.png)
Estd 4.22.2023
Introduction
In the competitive landscape of SaaS, understanding customer churn isn't just a metric—it's a critical business indicator that directly impacts revenue stability and growth potential. While many executives track overall churn rates, distinguishing between voluntary and involuntary churn reveals far more actionable insights. Voluntary churn occurs when customers actively decide to leave, while involuntary churn happens due to payment failures or technical issues rather than customer dissatisfaction. According to research by ProfitWell, involuntary churn typically accounts for 20-40% of total churn in SaaS businesses—a substantial portion that requires different strategic responses than voluntary departures.
This article will guide you through the process of accurately calculating both types of churn, interpreting what they reveal about your business health, and implementing targeted strategies to address each type effectively.
Understanding the Two Faces of Churn
Voluntary Churn: The Conscious Departure
Voluntary churn represents customers who deliberately choose to end their relationship with your service. These decisions typically stem from:
- Perceived lack of value relative to cost
- Poor customer experience
- Feature gaps compared to competitors
- Changes in customer business needs
- Budget constraints
Calculating voluntary churn requires identifying customer accounts that actively canceled their subscriptions through formal cancellation processes.
Involuntary Churn: The Accidental Loss
Involuntary churn occurs when otherwise satisfied customers stop paying due to payment failures rather than dissatisfaction. Common causes include:
- Expired credit cards
- Failed payment processing
- Insufficient funds
- Billing errors
- Technical glitches in subscription management
According to Recurly Research, the average B2B SaaS company experiences payment decline rates of 8-10%, with a significant portion converting to involuntary churn if left unaddressed.
Calculating Voluntary Churn Rate
To calculate voluntary churn rate accurately:
Identify voluntary cancellations: Count customers who actively canceled their subscription within the measurement period.
Apply the formula:
Voluntary Churn Rate = (Number of Voluntary Cancellations / Total Customers at Start of Period) × 100Example calculation:
If you started the month with 1,000 customers and 30 customers actively canceled their subscriptions:Voluntary Churn Rate = (30 / 1,000) × 100 = 3%
Calculating Involuntary Churn Rate
To calculate involuntary churn rate:
Track payment failures leading to account termination: Count customers whose accounts were terminated due to payment issues, not by choice.
Apply the formula:
Involuntary Churn Rate = (Number of Involuntary Cancellations / Total Customers at Start of Period) × 100Example calculation:
If 20 customer accounts out of your 1,000 starting customers were terminated due to payment failures:Involuntary Churn Rate = (20 / 1,000) × 100 = 2%
Data Collection Best Practices
Accurate calculation depends on proper data collection:
For Voluntary Churn:
- Implement exit surveys during cancellation processes
- Track cancellation reasons with predefined categories
- Monitor usage patterns prior to cancellation
- Record customer communication leading to cancellation
For Involuntary Churn:
- Track failed payment attempts by customer
- Document credit card expiration dates
- Monitor dunning process effectiveness
- Record response rates to payment recovery attempts
Interpreting Your Churn Metrics
Understanding what your metrics reveal about business health is crucial:
High Voluntary Churn Signals:
- Product-market fit issues
- Customer success gaps
- Onboarding inefficiencies
- Value perception problems
- Competitive positioning weaknesses
A study by Bain & Company found that SaaS companies with voluntary churn rates above 10% annually typically struggle with fundamental value proposition issues.
High Involuntary Churn Signals:
- Inadequate payment recovery systems
- Billing process friction
- Credit card update workflow issues
- Customer communication gaps
- Dunning process ineffectiveness
Strategic Responses to Each Churn Type
Addressing Voluntary Churn:
- Enhance product value: Prioritize features that address common cancellation reasons
- Improve onboarding: Ensure customers achieve value quickly
- Strengthen customer success: Implement proactive outreach programs
- Develop competitive differentiation: Clarify and communicate unique value
- Implement health scoring: Identify at-risk accounts before they cancel
According to Gainsight research, companies with robust customer success programs can reduce voluntary churn by up to 67% compared to those without such programs.
Addressing Involuntary Churn:
- Implement smart dunning: Use intelligent retry logic for failed payments
- Enable card updaters: Leverage card network services that automatically update expired card information
- Improve payment communication: Optimize messaging for payment failures
- Offer alternative payment methods: Provide multiple payment options
- Implement account updater services: Automatically refresh payment information
Research by Baremetrics indicates that implementing effective dunning and payment recovery systems can reduce involuntary churn by 20-40% for most SaaS businesses.
Calculation Tools and Systems
Several tools can help track and calculate these churn metrics:
- Subscription management platforms: Chargebee, Recurly, and Stripe Billing offer built-in churn analysis
- Customer success platforms: Gainsight and ClientSuccess provide churn categorization
- Analytics solutions: MixPanel and Amplitude help correlate user behavior with churn types
- Custom dashboards: Power BI and Tableau can be configured to visualize voluntary vs. involuntary churn
Conclusion
Distinguishing between voluntary and involuntary churn is not merely an academic exercise—it fundamentally changes how you respond to customer losses. While voluntary churn requires product and service improvements, involuntary churn demands operational optimization of your billing systems.
By calculating and tracking these metrics separately, SaaS executives gain clearer visibility into business health and can allocate resources more effectively. Remember that each type of churn requires its own distinct strategy: customer success initiatives for voluntary churn and payment optimization for involuntary churn.
The most successful SaaS companies maintain voluntary churn below 5% annually and involuntary churn below 1%, according to benchmark data from OpenView Partners. By properly measuring, analyzing, and responding to both types of churn, you'll be well-positioned to improve retention, increase lifetime value, and drive sustainable growth for your business.