Credit card fraud damages the financial industry. Most people know that. However, many people don’t realize how much pain this fraud also causes subscription businesses in ways that are not immediately obvious.
The Fraud Problem
The root of this problem is the $30B industry-wide fraud losses the banks who issue credit cards experience each year. As a result of these large fraud losses, issuing banks will often decline legitimate transactions in their attempt to avoid approving fraudulent ones. These false declines on legitimate transactions cost merchants more than $455B in lost revenue on single transactions around the world each year.
Unfortunately, the cost to any business with a recurring billing model is even higher. This is because failed payments cause customer churn, both directly and indirectly. Direct churn occurs when a subscription immediately comes to a hard stop due to an uncovered failed payment, while indirect churn occurs when customers are made aware of the failed payment and then choose to end their subscription.
According to FlexPay analysis, up to 48% of subscriber customer churn is directly caused by failed payments. Many businesses believe a failed payment is simply the loss of one month’s payment. They think of it as missing one transaction. In reality, the actual cost of churn is the total loss of all future billing cycles the customer would have made. Subscription businesses must recognize they are losing customers and their associated lifetime value (LTV) when a credit card payment fails, they aren’t just losing a transaction.
The Value of Recovery
Subscription businesses must recover customers from failed payments while avoiding recovery methods that either interrupt or shorten the natural duration of the customer lifecycle. Why is this so important? That’s because when a failed payment is successfully recovered, it creates a recovered customer who would’ve otherwise been lost.
Thinking of payment recovery as a way to recover customers instead of just recovering transactions is a profoundly different mindset for subscription businesses. This means a different mathematical equation must come into play, one that calculates the full value of the recovered customer and includes all future payments they will make on their subscription. That’s the real value of a recovered customer.
Here’s the formula you should use to measure the full value of a recovered customer following a failed payment.
Full Recovered Customer Value = (Monthly Billing Amount X Number of Recovered Billing Cycles) – Cost of Recovery
Financial Growth Impact for Subscription Businesses
Nothing will accelerate subscription revenue growth more than a high-performing failed payment recovery solution. Recovered customers deliver ongoing revenue to subscription businesses by recovering customers who contribute all the future months of their lifecycle, at a fraction of the cost of acquiring new customers. Customer acquisition is typically the largest expense for subscription businesses but having these extra billing periods accelerates overall growth in active customer counts and total company revenue without the need to spend any extra money.
Let’s use an example of a subscription business with the following metrics:
- 50,000 active customer accounts
- $50 average customer monthly billing
- 15% monthly growth rate
- 13% failed payment rate
- An in-house customer service program recovers 20% of the failed payments
- The average customer lifecycle is 8 months
Now we’ll calculate the estimated acceleration of a company’s overall growth rate when FlexPay’s Invisible Recovery™ platform is used. As you’ll see, Invisible Recovery™ will not only recover more customers from failed payments, but customers will have a longer lifecycle after recovery because they weren’t involved with fixing the failed payment problem.
Here’s the estimated impact on active customer counts and company revenue growth in the first year after deploying Invisible Recovery™.
|In-house Customer Service Recovery||FlexPay Invisible RecoveryTM|
|12-month cumulative Revenue Forecast||$39.9M||$47.5M|
|Active Customer counts after 12 months||80,631||108,405|
This example shows that Invisible Recovery™ will increase the company’s annual revenue by 19% and increase their active customer count in 12 months by 34%. As you can see, revenue growth quickly accelerates when failed payment recovery increases the number of active customers.
The Invisible Recovery™ Solution
The FlexPay Invisible Recovery™ platform is an AI-powered solution that optimizes customer recovery from failed payments. It works quickly behind the scenes to create an individual strategy for each failed payment, so customers never know there was a problem. This eliminates the customer churn that can be created when subscription customers are made aware of a failed payment.
Calculating the complete economic value of customers recovered from failed payments transforms failed payment recovery from a one-time transaction to customer recovery that generates many more months of billing. When you think of it this way, it’s clear you must make failed payment recovery a priority using a solution that maximizes the length of your customer lifecycle.