How does your OTT brand minimize churn and incentivize retention?
A churn rate for subscription services represents the number of subscribers who cancel their subscriptions. After your target market size, your subscription churn rate is the most important metric to indicate whether your brand will successfully scale or slowly collapse.
Luckily, your churn rate is one of the easiest aspects of your business to measure and address.
So what is a good churn rate for OTT providers? And what’s the main reason your subscribers are jumping ship?
This guide provides a rundown of insight and tips, including:
- Why subscription churn is such a big deal
- Average churn rates for established OTT brands
- The biggest churn motivators
- 6 ways to drive retention and lower churn
While you may employ different commitment-free options, such as displaying ads or offering pay-per-view content, subscriptions deliver predictable revenue. They’re also a sign that people value your service. But that’s not all.
what is ott churn, and why does it matter so much?
Two types of churn will cause your OTT brand to lose subscribers:
Involuntary churn happens when customers unintentionally lose access to your service. This may occur when a customer: forgets to update an expired payment method, loses their credit card/has it stolen, or encounters an electronic payment failure.
Stats show involuntary churn accounts for up to 20-40% of overall churn [*]. And responses from an IBM survey revealed that 16% of people accidentally had a subscription canceled because they forgot to update their payment/credit card information [*].
Though you can take steps to minimize involuntary churn, it’s not 100% in your control since it has more to do with the payment process than your product or service.
Voluntary churn is when customers actively decide to cancel their subscription. Because this usually means customers are either dissatisfied with your service or don’t find enough value, you must focus on changing their perception to keep or win them back.
Why go through all the effort? Below is a basic example of churn as it relates to customer lifetime value, customer acquisition costs, and sustainable business practices. If you’re already knowledgeable in these areas, skip to the section, “what is a good churn rate for ott brands?”
low churn rates increase customer lifetime value (CLV/LTV)
Your CLV is a snapshot of the health of your subscription business. It represents the average revenue a subscriber generates before they churn, and marks a key metric for investors to predict growth and profitability.
A CLV is used to balance the amount you spend acquiring new subscribers with how long it takes a customer to “pay back” that amount (and eventually generate a profit).
Let’s say you start a new yoga channel. Using easy numbers here, let’s imagine it takes $100 to turn a stranger into a subscriber (known as a customer acquisition cost). A monthly subscription for unlimited classes costs $15/month. Therefore, you need your subscriber to stick around for at least seven months just to break even.
But what if your customer stays loyal for a year? Or even two years? Now, this one customer has generated between $180 and $360 for the $100 you put in to acquire them. The longer they stay, the lower your cost to acquire them over time.
In year one, you’ll spend $100, collect $180, and make an $80 profit. In year two, you don’t have to spend money acquiring your customer, so you earn a straight $180. Year three brings another $180, for a grand total of $440.
This works out to spending just $33/year to bank close to $450. Not a bad investment, right? But this only works if your subscriber sticks around.
high churn rates increase your customer acquisition costs (CAC)
Now, let’s say there’s a hole in your subscriber bucket called the churn chute. Using our example, we know a subscriber will only start paying back their CAC after month seven. So what happens when they slide out the churn chute at month two?
It cost $100 to acquire them; you’ll only earn $30 in revenue and lose $70 on the deal. Plus, now you have to spend another $100 to acquire a new customer, putting you in the hole and raising your CAC to $170 just to replace them.
Now the next customer must subscribe for 12 months for you to break even.
high churn rates are unsustainable for business
As you can see, the cost of a churned customer has a profound effect on how much your brand can spend on marketing and free trials to win new subscribers. And the bigger your brand gets, the more subscribers you’ll lose to churn and need to replace.
Let’s say your yoga channel scored 50,000 subs. With a 10% churn rate, you’ll need to replace 5,000 subscribers with new customers. Boost your subs to 500k with the same churn rate, and you’ll need to acquire 50,000 new subs. No business is capable of this, especially not one hoping to be profitable and sustainable for years to come.
how to calculate churn
Churn can be calculated differently for each subscription model and business type. The easiest method is to:
- pick a time period to focus on (monthly, quarterly, annually, etc.)
- find your total number of churned customers over that period
- divide the total of churned customers in that time by the total number of subscribers you had on the first day of that period
Going back to our example, let’s say in one month we had 50,000 subscribers and 5,000 churners. That’s a 10% churn rate.
what is a good churn rate for ott brands?
Experts agree that OTT brands should aim for a 5% net monthly churn rate for subscription services. Though this may seem easier said than done, tracking your churn is the first step to lowering it and improving your service.
It’s critical to regularly benchmark your churn rate against your competitors and industry averages. Most established OTT brands manage much lower churn rates than 5%. Netflix used to boast a churn rate below 1% per month, for example [*]. However, recent research shows that even the big guys are starting to struggle.
a look at Netflix churn rate
As of March 2020, the churn rate of Netflix lies right around 4%. Between January 2018 and December 2019, their churn rate doubled for a number of likely reasons:
- December 2018: To negate revenue share with iTunes, Netflix stopped allowing renewals and subscriptions made through the App Store and made them exclusively available in-app.
- January 2019: Netflix increased their prices.
- November 2019: Big-time competitors Disney+ and Apple TV+ launched.
higher consumption during COVID-19, and higher churn?
Research shows large, foundational OTT providers, such as Netflix, Amazon Prime Video, and Hulu, typically have lower churn rates because they form the base of an OTT video consumer’s service stack [*].
In Q1 2019, the average churn rate for streaming services reached 35%. But stats from research firm Parks Associates revealed a churn rate of 41% during Q1 2020 [*].
- Traditional pay-TV providers have a churn rate of less than 4%.
- Smaller services such as ESPN+, STARZ, and CBS All Access experience over 50% churn.
- vMVPDs deal with a staggering average churn rate of 81%.
- 7% of users cancel their Hulu Plus subscription within a year, approximately half of Hulu Plus’ current subscriber base.
Amid COVID’s furloughs and unemployment rates, over 30% of households canceled their OTT memberships due to the expense. But that wasn’t the only churn motivator.
the biggest ott churn motivators
What are the most common reasons subscribers churn?
Many brands assume their targeting is wrong during the customer acquisition process. They believe that as long as some subscribers stay, they just need to better hone-in on their target audience.
But churn isn’t related to targeting. In fact, if you’ve managed to acquire a customer, your targeting is spot-on. Churn is more related to your value proposition. Churn happens after you’ve convinced people to sign up and give your service a try. So if they’re unsatisfied, it means your service is lacking.
The top drivers for OTT subscription cancellations include:
Thanks to their contractless nature, OTT subscriptions are much easier to cancel and start again than a contract with a pay-TV provider. So consumers are ever on the hunt to find better, cheaper services. If your product is priced higher than your competitors, you’ll need to prove why it’s worth your customer’s dollar.
OTT brands are struggling with this. As research shows, the top three reasons for churn stem from price and value:
Price increases can also cause subscribers to jump ship, especially if they don’t see anything extra worth the hike.
The end of a promotional period will also cause high churn. Once subscribers have a feel for your content library and viewing experience, they may decide your service isn’t worth the subscription price.
Ease of payment also factors in here. Netflix saw higher churn rates when it stopped allowing payments through the iTunes/App Store. They made it more difficult for subscribers to pay them, so subscribers just stopped doing so (whether voluntarily or involuntarily). Another related factor, subscription fatigue, indicates that almost half (47%) of U.S consumers are aggravated by the sheer number of subscription services they need in order to access the content they want.
Removing Netflix from the App Store just adds one more thing for those users to have to do, adding friction and potential churn.
competition + experimentation
The average OTT viewer only has room in their budget to support one to five subscription services each month. The majority of users stick to three primary providers, with Netflix, Hulu, and Amazon Prime Video snagging one (or more) of those spots. But new streaming giants like Disney+, Apple TV+, HBO Max, and Peacock are snatching up subscribers eager to experiment with a fresh content library.
Kept home from work, viewers were jonesing for content during the day. And streaming services took advantage of the lack of live sporting events and movie theater releases in prime time.
With extended free trials intended to build engagement and new subscriber growth, 8% of US households subscribed to at least one new OTT service during COVID-19 lockdowns. And 49% of them signed up for Disney+ while 27% subscribed to Apple TV+ [*].
Though 70% of those customers subscribed when their trial was over, many decided to cancel the experiments rather than pay full price. And that boils down to content.
lack of quality content
After price, not finding anything to watch is the most-often cited reason for dumping a subscription video service. If you have a robust content library, viewers may have trouble with search and discovery. Or they may need personalized recommendations to guide them amid the sea of choices.
Parks Associates research shows nearly 20% of subscribers churned because they found a better content library elsewhere. And 10% churned when their service removed programs they liked watching.
poor user experience and service
Subscribers expect a seamless, intuitive user experience on every device/platform. They want enhanced user functionality that predicts their next move. And they want updated features that won’t break with the latest OS update.
“All services, during this time of unprecedented consumption, have to be vigilant about delivering an all-encompassing user experience that exceeds consumer expectations in order to retain subscribers and reduce churn.” – Steve Nason, Research Director at Parks Associates [*]
It’s essential to keep improving your app, so it remains ahead of your competition. If your app repeatedly crashes, takes too long to buffer content, or navigation becomes a chore/headache, subscribers will churn.
So what can you do about it?
6 recommendations for driving ott retention
Churn is a reflection of how valuable subscribers find your service. So to prove your brand deserves a subscription, you must incentivize retention. Any of these recommendations should help:
1. first, tackle involuntary churn
Accidental payment failures are the number one cause of involuntary churn. Your customers want to pay you (because they like your service), but there’s a roadblock somewhere.
The easiest way to reduce payment issues is to partner with an automated billing service. This will alert users when their payment on file needs to be updated, so their subscriptions don’t lapse.
Other ways to tackle failed payments and reduce involuntary churn include:
- Re-billing accounts with insufficient funds on the 15th and 30th of the month.
- Allowing members to pause service.
- Creating win-back campaigns to alert churned members that they’re missing out.
- Offering incentives for members who sign up or pay with bank-to-bank payment methods like bank debit (ACH) instead of a credit card. Payment failure rates may drop as low as 0.5% compared to credit cards, sometimes slashing involuntary churn by over 70%.
2. improve the viewing experience
UI and UX are the two of the biggest drivers of your OTT app’s success. You must maintain a seamless viewing experience on every platform and device to engage users wherever they wish to watch content.
If your app looks or performs poorly, users will spend less time engaging with it. And low engagement rates are one of the highest indicators of poor user experience and eventual churn.
Since this topic deserves more attention, check out these guides next:
- Why OTT Cross-Platform Design and UX Across Mobile, Web, And TV Matters
- Fight OTT Subscription Fatigue With Killer User Experience
3. price strategically and always communicate your value
Don’t settle on the first subscription pricing model you come up with. Continually perform a competition price analysis to make sure you’re delivering value to your audience. Then share these results with your subscribers!
Is your yoga channel the most affordable? Does it offer more classes? Do you specialize in providing content for a specific type of practice? Do you add more new releases than your competitors? What’s in the pipeline for subscribers to look forward to if they stick around?
You must always focus on communicating the value a subscriber will receive from continuing their subscription. Besides email and in-app push notifications, you can also achieve this via an OTT content marketing strategy.
4. keep producing or securing more content
When subscribers feel like they’ve exhausted all their choices for content, they’ll be more tempted to abandon their subscription and experiment with another. So constantly offering subscribers new, compelling content is the best way to keep them engaged and increase your platform usage.
Netflix releases over 700 original titles every year and offers licensed content people used to watch on traditional TV. HBO Max enticed new subscribers with shows they love watching, such as Friends and Rick and Morty, but ultimately hopes their original programming retains them as long-term subscribers.
5. onboard immediately and give subscribers a roadmap
Most subscriber churn that occurs during the first period is a result of viewers not knowing how to get started. A report from PwC showed 50% of steamers would cancel an OTT service with an overwhelming amount of content or a challenging content discovery system [*].
So an optimal way to reduce first-period churn, which is arguably the most important/highest, is to throw your subscribers right into your service head-first.
To reduce the paralysis of finding something good to watch, Netflix makes new subscribers add at least three titles to their queue (based on their interests) before they get to watch anything. This gives subscribers something to get started with and learn the basics hands-on.
Establishing an onboarding experience like this is crucial to speed up your time-to-value, or how long it takes before a subscriber finds value in your service. You could create an on-screen tutorial for first-time users, or send them an interactive roadmap of steps to take in your “thank-you-for-signing-up” email.
Then, don’t forget to monitor their onboarding and usage experience with cross-platform app metrics to measure your success. This valuable data will help you understand how users are accessing content and help you anticipate/personalize their next moves.
6. always focus on engagement
Engaged users are happy, loyal subscribers. So once you have a subscriber, you can’t just forget about them; you must reach out and actively engage to keep them hooked. The viewer data you collect will provide key insights about your subscribers that you can use to act upon to better connect. Once you analyze these, your team can:
Send emails and in-app push notifications about new episodes of their favorite program, new films by a director they favor, or content they may like based on their viewing history. Let them watch instantly or quickly add these titles to their watchlist to ensure they spend more time on your platform/come back.
Just be sure to send notifications based on their specific user data, or else subscribers will become annoyed with intrusive suggestions that don’t pertain to their viewing habits.
Enable video previews. No one likes spending time choosing something to watch only to realize 10 minutes in that they’re not interested. Viewers then have to return to square one, frustrated and behind the curve.
Video previews of personalized recommendations offer sneak-peeks to help users make faster, smarter decisions. They quickly showcase the title’s storyline, characters, and overall tone. Research shows these reduce content discovery times, so viewers spend more time engaging and less time searching [*].
a well-designed cross-platform ott app is the best solution to reduce churn and boost subscriber retention
A high subscription churn rate (over 5%) spells trouble for OTT brands hoping to grow their market share, no matter how awesome their content library. Follow the strategies in this guide, and you’ll have better luck with subscriber retention and spend less money replacing churned customers.
The best way to ensure happy customers become loyal subscribers is to design an app users love to engage with. Taking the time to invest in a killer user experience across all platforms and devices pays back dividends. And it’s easy when you partner with a company well-versed in OTT app design like Zemoga.
Get in touch with our experienced team now to see how we can build better for you!