The difference between B2B & B2C churn rates
Key definitions and industry benchmarks when it comes to churn, as well as the difference between B2B, B2C, and prosumer churn rates.
As a leader of an online subscription business, you are probably already familiar with the concept of "customer churn" and its considerable impact on your company's profitability.
At Churnkey, we recognize the importance of keeping your churn rate as low as possible. It determines how big your business can grow at the end of the day - regardless of whether you run a B2B or B2C company.
With that said, a B2B’s expected churn rate isn’t identical to one of a B2C company. In addition, the way you address churn isn’t necessarily the same for B2B and B2C businesses. This is why it’s essential for you to understand the differences between B2C and B2B companies when it comes to churn.
Fortunately, there are effective ways to understand, analyze, and combat your business’s customer churn rate. And that’s what we’ll cover in this article. We will also cover key definitions and industry benchmarks, as well as the difference between B2B, B2C, and prosumer churn rates.
B2C & B2B SaaS Businesses: Similarities and Differences
You can find software as a service (SaaS) businesses in a wide variety of industries, from word processors to accounting software and everything in between.
SaaS is a model of delivering software on a subscription basis, allowing customers to access the most advanced software at a reasonable monthly rate. In addition, users enjoy automatic updates without having to purchase a separate, new edition of the software.
B2B SaaS Businesses
Most SaaS businesses are B2B, providing other businesses with the tools they need to streamline their customer service, marketing, and sales. Generally, B2B SaaS solutions reduce human resource costs by automating important processes.
B2C SaaS Businesses
B2C SaaS businesses usually take the form of apps that help individuals accomplish a task such as learning a new language, editing a smartphone video, or listening to podcasts. The nature of these services makes them more prone to customers coming and going than with a B2B product.
While both B2B and B2C SaaS companies offer subscription-based software available to customers, B2B software tends to be more expensive. And as you’ll see, B2B SaaS churn rates tend to be lower than B2C SaaS church rates since they’re usually focused on solving perennial problems for businesses.
Between B2C and B2B
It’s also worth noting that there are SaaS products that cross the line between B2B and B2C. Normally, these are designed to accomplish something that businesses, as well as individuals, may need, such as tax or graphic editing software.
What Does "Churn" Mean for an Online Subscription Business?
The term "churn" refers to the rate at which a subscription business loses its subscribers when the subscription expires or when it is canceled.
The loss of subscribers ultimately leads to revenue loss. But it’s not just about lost revenue in the short term. Lost subscribers need to be immediately replaced for a SaaS business to maintain itself. A churn rate that’s too high will quickly spell disaster for a business. So, a Saas business with a high churn rate will need to spend more on advertising and marketing in order to keep things going. Growth will require even more. This is why a company’s churn rate is an important indicator of its long-term success.
Thus, churn rates relate directly to the LTV (customer lifetime value) for your subscription business. Minimizing churn rates increases your LTV and leads to higher ROI in relation to your customer acquisition cost.
If you are looking to boost your subscription-based SaaS company's performance, reducing customer churn should be one of your main priorities.
Revenue vs. Customer Churn
There are two important types of churn: revenue churn and customer churn.
- Revenue churn defines the percentage of revenue lost from customers in a certain time period.
- Customer churn describes how many of your existing customers cancel their subscriptions in a given period of time. The customer churn metric can be used to calculate the average LTV of a subscriber.
Voluntary vs. Involuntary Churn
Customer churn rate can be further subdivided into voluntary and involuntary churn.
- Voluntary churn occurs when a customer decides to cancel a subscription to your services or products. SaaS business owners can reduce voluntary churn by improving customer satisfaction scores. You can also use tools like Churnkey to offer personalized deals to customers who have decided to unsubscribe.
- Involuntary churn is when customers unintentionally lose access to your products or services. You can't address this type of churn by improving your service or products, as even happy customers can become victims of involuntary churn. However, you can follow up with customers who involuntarily churn via e-mail or certain targeted ads. You may even want to consider sending out a regular e-mail reminder before a subscription charge to encourage customers to make sure that their payment information is correct.
Many subscription businesses make the mistake of focusing solely on voluntary churn. However, according to ProfitWell, 20%-40% of overall churn can be attributed to the involuntary type.
Involuntary churn can happen for many reasons:
- A customer's credit or debit card gets stolen
- A customer loses his card
- A customer forgets to update their payment information when their debit or credit card expires
- A customer's bank rejects their payment
Is There Good Churn?
While it may not seem possible, there is such a thing as good churn. This can happen for two primary reasons.
First, you may have customers who use your product for a season, accomplish the task they needed it for, and unsubscribe once they’re finished. At the end of the day, they aren’t leaving because they were unhappy or have found a better product. They’re unsubscribing because they no longer need your service.
This is a good thing because, if they were pleased with your service, then there’s a good chance that they’ll return to your service once they need it again. As a result, you can continue to connect with them via e-mail or other marketing efforts so that you’ll be fresh on their mind when a need for your product arises.
In addition to customers who no longer need your service, good churn can happen when a customer who isn’t a good fit for your product unsubscribes. While it may hurt to lose a customer, you don’t want to spend time or other resources chasing after uninterest buyers.
This will also give you the ability to see if a particular marketing strategy is working poorly by bringing in the wrong customer. Once you’ve identified an issue like that through higher rates of churn, you can focus your marketing dollars on the strategies that work best.
How to Calculate Churn Rate
There are numerous ways to calculate churn rate, but we recommend keeping things simple.
After you pick a time period to focus on (for example, monthly), you can calculate the churn rate as:
Churn = # of customers that churned in period / Total # of customers at the start of the period.
You can also calculate voluntary and involuntary churn separately and then find the total churn as:
Total Churn = Voluntary churn + Involuntary churn
Churnkey has an intuitive insights dashboard that lets you see why customers leave at a glance, which deals they take, and who's most at risk. These can help you identify why churn occurs and proceed with devising ways to reduce it.
Monthly vs. Annual SaaS Churn Rates
You may be wondering, “What is a good churn rate for SaaS?”
You’ll sometimes hear it said that a good rate falls somewhere around 5%. That’s certainly true in some cases (as we’ll soon discuss), but it’s important to clarify whether we’re talking about a monthly 5% average churn rate or an annual one.
Here’s why that difference is critical and can be the difference between your business finding success and falling off a cliff.
If your annual churn rate is 5% and you have 1,000 customers, then you’ll lose 50 customers over the course of a year. That’s unfortunate, but an extremely low number in the SaaS industry, especially when juggernauts like Buffer reported having an annual churn rate of 46%!
Compare that to what it would look like if the same 1,000 customer base had a monthly average churn rate of 5%. In that case, you would lose 460 customers over the course of a year. That’s nearly half of all your customers – a significantly larger number.
This is why it’s important to keep these differences in mind as you think about the average churn rate for your SaaS business.
The Difference Between B2B, B2C, and Prosumer Churn Rates
The most important factor determining if your churn rate is within a normal range is whether your SaaS business sells to other businesses, consumers, or audiences in between.
Churn Rates for B2B SaaS Companies
B2B stands for "business-to-business." B2B SaaS companies sell their services directly to other businesses or, more specifically, they sell to the decision-makers within these other businesses.
On average, churn rates within B2B settings are lower than their B2C counterparts: B2B churn averages at 5.00%, compared to 5.60% total churn rate for subscription businesses.
This lower churn can be attributed to the following factors:
- Higher prices. Generally, software products geared towards businesses are more complex and have a higher price point. This leads to more considered purchase decisions by B2B customers and, as such, lower churn rates.
- Accounting departments. Businesses usually have specialized accounting departments that ensure that the bills are paid on time. As a result, the software is kept around for longer.
- Annual subscriptions. Businesses use software tools on a long-term basis and prefer to buy annual subscriptions, which come with higher renewal rates.
With all that said, B2B businesses do face churn-related challenges that B2C customers don’t often deal with. Here are a few of the more common:
- Sometimes businesses fail. When a business that’s subscribed to a B2B SaaS product closes down, their need for the product will go with it. Obviously, this is a big deal within the B2B world. Especially when you consider the fact that 20% of small businesses fail within the first year.
- Point people from your B2B clients can change. Whether through promotions, retiring, being let go, or finding a job elsewhere, employee turnover can disrupt important relationships between a B2B business and its customer.
Churn Rates for B2C SaaS Companies
B2C stands for "business-to-consumer." This means that B2C companies sell their services or products directly to customers for personal use.
The average churn rate for B2C subscription companies is around 7.05% - considerably higher than that of B2B companies. Here is why:
- Lower prices. Lower price points of B2C SaaS products mean that consumers are more likely to make an impulsive purchasing decision, which is likely to result in hitting the "unsubscribe" button down the road.
- Simplicity. Individual B2C customers don't need to get approval from the boss before subscribing to a service. Similar to lower prices, the simplicity of making a purchase can lead to impulsive buying.
- Higher volume. B2C companies sell more - which translates into higher churn rates.
B2C SaaS businesses are also faced with unique churn challenges. This requires B2C SaaS businesses to approach churn with a more specialized strategy. Here are a few of the most common obstacles B2C SaaS companies face that B2B businesses don’t:
- Competition is higher in the B2C world. Since the general consumer market is so much bigger than that for B2B companies, there’s a lot more competition out there. Consider the fact that Apple’s App Store, a major force in the B2C industry, is forecasted to grow by 21% annually through 2025. So, competition is stiff within the B2C world. And that makes churn a difficult challenge for B2C SaaS companies to fight.
- In addition to competition, many B2C SaaS products are entertainment and learning oriented. Think of Netflix, Spotify, and Duolingo. Since they tend to be less driven by persistent needs, they’re more prone to customers subscribing and unsubscribing with their waxing and waning interest.
- Individual consumers are also more likely to suffer from payment problems. Whether it’s a delinquent credit card or an expired debit card, B2C customers are far more likely to leave SaaS businesses with involuntary churn than their B2B counterparts.
Churn Rates for Prosumers
Many SaaS companies cannot be classified as typical B2B or B2C companies. The individuals or companies that fall in between B2B and B2C are called "prosumers."
Prosumers are individuals who purchase tools or subscribe to online tools for potentially professional purposes. Influencers, photographers, podcasters, video creators, and bloggers can all be considered "prosumers."
Not surprisingly, the average prosumer churn rate falls somewhere in between that for B2B and B2C companies.
How to Reduce Churn Rates For B2B and B2C
If you’re going to reduce your SaaS churn rate, you’ll first need to determine why it’s happening. You’ve got to diagnosis the underlying issues before you can come up with an effective prescription for fixing them.
In order to diagnose the cause of your high churn rates, you should take a hard look at the customers who tend to be churning the most. Do they fall into a specific demographic? Are you acquiring them from a particular marketing strategy? Do most of them drop off at the same month in their subscription? All of these questions can help you understand why your churn rate is so high.
If your analysis doesn’t lead you to clear answers, you may want to send unsubscribed customers an e-mail asking for their feedback. Or you could implement one of Churnkey’s cancel flows to find out why they’re leaving in real-time. Customer feedback is huge for understanding the causes of your high B2C and B2B churn rate.
Price point is the most significant factor contributing to the differences between B2B and B2C churn rates. However, there are other variables throughout the consumer journey that subscription businesses can adjust to reduce churn rate:
- Better onboarding. Onboarding is the process of introducing your service or product to new customers. An organized and effective customer onboarding process will build trust and ensure customer loyalty from early on.
- Long-term pricing. Annual subscriptions can help you retain customers longer and ensure recurring revenue.
- Showcase your “best” features. Every online tool has a core set of features that users use more than others. Figure out which features these are and ensure that customers are onboarded into seeing their value.
- Engagement. Customer engagement is an ongoing interaction between your business and its customers. Focus on improving user experience and resolving customer complaints and queries as soon as they arise.
- Better cancel flows. When your customers are leaving, you can make the most out of it by creating a proper customer offboarding process. Use tools like Churnkey to get a clearer picture of why you are losing subscribers and find out which aspects of your products worked for them and which didn't. With Churnkey, you can also offer customized deals at offboarding to minimize churn.
Minimize Your SaaS Company's Churn Rates with Churnkey
You should never overlook your SaaS company's churn rate, as it determines the customer retention rate, your revenue ceiling, and, ultimately, limits your business growth.
Now that you understand the differences between B2B and B2C churn rates and the factors behind them, it's time to take action!
Subscribe to Churnkey to minimize your churn rates by gaining valuable insights, improving the offboarding experience, creating personalized offers, and more.