When someone pays for a subscription, they typically use a credit card. This means subscription businesses are uniquely vulnerable to problems in the card payments system – specifically, involuntary churn when a payment fails to go through as expected.
Understanding False Declines
Often subscription companies don’t realize that many of their declined credit card payments are caused by problems in the card payments system.
The payments authorization ecosystem has two clear objectives:
1. To approve all legitimate payment transactions.
2. To decline fraudulent and other undesirable payment requests.
The payments system is enormously complex and only has milliseconds to make accurate payment authorization decisions for billions of payment requests. There isn’t time to consider each transaction perfectly and sometimes mistakes are made. The enormous losses banks incur from fraudulent transactions approved by their authorization systems — an estimated $28.6B in 2020 — have created an incentive for banks to bias the algorithms in their fraud detection systems to avoid losses. Simply put, it’s less expensive for them to decline a legitimate transaction than it is to approve a fraudulent one. These false-positive responses are called false declines.
How False Declines Hurt Your Business
Subscription companies are harmed by false declines in two ways:
• An average of 24% of recurring payment requests made by subscription businesses are declined, resulting in huge revenue losses.
• A false decline on a subscription that can’t be resolved ends the subscription relationship prematurely and eliminates any opportunities to upsell. This leaves subscription businesses in a tough spot. In order to successfully manage churn, it’s important to understand the different types of churn, measure them separately, and have programs and technology in place to reduce each source.
Two Types of Churn
Customer losses can be described in two ways: voluntary churn and involuntary churn.
Voluntary churn occurs when customers choose to end their subscription. Many subscription companies assume that most churn is voluntary — the subscriber has decided to cancel their subscription — so they invest significant time and money to improve the customer experience in hopes of preventing this.
Involuntary churn occurs when payment-related issues prevent legitimate, recurring payments from going through successfully. Involuntary churn is caused by failed payments (also known as declined credit card transactions), and is the source of up to half of all churn. Fortunately, involuntary churn can be identified, managed, and reduced.
Understanding the Effect of Failed Payments on Your Business
How can a company tell if failed payments are affecting their bottom line? It all begins with data. Gathering the necessary facts and numbers with the business tools already have in place is a great place to start, though additional data and reporting could be needed in some cases.
Determining the amount of involuntary churn and calculating the total cost of customers lost to failed payments isn’t difficult. In order to do so, businesses need to know where to gather the data. Pulling together a small team of people from the finance, technology, and reporting departments who can help collect the information and create reports for analysis is a great place to start.
Measuring the Cost of Involuntary Churn
Measuring involuntary churn requires three types of information: the number of all churned customers; a list of all the customers who had a failed payment; and the length of the average customer lifespan in billing cycles.
These three data points are used to measure the percentage of churn that is involuntary and allows for the calculation of the total cost of these customer losses.
The Value of a Recovered Customer
While it’s important to know how much failed payments and involuntary churn cost, there’s another important number subscription businesses need to know: The value of a customer who is recovered from a failed payment.
A recovered customer is usually a happy customer for many billing periods following the recovery. This means the true value of a recovered customer is the amount of revenue they will bring in month after month after recovery to fulfill the length of their subscription. It’s never just one month’s payment that’s at stake.
How Technology Improves Payment Recovery
The ideal failed payment recovery solution develops a unique recovery strategy for each failed payment. It factors in the issuing bank that declined the payment request, the reason code given for the failed payment, and the type of credit card that the customer used on their account. True AI-powered products are particularly well-suited to create individual solutions for each failed payment, and typically deliver the highest failed payment recovery rates.
While it’s always best to avoid involving the customer in the payment recovery process, that’s not always possible. Some failed payment reasons — such as hard declines caused by expired or invalid card numbers — require direct customer involvement and can also be a source of churn. Some customers won’t want to engage in the recovery process when asked to help, resulting in a lost subscription. That’s why using a high-performing recovery method like FlexPay is so important. FlexPay works directly with the payments system to avoid customer involvement and awareness of the failed payment whenever possible, but offers businesses the ability to reach out to customers in a positive way when needed.
Before a subscription business can make any moves to reduce churn, they must first understand it. Calculating the cost of churned subscribers and analyzing customer data will offer clear answers on who is churning and why. With this knowledge, businesses can then implement strategies — using resources like FlexPay — to recover customers and turn them into lifetime subscribers.