SaaS and subscription services are more common and popular than they’ve ever been before. Think about businesses such as Netflix or Shopify to name just two. These are household names, showing the convenience attached to either subscribing or using such a service. If you’re running this type of business, you’ll no doubt keep a very close eye on your churn rates.
Not only does this affect the overall success of your business but high churn rates can also drive up your operational costs. In addition, they increase the chances of a payment platform account lock, which seriously disrupts your operations. This is why many businesses look for a Square alternative as one example. For high-risk payment processing, the chances of problems are even higher. For this reason, it’s important to understand how to reduce your churn rate, lower your costs, and look toward a successful business future.
The Psychological Underpinnings of Customer Churn
When you establish a business, of course you aim for it to be successful. You don’t want to think about obtaining customers, only for them to leave. Yet, it’s a reality that needs to be addressed.
First things first: what is a churn rate? This term means the number of customers who stop using your service and leave. If you have a high churn rate, it’s a negative sign because you’re losing customers. Yet, if your churn rate is low, you’re retaining them and things are looking good.
You might be wondering what is a good churn rate? This varies depending on the industry. However, according to research, subscription companies have an average churn rate of 5-7%, and 4% is considered a good level. SaaS companies have an average of 3-5% per month.
A high churn rate can affect a business in many ways, but there are some commonly overlooked factors too, many of which are psychological. Understanding these factors will help you create a quality customer retention strategy, therefore reducing emotional decision-making and boosting success.
The Sunk Cost Fallacy and Its Impact on Churn
The first thing to consider is the sunk cost fallacy. This is when you hear that tiny voice in your head that tells you not to give up on something because you’ve already invested so much into it already. This not only relates to business owners who decide whether to stick or twist, but also customers, especially those paying for continuity subscription services.
Identifying Sunk Cost Behavior in Customer Data
Using the wealth of customer data you no doubt already have, you can spot whether your users fall into the sunk cost thinking trap. You’ll spot patterns across engagement and user behavior and notice any customers who may continue paying for their subscriptions because they believe they’ve already invested so should just stick around. With this information, you can change your retention efforts to engage them more.
How can you spot this and reduce customer churn?
Look at data such as purchase history, how often they use the service, and how often they interact with feedback systems or support. If you notice that customers continue to pay but use the service less and less, it’s a sign of sunk cost thinking. Track this information over a period of time and you’ll gain valuable insights.
Leveraging the Sunk Cost Fallacy for Retention
You’re probably now wondering how to reduce the churn rate once you’ve spotted sunk cost thinking. At this point, your customers haven’t left, but they’re at a high risk of doing so and fast action is required. A few useful strategies include offering personalized solutions to customer problems or pain points, and incentives that encourage them to stick around and engage more deeply.
The other positive here is that your customers will feel that you care about their well-being and their use of your product. This builds trust and is a great way to focus on how to reduce churn rate and increase retention.
The Role of Loss Aversion in Customer Decisions
When asking what is a good churn rate for SasS, consider loss aversion.
Humans have many cognitive biases, but have you ever noticed how most people hate to lose more than they actually love to win? This phenomenon is so common it has a name: loss aversion, and you can use this in your retention efforts.
Loss aversion plays a key role in decision-making, particularly when a user is deciding whether or not to leave your service and move to a competitor, or cancel their subscription generally. Digging deeper into this way of thinking can help protect your business from high churn.
Framing Subscription Benefits to Minimize Perceived Losses
Subscription services in particular can benefit from understanding loss aversion. It’s so easy to switch to a different provider, particularly if they offer a lower rate or a new incentive. To protect your business, don’t just explain what your users stand to gain by sticking around; instead, inform them about what they could lose if they leave. It’s a small shift but it’s powerful.
For instance, rather than saying “Gain access to premium features,” say, “Don’t miss out on exclusive content.” Instead of, “Save money with our annual plan,” say, “Avoid paying higher monthly fees.” As you can see, they basically say the same thing but the way they’re delivered emphasizes what a customer stands to lose, and people hate to lose.
The Ripple Effect: Churn's Impact Beyond Lost Revenue
When you consider what is churn, the first thing that comes to mind is loss of revenue. For sure, that’s a huge impact, but there are other consequences too. Let’s explore these in more detail.
The Viral Nature of Negative Experiences
An unhappy customer can often be quite loud, and nowadays we have social media to amplify that noise. Just one well-timed tweet can turn into a major PR headache.
Some churned customers may simply leave for no reason other than the service no longer services them, and they’re unlikely to say much. However, an unhappy churned customer could turn into a nightmare by influencing other existing customers, potentially leading to them also leaving. It’s that dreaded domino effect, and to overcome it, it’s vital to understand how this happens in the first place. After all, churn has more hidden costs than we realize at first.
Quantifying the Influence Radius of a Churned Customer
Underestimating the ripple effect of a churned customer is a mistake. Yes, you’ve lost revenue from that one customer, but if they influence another customer, or even ten or twenty, you’re losing in a much bigger way. This is called an “influence radius,” and understanding this is a key point of damage control.
Social network analysis models are a good starting place, as these can help you map connections and influence of any churned customers within those specific networks. Sentiment analysis tools are also valuable, helping you to track and analyze communications from churned users. This will help you understand their tone and potential influence.
Strategies for Mitigating Post-Churn Negative Influence
When you spot a potential issue, it’s vital to take action and prevent it from spreading any further. If you can do this fast enough, you’ll protect your reputation and ensure ongoing customer loyalty in your SaaS or subscription business.
Proactive outreach strategies can be very helpful here, and this can take the form of an automated trigger system. This way, you can address any concerns the customer may have that caused them to leave, preventing lingering negativity finding its way into the online space and affecting other users. AI is your friend here as sentiment analysis can help you monitor feedback in real-time and assess any potential risks.
In effect, it’s about acting quickly to “put out the fire,” rather than allowing it to spread.
The table below gives the average churn rates by industry, helping you to understand the impact it may have on your SaaS or subscription-based company.
| Industry/Type of Business | Average Churn Rate | Details |
| Telecommunications | 15% – 35% | High due to competitive market and contract expiry. |
| SaaS (Software as a Service) | 5% – 10% | Can be lower with strong customer retention programs. |
| E-commerce | 30% – 60% | Highly variable based on product type and customer loyalty. |
| Retail (Physical stores) | 10% – 20% | Varies based on location, product quality, and customer service. |
| Financial Services | 5% – 10% | Customers tend to be more loyal, but competition is high. |
| Insurance | 10% – 20% | Churn rate often reflects customer dissatisfaction with premiums or claims experience. |
| Health & Fitness (Gyms, etc.) | 20% – 40% | Often high due to membership cancellations, especially after the first few months. |
| Media & Entertainment | 20% – 40% | High churn in streaming services as consumers shift preferences. |
| Hospitality (Hotels, etc.) | 30% – 50% | Varies by seasonality, location, and guest experience. |
| Education (Online courses) | 10% – 30% | Dependent on course quality and engagement level. |
| Real Estate | 10% – 15% | Churn is lower, but it depends on market conditions. |
| Automotive (Car Leasing) | 5% – 15% | Lower churn due to long-term contracts. |
| Travel (Airlines, etc.) | 20% – 40% | High due to seasonality and competition. |
The Hidden Costs of Churn on Employee Morale and Productivity
When learning about what is churn rate, it’s important to understand that it doesn’t only affect customers and your business profitability. It can also affect the morale and productivity of your team. Think about it this way: if customers are constantly leaving, it’s normal for your staff to start to worry about the future of the business. This can be extremely demotivating and can, in many cases, lead to employees leaving and the need to recruit all over again.
In effect, it’s a vicious cycle and one that can lead to very poor outcomes. So, know that when looking at how to reduce churn in SaaS businesses, it’s not just about the bottom line but also about productivity in general.
High churn rates can lead to low employee morale.
The Hidden Costs of Churn on Employee Morale and Productivity
SaaS and subscription-based businesses are extremely vulnerable to churn and employees know this. To counteract any stress or undue worry around this subject, it’s vital to have open lines of communication with your employees. Make it clear that they’re able to talk about churn within their team and wider organization and have their questions answered. This will help to boost morale and trust within the management structure.
Overall, you can’t eliminate the possibility of churn completely, but you give it a positive focus by creating a catalyst for future growth and improvements.
Predictive Analytics: The Future of Churn Prevention
It’s easy to focus on improvements in terms of what is a good churn rate for subscription services, but it’s also important to consider technology. There are many new advancements that are helping in analyzing data, often utilizing machine learning models. These can help to identify customers who are at risk of churn, so action can be taken before it reaches that point.
The success of these models is evident in the numbers. A study by Recurly showed that 42.4% of customers had reduced overall churn rates compared to the year before. The main reason is thought to be overall reduced involuntary churn, shown in 58.4% of cases.
Behavioral Segmentation for Churn Risk Assessment
Identifying customers at risk of churn is complicated by the fact that every customer is unique in their needs and behaviors. However, you can categorize customers based on specific aspects, such as engagement levels and usage patterns. From that, you can identify the customers who may churn in the near future.
Developing Custom Risk Scores
Custom risk scores are a useful tool to help you identify at-risk customer groups. By looking at specific factors, the system can create a risk profile for every customer, using machine learning technology. Algorithms can accurately calculate and update risk scores in real-time, giving you a clear picture as your business shifts and changes.
API integrations can also be used in this regard, giving up-to-date risk scores and insights that are backed up solid numbers.
The table below gives a useful glimpse into churn risk factors and how important they are.
| Churn Risk Factors | Weight |
| Usage Frequency | 30% |
| Feature Adoption | 25% |
| Support Tickets | 20% |
| Contract Duration | 15% |
| Payment History | 10% |
Real-Time Intervention Triggers
We mentioned real-time scores, and that’s because timing is vital when it comes to preventing churn. Having systems in place that can identify and alert you to any potential churn signals in real-time helps you take immediate action, avoiding critical lost opportunities. In the end, you can react to potential threats, rather than having to constantly deal with issues after they’ve happened.
Take Netflix for example. They have extremely low churn rates due to their continual improvements to user experience and a strategic approach to releases.
Balancing Automation and Human Touch in Churn Prevention
Technology is certainly extremely useful and it’s moving at a fast pace, but in this situation, the human touch is still vital. It’s about finding a balance between automation and human intervention, so you’re using technology to enhance the experience, not replace the human element.
The video below gives some useful tips on how to achieve that balance and how to calculate churn rate.
The Churn Rate Paradox: When Lower Isn't Always Better
By this point, it’s clear that a high churn rate creates problems. One of the most notable is leading to potentially high payment processing fees and the risk of account closure. However, there are some situations when at least some churn can actually be useful over the long-term. Let’e explore this intriguing concept.
The Concept of Healthy Churn
A little bit of churn can actually be a good thing, and this is known as “healthy churn.” Over time, a good and stable level can lead to higher customer engagement levels. However, it’s critical to know the difference between the good type of churn and the extremely destructive type.
Calculating the Optimal Churn Rate for Your Business Model
As every business is different, so is the optimal churn rate and churn rate formula. SaaS and subscription-based businesses have their differences, and this extends to other types of companies too. For that reason, identifying a balanced rate for your individual business is key. The aim is to find a middle ground between balancing customer retention and allowing your product to evolve naturally toward your target market.
A good way to do that is to use a Monte Carlo simulation. This can help you model the variability of customer behaviour, giving clear insights. You can also use machine learning algorithms to adjust your churn predictions and shift according to the results in real-time. Of course, there is no replacement for doing your homework either, and that means understanding average and optimal churn rates across your sector and beyond. This helps in goal setting and informs your future plans.
Churn rate formula gives you insights into the health of your SaaS or subscription business.
Using Churn as a Feedback Mechanism for Product Development
There’s no denying that churn is negative on the whole, but turn it on its head and you’ll see that it can be a useful tool for improvement. Using insights from churned customers can help you improve and develop your services for the future. Let’s take a closer look at how you can do that.
Designing Exit Surveys for Maximum Insight
A highly valuable tool is an exit survey. Creating a high quality survey for customers who are leaving your service can lead to fantastic insights. However, remember that you’ll only obtain these insights if your survey is good quality. For that reason, spend time thinking about the questions you want to ask and the data you’d like more of.
Natural language processing, or NLP, can be a great tool here to automate analyzing open-ended responses. This can lead to deeper insights that can be used moving forward. Predictive models are also helpful in identifying the best respondents to approach in the first place. Finally, we can’t forget AI. Surveys powered by AI can be customized to ask personalized questions, bringing more value from responses.
How PayCompass Can Help
At PayCompass we understand just how detrimental churn can be for SaaS and subscription-based companies. However, churn is also damaging for high-risk industries, such as e-commerce, travel, online dating, and CBD products. Thankfully, there is good news.
As an excellent PayPal alternative, we offer a streamlined payment processing service that reduces the risk of chargebacks, high fees, and account locks. All of these can be disruptive at best and extremely damaging at worst, so it’s vital to avoid them wherever possible. In addition, our payment services are designed to address many of the issues that lead to churn in the first place, making it a true win-win.
Our platform is smooth, intuitive, and easy to use, using real-time monitoring capabilities to identify at-risk customers and take fast action. Not only does this help you reduce churn levels but it provides peace of mind at every turn. Ultimately, we’re a quality Stripe alternative that cuts out the need for worries.
If you’re ready to switch to a payment platform that can help you reduce churn rates and increase customer retention, check out our welcome page and reach out to PayCompass today.
Key Learnings Recap
Throughout this guide, we’ve explored the fact that high churn rates are very damaging to any business, but particularly a hgh-risk SaaS or subscription business. In addition, churn can also cause psychological problems that can cause stress and overwhelm. Of course, churn can also cause problems with employee morale and damage brand perception over time. However, the good news is that there are many ways you can reduce churn.
The first step is to create a strong churn prevention strategy, by making use of technology and analytics. However, it’s important to remember that churn isn’t wholly negative and can be a good way to learn what needs to be improved.
Yet, we can’t ignore the fact that one of the most troubling aspects for high-risk businesses is the challenges faced with payment processing. Handily, PayCompass is on hand to help, offering tailored accounts for high-risk businesses, packed with tools to help avoid issues.
