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Payment & Profitability Trends to Watch

Paul Larsen, senior director of Optimized Payments, shares payment trends that impact profitability.

Paul Larsen, Senior Director of Optimized Payments, shares the trends that subscription businesses need to watch for in the payment and profitability sectors of the industry.

Though Paul Larsen of Optimized Payments may refer to himself as a relic, in the subscription industry he’s known as a “master.” Of what exactly? What so many subscription businesses try to optimize, hack, and gain competitive advantage in: payments.

“I hope you’re fueled up and ready to dive into the choppy sea of subscriptions to find the payment currents and the payment trends that are impacting profitability both positively and negatively,” said Larsen during his session at Subscription Show 2022.

Larsen has been a staple at Subscription Insider’s annual conference — Subscription Show — for several years. His 30-plus years of experience in the areas of payments and profitability make him a valuable resource for anyone in the subscription industry. Eleven of those years were spent with a merchant, during which he focused on something all subscription businesses face: involuntary churn.

All this experience situates Larsen well for identifying trends that could affect the subscription industry.

“There are two trends that are constant, that are evergreen. They’ve been enduring throughout my time in subscriptions and, in fact, without these two trends we wouldn’t have a subscription show, and we wouldn’t have a subscription economy,” says Larsen.

Trend #1: The promise of subscriptions is undiminished.

Though an increasing number of people are experiencing subscription fatigue, according to Larsen, “no more effective, organic, commercial path to maximum customer lifetime value and consistent revenue has ever been developed.”

Despite challenging macroeconomic conditions, black swans and consumers becoming more discerning about their subscriptions, the promise of subscriptions remains undiminished.

“We are a nation that has always been amenable to subscriptions. Subscriptions are in our DNA. It goes all the way back to Poor Richard’s Almanac and Ben Franklin. And even if we look at the last 10 years, the subscription economy has raised more than four times faster than the S&P 500,” says Larsen. 

According to Larsen, companies serving subscriptions are experiencing a Compound Annual Growth Rate (CAGR) of 18% versus the 4% the S&P 500 is experiencing. Thus, subscriptions remain a viable business option with opportunities to grow.

Paul Larsen, senior director, Optimized Payments
Copyright © 2023 Authority Media Network, LLC. All rights reserved. Reproduction without permission is prohibited.

Trend #2: The perils threatening lifetime value are relentless.

Involuntary churn is a seemingly constant challenge for subscription businesses because of situations both historic and fresh, personal and global.

“There are things that happen to individuals — the loss of a card, the struggle with insufficient funds — those are ever-present. But there are also global events as well — from data breaches that result in massive issuances of cards to an economy that’s struggling,” points out Larsen.

And there’s one tectonic trend that everyone is facing right now: inflation. Headlines across the world show that people are experiencing the squeeze of inflation. In addition, the U.S. currently has around $900 billion in credit card debt — which is accelerating faster than any other time in the last 20 years. This means insufficient fund declines are on the rise as well.

Larsen and his team at Optimized Payments are seeing this play out with their clients. And it seems no one is impervious to its effects

“Whether you’re SaaS, streaming, publishing, [or physical] boxes…you’re being impacted greatly by the financial situation that our customers are going through,” says Larsen.

Copyright © 2023 Authority Media Network, LLC. All rights reserved. Reproduction without permission is prohibited.

Moving forward with optimism

Though the outlook seems bleak, that’s actually not the case, Larsen says.

“We need to adjust our recovery tactics and logic based on what we know is happening in our ecosystem and we need to track our success rates by decline code and by retry,” says Larsen.

Though the conditions subscription businesses experience are constantly changing, there are still plenty of opportunities to succeed.

“The maxim is: as environmental conditions change, so must your rules of engagement change. And the tools of engagement that we use to combat fraud need to be recalibrated on a regular basis,” states Larsen.

Tactics that have worked in the past may no longer serve the changing needs of the business. Part of what makes a subscription business successful, resilient and future-proof is its ability to adapt to external conditions as driven by subscribers.

One of the primary challenges for subscription businesses in 2023 is insufficient funds.

“The bad news is, for all of us, it’s indicative of the stress that all of our customers are in. The good news is that these are the most recoverable of the declines,” says Larsen.

According to Larsen, insufficient fund declines provide the greatest opportunity for recovery. They just may take more intelligence and a lengthier timeframe to achieve.

Current trends subscription businesses need to consider

With the evergreen trends of the subscription industry in mind, there are a few other shifts that Larsen suggests may affect the way subscription businesses operate.

1. Decline reason code shuffle

According to Larsen, for more than 30 years, merchants complained to VISA, Mastercard and other card issuers about one particular decline code: Do Not Honor (DNH). 

“We asked year after year, decade after decade, for more clarity so we would know how to better respond to our customers,” says Larsen.

Recently, this request was granted by way of a decline reason code shuffle. Now, Optimized Payments sees DNH in the single digits in overall declines for their portfolio of clients.

“Of course, the question is, where did they all go?” asks Larsen.

DNH served as an amalgamation of different decline reasons of which issuers didn’t want to provide further clarity. Thus, declines categorized as DNH are not suddenly approved.

“[All of those declines went] back out into the ecosystem, into existing declines, but also into fresh, newly created declines like Closed Account,” says Larsen. 

Closed Account has become a significant repository of DNH declines. 

2. Retry restrictions, penalties and fees

As a result of the shift in decline code shuffle, restrictions, penalties and fees assessed by card issuers have changed as well.

Closed Account, for example, appears to be a hard decline. If the account is closed, then there’s no more that can be done, right? But merchants can retry those declines if they choose. However, card issuers like VISA have changed their policy, and now charge a $.10 fee for every closed account decline that is retried.

“What do we do about that? Obey the letter of the law? Or do we do what Ronald Regan did when he confronted the Soviets with their own Russian proverb when they were negotiating nuclear disarmament: ‘Trust, but verify?’”

The “right” decision is up to each company. Whether or not they retry and how often they retry depends on their payment strategy.

“What if you could actually recover 2% to]20% of those declines through sophisticated recovery logic?” asks Larsen.

For example, Larsen suggests that the Profit and Loss of an item can turn into just profit if a business can recover 3% of a $40 item. Imagine being able to resurrect 20% of Account Closed declines, which VISA indicated were unrecoverable.

“‘Trust, but verify’ is always what we say about your recovery logic. Things aren’t as cut and dried as you think. At the end of the day, VISA is an entity, but it’s thousands of individual issuing banks that are making the decision about how to bucket these declines. And to believe that each and every one of them is taking the same approach to recasting what used to be DNH declines is tomfoolery,” says Larsen.

This is where subscription businesses need to do their own research and develop relationships with local issuing banks, like what Matt Wegner and his team did at Adobe, in order to increase their approval rates.

Copyright © 2023 Authority Media Network, LLC. All rights reserved. Reproduction without permission is prohibited.

Paul Larsen, senior director, Optimized Payments
Copyright © 2023 Authority Media Network, LLC. All rights reserved. Reproduction without permission is prohibited.

3. The rise of the “salvage” vertical

Over the last few years, the “salvage vertical” came into prominence. The salvage vertical is an area of the subscription industry that focuses on recovering payments/subscribers who involuntarily churn.

“Emblematic of where we find ourselves is an entire vertical, an entire cadre of companies that has arisen to tackle this problem of involuntary churn. Recognizing that they’re flourishing is indicative of our pain,” says Larsen.

These companies are dedicated to helping merchants recapture failed charges. While the services these companies offer are important, Larsen points out that the success of the salvage vertical shows the extent to which passive churn negatively impacts merchants.

4. Rapid dispute resolution

A final trend that can benefit subscription companies is Rapid Dispute Resolution (RDR). This is an effort to get in front of disputes and turn them into harmless refunds.

“This is really important especially if you don’t find chargebacks,” says Larsen.

Chargebacks can have a major negative impact on the bottom line of a company — to the point of putting it on “death row” as Larsen calls it. However, by blunting the amount of chargebacks and by resolving issues with customers quickly, subscription businesses can boost their bottom line.

But as Larsen points out, “that’s a decision that every organization has to make for itself. What to fight, what not to fight, and how to create that strategy.”

Some organizations refuse RDRs (i.e., offering an instant refund) because they don’t want to offer a refund when they’ve done everything right. Instead, they would rather fight the disputes and win.

“I have a customer of ours and they have half of their team that just gets so offended when there’s a chargeback. They want to fight every single one of them — even $9, $11 and $13 charges. And the other half of the team is more practical and level-headed. They’ll say, ‘That doesn’t make sense. Even if we win, it will probably cost us more to get there. And we’re creating ill will in the marketplace. Why would we do that?’”

The right balance will be different for each company. It’s up to them to figure out what makes the most financial sense as well as what best serves their customers or the goals of the organization.

As Larsen proved in his session (and continues to in his work with Optimized Payments), relics can be invaluable sources of information. Though his years of experience in the payments and subscription industry make him a guru of sorts, the insight and understandings Larsen possesses are in reach of any subscription business owner. By following trends, making adjustments to meet shifts in the ecosystem, and measuring everything, subscriptions will continue to thrive.

Copyright © 2023 Authority Media Network, LLC. All rights reserved. Reproduction without permission is prohibited.

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