For subscription video services, signing up new customers is only half the battle. Keeping existing subscribers engaged, and making sure they don’t cancel, is just as important. Just ask Netflix, which saw its share price slide 35% last week after disclosing that it had lost 200,000 subscribers in the last quarter.
Turns out Netflix may not be alone struggling with churn: 37% of U.S. consumers canceled a paid streaming video service over the past six months, according to Deloitte’s 16th annual Digital Media Trends report. And as the number of services increases, so do opportunities for subscription-hopping: 33% of U.S. consumers said they had both added and canceled a subscription over the same timeframe.
“That is a relatively large number, when you think about the amount of money that streaming companies are putting into the content that they're developing in order to acquire these customers,” cautioned Deloitte Vice Chair Jana Arbanas, who leads the company’s Telecom, Media & Entertainment practice in the U.S.
Churn has been somewhat steady over the past few years, but there are signs it may be taking a turn for the worse. Netflix, for instance, has had one of the lowest churn rates of the industry, with Antenna Analytics estimating in early 2021 that the company’s monthly churn rate was just 2.4% — far below the 7% other premium subscription services were seeing at the time.
By the end of March, that rate had gone up to 3.3%, with subscribers abandoning the service at a significantly higher rate following Netflix’s price increase in January, according to Antenna’s estimates. CFO Spencer Neumann denied a connection to the price increase during last week’s earnings call, but he did acknowledge that cancellations had gone up a bit. “We’re talking 2-3 tenths of a percentage point,” he said.
Still, even small fractions can have a big impact if you’re dealing with hundreds of millions of subscribers, as the company admitted in a 2019 earnings report: “Very small movements in churn can have a meaningful impact on paid net adds."
And it doesn’t look like things are going to get better for Netflix and its competitors: Both Gen Z and millennials had churn rates of over 50% over the past six months, according to Deloitte’s survey, compared to 40% for Gen Xers and just 17% for baby boomers.
A common refrain among media pundits is that younger people are stingy, and that these customers are bound to change their ways when they grow older and settle into better-paying jobs. Arbanas isn’t buying that, at least not when it comes to churn. Instead, she believes this behavior has a lot more to do with knowing your way around a service’s interface, and the ability to customize your own content bundle.
“As this generation gets older, even though they may have more disposable income, they will still feel quite comfortable navigating those processes,” she said, pointing to the fact that millennials have just as high of a churn rate as Gen Zers. “People predicted that with millennials, and that's not necessarily the case.”
One reason churn matters so much to subscription services is that the economics of these businesses become more favorable the longer a subscriber stays with them. Mobile phone operators, for instance, have traditionally spent around $340 on the acquisition of a single new customer, which can include buying out existing contracts, or free devices with a long-term plan. After that initial investment is amortized, the profit margin per subscriber dollar increases significantly.
The economics of a streaming company are somewhat different, but keeping churn rates under control can still make all the difference, especially when your business matures beyond the early days of rapid growth.
The good news for the streaming industry is that there are some ways to minimize churn. That’s especially true for the churn-and-return crowd — people who cancel a service when they’re done with the latest season of their favorite show, and then resubscribe when the next season is available.
For years, Hulu has been offering these kinds of subscribers the option to pause their subscription for up to 12 weeks. Arbanas thinks that price cuts could also help tie people over, and hold on to their plan. “We think that there's a play around greater optionality from a pricing perspective,” she said. This also includes offering ad-supported plans, as Netflix is looking to do now.
In the end, it’s about finding the right plan for the right consumer. “You'll always have consumers that are really cost-conscious and then a set of consumers that are willing to pay more,” Arbanas said. And it’s not just about the price tag alone: Giving consumers a discount if they prepay for a year, or buy a subscription as part of a bundle, also helps to retain them for longer periods of time. “I'm going to think twice about [canceling] something that's bundled versus a standalone service,” she said.
However, streaming executives also have to be clear-eyed about the limitations of these measures. Churn rates that increase or decrease by a fraction of a percent may make a big difference to services like Netflix, but chances are that’s as far as the needle moves either way.
“I don't think that churn will ever be at zero percent,” Arbanas said. “A fair amount of it will be the cost of doing business.”
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