Why it's important to identify and investigate involuntary churn
While active cancellations are the most visible component of churn, sometimes they aren't the biggest. Customer delinquencies can be just as commonplace and equally deadly to your success as a business. There are three major reasons why:
Involuntary churn can ruin your unit economics
Growth relies on sound unit economics. Specifically, you're looking to achieve a 3:1 ratio between the lifetime value (LTV) of each customer and their customer acquisition costs (CAC).
Involuntary churn has a calamitous effect on this ratio. Let's say that your average customer lifetime is 18 months and your average MRR per account of $100. With an LTV of $1,800, you can get away with a maximum CAC of $600 to maintain that healthy 3:1 ratio.
Your product is a smash hit and you're sitting pretty with zero active churn. Yet, your quick growth masks a threat that lurks in the background.
Involuntary churn doesn't strike immediately. Credit cards expire about every 3 years, so in the 18-month lifecycle of your customers, about half will need to update their payment info or you'll lose them to involuntary churn.
If you have 1,000 customers, that's 500 involuntary churners. Spread linearly throughout the 18 months, these delinquencies starts to take a serious toll on your revenue:
You'll see involuntary churn as a slow erosion on your growth over time rather than a downward spike. It quickly adds up.
At 18 months, you've lost almost a half a million dollars in revenue.
Yet, the problem goes beyond lost revenue. With customer delinquencies factored in, your LTV is $1,325. If your CAC is $600, you've got an LTV:CAC ratio of just 2.2, below the threshold for sustainable growth. You have a terrible forced choice:
- Increase your prices in an attempt to increase the numerator in the LTV equation.
- Decrease CAC to reduce the amount you are spending on each customer.
Neither option is palatable (or always possible). Both your pricing and your CAC should be dictated by the nature of your customers, not your churn. Yet, unchecked involuntary churn won't stop after killing your unit economics. It will kill your customer experience too.