Why Strategic Churn is Good for Your Bottom Line 

If you have a subscription-based business, a concept that may seem counterintuitive at first glance is strategic churn. Losing hard-won customers is something that we try to avoid at all costs. Yet, for many savvy subscription leaders, strategic churn, or the intentional loss of poor-fit subscribers who drag down overall customer satisfaction, gross margins, and product development velocity, has become a crucial strategy for increasing the bottom line and ensuring long-term viability in a market that’s undergone a whiplash-level pivot from growth at all costs to growing efficiently.

According to recent data from Chargebee’s 2024 State of Subscriptions and Revenue Growth report, a staggering 73 percent of subscription businesses are raising prices in 2024 — a significant uptick from the previous year's 62 percent. What's more intriguing is the willingness of these businesses to accept substantial churn rates of 20 percent or more of their customer base in pursuit of greater profitability and sustainability. But done right, this strategy of increasing prices, ideally in conjunction with releasing product and service enhancements that appeal to core loyalists who are willing to pay more for a more valuable service, helps separate the wheat from the chaff.

Higher paying customers drive higher annual recurring revenue (ARR) per customer, higher customer lifetime value (CLV), and are stickier with more predictable retention rates. Alternatively, price-sensitive customers who are less willing to pay are often those who submit a disproportionately high number of support cases, request expensive returns or process chargebacks, are more prone to posting negative reviews online, and have a higher propensity to voluntarily cancel (i.e., "strategic churn").

In my recent discussions with B2B and B2C subscription growth leaders, we’ve discussed the rationale behind embracing strategic churn at length. Across industries, from SaaS platforms to content streaming services, the consensus is clear: sacrificing short-term numbers for long-term gains is a strategic opportunity.

Let's look at why strategic churn is emerging as a powerful tactic for subscription companies to optimize customer lifetime value (CLTV), drive net revenue retention (NRR), and achieve positive cash flow, all while fostering deeper relationships with their most valuable customers.

Prioritizing Value Over Volume

One of the fundamental principles driving strategic churn is the recognition that not all customers are created equal. While acquiring new customers is essential for growth, retaining those who value your product or service is equally — if not more — important. By focusing on quality over quantity, subscription companies can tailor their offerings to cater to the needs of their most loyal and high-value customers.

Some Butter is Better Than No Butter

Butternut Box, a leading UK-based fresh dog food subscription box, recently experienced strategic churn when it decided to make a calculated bet on raising prices in three step-up phases between 2022 and 2023. The decision to raise prices was motivated by a variety of factors ranging from a 30 percent to 40 percent increase in the cost of lamb and beef to supply chain challenges due to new factory construction and the need to become profitable as a company. Butternut Box used the pricing changes to shift into a value-based pricing model from its previous cost-plus model and worked with third-party pricing consultants to run surveys to develop psychological price barriers. The company then rolled out its pricing increases in phases, beginning with new customers and continuing with existing customers.

Butternut Box carefully monitored its churn during this time. It implemented targeted campaigns aimed at customers who were dissatisfied with the new prices, offering personalized win-back messages and adjusting plans to retain them. This included tools to review and adjust their subscriptions, such as removing additional products or switching to surcharge recipes. Additionally, Butternut Box improved the pause/cancel experience by allowing customers to modify their plans online instead of calling. The philosophy that "some butter is better than no butter" guided the business to offer flexible options to retain customers who were considering downgrading rather than canceling entirely. Incredibly, neither acquisition rates nor CPAs suffered through the change.

The results? Butternut Box significantly increased CLTV while maintaining stable gross retention and exponentially improved its CAC: LTV ratio. Butternut Box proves that even in customer-obsessed businesses like itself, strategic churn results in a more sustainable business, which is better for customers.

Switching to Usage-Based Pricing Was a Win for Livestorm

Another interesting example is Livestorm, a B2B SaaS vendor. Livestorm was among the first in the video conferencing industry to switch pricing from license-based to usage-based. Livestorm managed to transition most of its customers from 70 percent paying fixed monthly fees to 80 percent paying for usage in less than a year. What’s extraordinary is that it doubled its average revenue per account and tripled its lifetime value. Along the way, a meaningful proportion of the legacy customers opted against shifting to usage pricing (strategic churn), freeing up Livestorm to accelerate development and better serve its more valuable customers while overall revenue increased.

Embracing the Strategic Churn Journey

Embracing strategic churn requires a shift in mindset from focusing solely on short-term sales acquisition rates to prioritizing long-term sustainability and CLTV. It's about understanding that not every customer is meant to stay forever and letting go of those who no longer align with your strategic objectives. Eighty percent of consumers are more likely to purchase a new subscription that allows them to cancel online (2021 State of Retention Industry). Remember, by making it easy for customers to cancel and offering a positive experience, you increase the likelihood of them returning. This could happen if they realize the value of your product or service, if you introduce new features they desire, or if their circumstances change.

By proactively managing churn and nurturing relationships with high-value customers, you can unlock new opportunities for growth, innovation and market leadership. In an era of relentless disruption and fierce competition, embracing strategic churn and subscriptions can be a powerful revenue growth tactic.

Conclusion

Strategic churn represents an opportunity for growth you may not have considered until now. By raising prices and/or adjusting your model, you can improve your product appeal more quickly to your most committed customers. By prioritizing value over volume, embracing customer-centricity, and learning from real-life success stories, you can harness the power of strategic churn to drive sustainable growth, increase profitability, and chart a course toward long-term success.

Guy Marion is the chief marketing officer at Chargebee, a revenue growth management (RGM) platform for subscription businesses.