined three of the more
common decline reasons—Insufficient
Funds, Temporary Hold, and Exceeds
Daily Limit—that we remediate using
proprietary logic. The revenue recovery
rates were fairly consistent throughout
2015, demonstrating how managing
declines can lead to significant revenue
contributions on a repeatable basis.
Revenue recovery rate of our sample, attributed to proactive management
Q1 Q2 Q3 Q40
22
11
33 31.5% 32.9%
14.7%
28.9%
14.3%
29.8%
13.7%
31.4%
25.0%
12.1%
31.4%
27.4%
25
Recovering Lost Revenue
Keys to Recovering Revenue
⊲ Identify the reason for a transaction
decline so the appropriate action can
be taken. Common decline reasons are:
Insufficient Funds, Temporary Hold, and
Exceeds Daily Limit.
⊲ Use an Account Updater function to
automatically repair failed transactions.
Recurly’s Account Updater recovers
up to 9 percent of a customer’s annual
revenue, on average.
⊲ Read more about Recurly’s free Account
Updater service.
The recovered revenue rate represents only one facet of value, as it
represents only the money recovered from individual transactions. If a
customer is lost or churns due to a credit card issue, then the subscription
business not only loses the revenue from that failed transaction, the
business could also lose all future revenue from that customer. Since
subscription businesses are based upon the premise of customer loyalty
and retention, it is critical to build revenue recovery processes into
business workflows.
If a customer is lost or churns due to a credit card issue, the business could lose all future revenue from that customer.
Summary and Methodology
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Summary
The recurring nature of subscriptions provides an opportunity to reinforce value for customers every time a product or service is delivered and with every billing cycle. Customer retention is key as customers who derive value reward companies with economic loyalty.
Two of the factors that subscription businesses need to manage closely
are credit card declines and customer attrition, or churn. Mitigating churn
can provide subscription businesses with significant revenue uptick
and can be achieved with modest process improvements. One of the
first steps is to identify business patterns, especially as they compare
to industry averages. For example, companies that target consumer
audiences may see increased customer churn after the holiday period
and should create proactive strategies for mitigating
this ‘hangover effect.’
Churn falls into two categories, voluntary and involuntary. The former
category indicates customer dissatisfaction with products or services,
providing a clear indication that improvements are needed in product
or operational areas. Involuntary churn is usually caused by credit card
issues which, when remediated, lead to two important results: increased
revenue gained from capturing the value of failed transactions, and
increased rates of customer retention as satisfied customers were not
lost due to credit card declines.
The nature of card-not-present transactions, unlike physical commerce
where both the card and the customer are present, require specialized
strategies if the transaction fails. While most transactions are successful,
the nature of subscription businesses provides opportunities to ‘recover’
revenue that might otherwise have been lost. This is especially important
at renewal time for subscriptions as credit cards may have been updated
or replaced. In our sample set of 25 million transactions that occurred
over 2015, Recurly was able to recover almost 11 percent of revenue for
these subscription businesses, providing a noticeable, positive impact.
As more businesses embrace the subscription model to deliver
predictable revenue and form closer relationships with their customers,
customer loyalty and retention metrics such as those we analyzed in this
report provide the key to automating revenue-optimizing decisions.
28
Methodology
Our study examined a sample pool of 25 million aggregated and anonymized subscription transactions generated throughout 2015.
We categorized these transactions by market—either business-to-business (B2B) or
business-to-consumer (B2C)—and by whether the product or service was digital or
physical, in order to identify trends, including seasonality.
We also segmented our sample transactions into five clusters of price points and
identified whether the transactions originated with a B2B or a B2C company in
order to examine the impact of price.
The sample set included paid recurring transactions only and did not include the
initial subscribing transaction.
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Glossary
Transaction Decline Rate
The number of declined transactions as a percentage of
the total number of recurring transactions in the sample.
Voluntary Churn
Customer attrition based upon a direct customer action
intended to terminate a subscription, for example when a
customer cancels their subscription or purposefully lets it
lapse without renewing.
Coupon Customer Impact Rate
The total number of customers who redeemed a
coupon divided by the number of customers in that
month for each business offering coupons. The reported
rate is an average across these businesses. The time
period included was the 2015 holiday season (October
to December).
Recovered Revenue
The sum of revenue recovered by Recurly (through
processes such as Account Updater, automatic retries,
and dunning) that would have otherwise been lost,
divided by the original revenue amount.
Monetary Decline Rate
The total value of declined transactions as a percentage
of the total value of recurring transactions in the sample.
Involuntary Churn
Customer attrition based upon a passive customer
action, such as a declined credit card. If the credit card
information is not updated or repaired, it causes the
customer’s subscription to be terminated.
Churn Rate
The total number of customers who left due to either
voluntary or involuntary churn during a given time period
divided by the total number of customers at the start
of that time period. Only recurring transactions were
included in sample set; initial were transactions excluded.
Recurly measured churned and total customers for
each month of 2015 and averaged these rates into
four quarters.
Recurly provides enterprise-class recurring billing management for thousands of subscription-based businesses worldwide.
+1.844.732.8759 [email protected] © 2016 Recurly, Inc. All rights reserved.