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Subscription commerce merchants adapting to rising churn rates

Today, merchants prioritize innovative ways to retain their existing customer base and monetize it. They are moving away from the traditional methods of customer acquisition. This major shift shows that subscription-based businesses have adapted to the current macroeconomic climate.

The “2023 State of Industry Report”, published by subscription billing software company, highlights this shift. Chargebee.

Chargebee researchers conducted a study between March 18, 2023 and April 15, 2103 to analyze the customer retention strategies of 318 industry leaders. The 28 questions in the survey asked about how these leaders have adapted to changing conditions. They covered business strategies, budgets and retention tactics.

The research signals the dawning of a new “Retention Era” where customer retention is now the number one priority for 87% the businesses surveyed. The strategy is comparable to or exceeds traditional new customer acquisition techniques.

Chargebee’s research also reveals that 96% subscription executives believe that customers who cancel their subscriptions do so for reasons which can be managed or corrected. 

Chargebee, 2023 State of Subscription Industry Report

Investments Focused on Retention

The companies have adjusted their strategies for this year. The tactical shift has moved from battling churn through adjusting priorities and budgets to a more focused approach — generating revenue from existing customers.

The report shows a trend of increasing customer attrition. 64% companies surveyed expect a rise in this year’s churn. The report shows that 51% increased spending in technology and 32% in initiatives. 27% of the companies surveyed said they would increase their loyalty program.

Guy Marion, Chief Marketing Officer at Chargebee, said that this year’s business landscape has changed rapidly. Companies, regardless of the business model, have prioritized investment to continue growth.

He said that data shows a majority (B2B and DTC) of subscription businesses are expecting an increase in churn. They need to have a solid investment strategy if they want to grow and maintain revenue.

He suggested that “the smart bet” was on retention. It is a more direct, efficient and long-term approach to growth. Customers are at the heart of his business.

Concerns Go Beyond Churn

Respondents reported that their biggest concern for the year ahead is to keep up with rapid changes in technology and the profound impact artificial intelligence (AI), has on operations. It is crucial for companies to keep up with the rapid changes in technology and advances in artificial intelligence (AI) as they strive to remain competitive.

Despite challenges, optimism reigns supreme, with 79% predicting growth in this year. In terms of pricing, most businesses expect either stability or an increase in prices. 92% subscription businesses predict that their prices will rise or remain at their current level.

Customer success and support are the key to a successful growth strategy. Subscription-based sales face a major challenge: slowing down the churn of customers.

This reflects the dramatic changes that have occurred in the past two years. Before Covid, businesses were still in a “growth at any cost” era. Marion said that money was flowing more freely and this could be seen in the way product marketing strategies and consumer behavior were faring.

Churn Chaos

At this point, companies had just begun to grasp the importance of retention. In our 2020 survey, 93% respondents said retention was just as important or even more so than acquisition,” he explained to The E-Commerce Times.

Churn rates ranged between 2% and 3.9%. 69% of B2C businesses had set a churn goal. In 2020, 96% believed that the reasons for customers leaving their company could be managed. Marion pointed out that 31% could not identify the reasons for leaving.

Then came the pandemic. This period saw a surge in disposable income and an increase in business. Many retailers have switched to digital and this has had a positive impact across the board.

He explained that as we transitioned from the pandemic to a more tight economic environment, B2C companies began to feel what is called subscription fatigue.

The industry is experiencing a churning rate increase. Chargebee benchmarks show that 42% of B2C businesses churn 3% or higher monthly and 16% churn 4% or greater. Marion says that the average has increased to close to 6%. That’s nearly double what it was before the pandemic.

Tech Spend, Loyalty Programs Solutions To Churn

Not all of the indicators are negative. Marion observes that in the current report there is a similar percentage of people who think cancellations by customers can be resolved (96%) Still, only 15% state they do not know the reason — a 52% decline.

This shows that perceptions of the industry have not changed significantly in the past few decades, but execution has. The ability to manage and reduce cancellations has improved for companies due to operational efficiency and capabilities improvements, Marion reported.

Spending on technology, retention, and tools differs significantly between 2020 and 2023. In 2020, businesses invested 15% of their budgets on technology and tools. In 2020, businesses spent 15% on technology and tools. The retention initiative expenditure went up from 14% in 2020, to 32% in 2030.

The data indicates that businesses now have a better understanding of the consumer behavior thanks to technologies like Chargebee Retention which provide predictive analytics and data that can be used for more intelligent decisions.

One example is a brand that sells self-care products and beauty products. They reduced churn by 12.5% and brought it down to less than 9% when they offered better personalization and upgraded offers at renewal time. This reduced cancellations through proactive churn-deflection and supportive gestures. The company also launched new loyalty programmes to increase brand loyalty, retention and predict growth for the coming year.

Growth and Retention strategies

Retailers and marketers will have to adapt to the falling budgets and rising cost as consumers are less able to continue their old shopping habits. Marion’s first takeaway from this report is that there is only one constant: change.

“We have seen similar trends in the past, but we’ve also seen progress with the way people react to them.” He noted that companies are investing in technology and automating processes to increase productivity, improve customer service, and track results for better decision making.

B2C firms are most concerned by the impact external forces have on their business. This includes AI technologies, such as ChatGPT, that are revolutionizing customer service, content generation and the tight labor market. They are also worried about rising interest rates and the tightening of the labor market. He added that they plan to spend more on technology in order to support growth and retention.

Marion said that three of the top priorities for B2C companies to spend more money on are retention related.

B2C businesses are responding to this increase in churn by implementing growth strategies that place a priority on keeping their existing customers satisfied. B2C businesses will focus on improving customer service this year and onboarding.

Chargebee, 2023 State of Subscription Industry Report

Fluid Retention Strategies Are Needed

Marion said that as the subscription model evolves, companies will need to continually realign themselves with consumer behaviors.

He expects to see more companies innovate their business models in order to provide new experiences for the customers. Porsche’s Drive product, which won a Cube at SubSummit 2020, is a good example. This is a monthly subscription that allows Porsche enthusiasts to have access to near-new cars on a flexible basis.

“Companies who offer only one-size fits-all solutions might struggle to keep pace with changing customer needs, especially when coupled with an increasing need for efficiency,” concluded he.

Marion believes that the churn rate is not as high as it used to be, with new technology to combat it and 27% of businesses prioritizing their loyalty programs.

He was surprised by the optimism he found in the report. The report showed that 94% businesses who expect to see their churn rate increase also expect an increase in revenue.

Businesses are actively reallocating their budgets in order to improve customer satisfaction by leveraging new technology and tactics. Nearly half of respondents (46%) see improving customer service quality and responsiveness as a crucial strategy for this year.