September 17, 2019

The case for encouraging churn

And other subscription pricing lessons from Netflix

by @maguay

Writer. Amateur photographer. Information architect. Frm. founding editor @racket and @capiche, senior writer @zapier, Mac and Web editor @AppStorm. Personal blog: @techinch.
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When software escaped big box retailers, site-wide licensing, and IT department approval, suddenly all you needed to get a new tool was a credit card and a few dollars to spare. The rise of web apps turned software into a service, something you pay for every month instead of in one lump sum.

Subscriptions are a boon to anyone who ever struggled to justify spending hundreds of dollars on software upfront. They have also been a boon, though, to businesses that wanted to lock customers in and extract as much value as possible.

One doesn't have to look far to find hostile subscription practices: Yearly subscriptions advertised with their price per month. Accounts that require a phone call to cancel. Surprisingly cheap plans that turn out to not include the product's most advertised features. Features that seem to work, only to require an upgrade before you can save your work.

Software is quickly becoming the next cable bundle and cell phone plan, subscriptions you may choose to live with but complain about whenever given the chance. Yet, one popular subscription, the very one replacing cable, rarely garners the same complaints: Netflix.

Embrace churn. It's your friend.

Perhaps it's the nature of their product, delivering must-see entertainment we'd hate to miss. Perhaps it's the depth of their service, with a seemingly endless list of content, far more than $12.99 could otherwise buy.

Or perhaps it’s the very thing that made subscribing so easy in the first place: You can cancel Netflix whenever you want.

Churn, the percentage of existing subscribers who cancel their accounts, is perhaps the most dreaded thing in software today. With enough churn, it's impossible to grow, as you lose customers as fast (or faster) than you gain them.

You could fight that by locking customers in, keeping them from leaving even if they want to. Hide the cancelation button, require customers to call or email to cancel, make it difficult to migrate data, or lock them into annual accounts and charge them to leave.

Or, you could do what Netflix does: Leave the door unlocked and the Exit sign turned on. Let people leave anytime they want. Fight churn instead with a better product, and keep people coming back not because you forced them to stay, but because they truly want what you offer.

Netflix 2003 Landing Page

From its earliest days of mailing DVDs in iconic red envelopes, Netflix competed with video rental stores that were better known for onerous late fees than for the videos they supplied. Not Netflix. They promised no late fees, no commitments. Not quite sure about renting through the mail, much less subscribing for unlimited movies? No worry, you can cancel anytime.

Netflix 2019 Landing Page

That commitment didn’t stop with DVDs. As Netflix’ focus shifted to steaming shows produced in-house, they kept the same customer friendly approach to cancelation. If anything, they doubled-down, listing “Cancel anytime” right above the signup button.

Investors worried, speculating if you didn’t lock customers into long-term contracts, they’d flee as soon as they finished a show. Netflix thought otherwise, telling the SEC that “management believes that in a largely fixed-cost streaming world with ease of cancelation and rejoin, the churn metric is a less reliable measure of business performance, specifically consumer acceptance of the service.”

Cancel Netflix for a couple months to catch up on Game of Thrones with an HBO subscription? Netflix isn't surprised—they've already planned to get you to resubscribe with the next season of Stranger Things.

It’s not only talk. Canceling Netflix takes 3 clicks: Open the Netflix Account page, click the prominent Cancel Membership button, then confirm with the Finish Cancelation button. They follow through with their promised simplicity.

Here’s how to do that in your service:

  • Make Cancelation Easy. Put an obvious Cancel Subscription button in your app settings, and detail how it works in your documentation. Let people unsubscribe in three clicks or less.
  • Don’t Require Talking to a Human. People subscribed to your app without talking to anyone. Give them the same option when canceling. Don’t require a phone call or email to cancel, or any other unusually difficult confirmation.
  • Save Discounts for Later. When people want to cancel, they already know what they want. Perhaps email later to nudge them to resubscribe, even offer a coupon to come back if you want. But for now, let people cancel when they want, without bribing or begging them to stay.

Churned customers aren’t a pure loss to your business. They paid for some period of time, after all, bringing in more revenue than someone who never subscribed. And now that they churned, it’s a learning experience. You can see when they canceled their account, see when they signed up again if they do, and learn from each step in the process. Use that to improve your product—not to lock customers in.

Make canceling easy and clear.

Netflix Cancel Screen

Canceling accounts is scary, though. Will you lose your data, and have to start over when you come back? Perhaps your Netflix library isn't crucially important, but it’d still be annoying to figure out which episode you last watched, and reteach the algorithm which shows you like.

Cancelation screens could be an easy place to scare customers into staying, to make them worry again if canceling is the right choice. Netflix, instead, reassures you. They tell you again that it’s fine to cancel, and that they’ll keep your data around for 10 months. You’ve already paid for this month, so Netflix tells the exact date your subscription will run out, and lets you continue watching until then.

That highlights other great subscription policies:

  • Let Customers Finish Their Subscription. Instead of kicking customers out as soon as they cancel, or offering a credit for the remaining time to entice them back, let users keep using the service until the end of the original paid period. This lets people cancel when they think they want to, instead of requiring them to remember to cancel right before it's time to pay again.
  • Make Renewal Dates Predictable. Ideally, start subscriptions the date customers pay, and charge them again a month from that date. Not 30 days later, either—match the number of days in that month, and always give users a real month of usage. List the next billing date in your settings, and when your app last billed them. Your customers are the ones paying, and they deserve to know when they’ll pay.
  • Keep Data Around—and Offer a Way to Delete It. Don’t remove users’ data as soon as they cancel their subscription or let it lapse. Keep it around; trust they may come back. But also, for the customers who actually want to leave and not come back, include a way to fully delete their account (something Netflix could improve, as that currently requires an email). It’s required for GDPR compliance, and the right thing to offer, albeit with perhaps a few more warnings than subscription cancelations should require. If you let people leave, be willing to let them go.
  • Let Users Take Their Data With Them. If you build software, or if you’re Netflix and produce shows, that’s your product, something people should pay to access. But your users’ data, that’s their product, something they should always be able to access, even if only the list of shows they’ve watched. That’s why every subscription service should let users always access their data and export it. Give them a way to take data with them when they leave, even if their subscription is expired and they come back for it later. It’ll be yet another thing that gives them a good experience with your software, something else that long term may keep them from fully churning.

Ever wondered why customers might choose to purchase your subscription as an in-app purchase, or via PayPal, instead of entering payment details directly? Control is a large part, almost more than the convenience. We know we can unsubscribe anytime in the App Store or PayPal, so even if customers don’t love either of those products per se, they do trust them and know at least they can unsubscribe easily.

Treat users well. Give them all the info they need, without unnecessarily scaring them. Don’t make them stay, and they’ll be more likely to come back, more likely to trust you with their billing info in the first place.

Share all the pricing info.

Pricing shouldn’t be difficult. A quality item for a fair price that doesn’t change without reason, that’s what most people expect.

What customers don’t expect is to pick up a widget and need to ask the price—only to then wonder if the customer before them was told the same price.

Software subscriptions already take a leap of faith to hand over your credit card details for a monthly charge. Don’t make it harder on customers by hiding your product’s true price.

Netflix Pricing

Netflix, true to form, is upfront with pricing. First, you get a free 30 day trial, the full library included. Then, on the landing page, you can see the three plan options with their features.

Only on signup do two less transparent practices come in, things your app should try to avoid. First, while the core landing page shows all plans equally, the signup flow highlights the most expensive plan, subtly pushing you towards that option instead of leaving the choice open. Then, you have to add payment info to start a free trial, something that the clear cancelation policy makes less frustrating, but still leaves the potential for users to sign up, forget to cancel, and end up paying without intending to.

There’s one other thing that Netflix could be a bit more upfront about: Sales tax. Smaller apps often either don’t charge sales tax, or simply include it in the price and hide it from customers (as VAT is often treated around the world). Larger companies, Netflix included, add tax with the final bill. That’s fine, but be sure to note it so customers know what to expect (which Netflix does, though only in their help docs).

That highlights some of the common subscription pricing issues that, while not as bad as holding customers’ hostage to their accounts, are equally likely to make customers hate subscriptions. Here’s what to do to avoid them:

  • Don’t Push People Towards a Specific Subscription. Customers had to think hard enough to try out your app and decide to subscribe. Don’t push it. They should be able to easily choose the best plan for their needs. Don’t push them towards a higher plan unless they need it. Trust that your product will win them overtime, that they’ll upgrade because they want to.
  • Show the Real Price People Will Pay, Not a Monthly Average. If your app shows a price per month, make that be the actual price they pay each month. If your annual plans are charged as one lump sum, show the full amount that will be charged. Don’t show an annual price divided by 12, or a monthly price with an annual discount included by default. If the payment plan says month, then customers should be able to pay that price for one month then cancel if they want. Let the annual discounts speak for themselves; don’t use them to trick people into paying per year.
  • Let People Know What Annual Subscriptions Mean. Along with that, if customers do want your annual subscription, let them know what that means. Will you bill them once for the year’s plan in a lump sum? Will you bill them once per month, but on a year contract? Is there a fee to cancel a yearly contract that’s paid over each month? Or if customers pay a lump sum, will you refund the remaining time if they cancel, store it as credit, or allow access to your app until the end of their paid time? Annual subscriptions come with difficult questions, are inconsistently managed, and often used as an easy way to make customers pay longer than they originally intended. They can also be a way to build customer loyalty with discounts, something your best customers will love. But make it a benefit, not something that obscures your product’s real price.
  • Remind People Before They’re Charged. Unexpected bills, especially large ones, are jarring and potentially budget-breaking. Annual subscription fees often start at $100 a user for cheap apps, and tens of thousands of dollars for large deployments of expensive services. You don’t want an unexpected charge of hundreds or thousands of dollars, and neither do your customers. So tell them first. Perhaps monthly reminders would get annoying; maybe let customers turn the notifications off, if you want. But always let people know before you bill them annually. It’ll have been long enough since the last bill to have possibly forgotten that they were subscribed, and you won’t build good will by charging customers who aren’t actively using your app. Let them know first. Give them the freedom to unsubscribe if they really want to—and help your loyal customers plan for the bill so the credit card notification isn’t a shock.

Deliver more value than anyone expects.

Netflix, of all services, could likely get by with less customer friendly policies, a bit more nudging to upgrade and less obvious cancel button. After all, where else would you watch Stranger Things, Black Mirror, Rilakkuma and Kaoru, and more? HBO for years required a cable subscription, and even today its HBO Now subscriptions are often tied to carrier deals around the globe, yet people are willing to jump through hoops to watch Game of Thrones and Chernobyl.

That makes Netflix’ stance all the more commendable. They aren’t making it easy to cancel merely to attract customers to a sub-par product—they’re offering it from a position of strength. They mastered “consumer acceptance of the service,” and gave us hundreds of reasons to keep subscribing.

Do that with your product. Don’t make your subscriptions be a way to extract value, to smooth out your revenue curve and ensure customers upgrade—as many traditional software turned subscriptions feel. Don’t make customers feel hostage to your service, required to keep using it to maintain their data, as many newer apps’ subscriptions feel. Instead, build that better mousetrap, and people will be more than willing to pay for it, time and again. They won’t question why you’re billing their credit card, they’ll be surprised they’re only paying that much.

Netflix compared to other services

In the short term, you may be able to boost metrics through growth hacks that trick customers and create friction for cancellations and downgrades. Those boosts, though, come at immense cost.

In addition to obvious brand costs of making your customers feel duped, there are also product costs. Any friction you create for churning customers directly taints your ability to understand the value your product delivers.

The world of on-premise lifetime lock-in to enterprise software is gone, and it’s not coming back. No matter how much friction you create, your customers will find their way out the door if a better solution exists. And the easier it is for them to find that door, the faster you’ll learn how to save the next customer—and to possibly win back the churned customer.

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Image Credit: Header photo via Unsplash.

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