Did you know that there is a direct relationship between the payment experience of your subscribers and how long they stay subscribed?

Subscription companies are customer-obsessed and invest heavily in delivering a great product and customer support experience. Yet, one of the largest drivers of subscriber churn, your subscriber’s payments experience, is often not given the same attention. 

Uncover the biggest lever to creating short-term gains in LTV—your subscriber’s payment experience. In this on-demand webinar, FlexPay’s Darryl Hicks and Optimized Payments’ Sharon Gross will:

• Analyze the payments experience,
• Identify the common problems that harm it and what that costs your business,
• Understand where in their subscriber’s payment experience to focus for short-term LTV (lifetime value) gains.

Attendees will understand the roadmap for how their subscription company can upgrade their payments stack, improve their payments experience, and reduce the customer churn caused by it.

On-Demand Playback

Presentation Slides (PDF)

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About Our Experts

Darryl Hicks, CEO Flexpay

Darryl has been active as a successful serial entrepreneur and technology expert for more than 20 years, having successfully exited from two of his prior businesses (2006, 2011). A pioneer in Card Not Present sales, Darryl has extensive experience building and managing technologically complex online and offline Direct Marketing businesses.

Sharon Gross, VP, Recurring Services, Optimized Payments 

Sharon is a payment consultant and account management professional providing clients with payment advisory services focusing on optimal authorization, KPI and fee analysis, with guidance on partner vendors, regulatory compliance, and market landscape.

Transcript

Kathy:

Hello and welcome, everybody. We are today going to talk about how to create short-term gains in subscriber lifetime value. Did you know that there is a direct relationship between payment experience of your subscribers and how long they stay subscribed. Subscription companies, we are so customer obsessed and we spend a lot of time and invest heavily in delivering a great, great product and a great customer support experience, yet, yet one of the biggest drivers of churn is your subscriber’s payment experience. It’s really not given the same attention as support and product. That’s the purpose of today’s conversation.

We are going to talk through what is the biggest lever to creating short-term gains in your lifetime value. I’ll kind of tell you and give you a hint on what the answer is. It’s your subscriber’s payment experience. With us, we have Darryl Hicks. He’s the CEO of FlexPay. He is a successful serial entrepreneur and technology for over 20 years, and he has exited two of his prior businesses. Very successful serial entrepreneur. He’s a pioneer in card-not-present sales, and he has extensive experience building and managing technology and complex online and offline direct marketing businesses. Our other expert today is Sharon Gross.

She is the VP of recurring services of Optimized Payments. Optimized Payments is a payment consultancy that provides their clients with payment advisory services focused on optimal optimization, KPI and P&L analysis with guidance on partner vendors, regulatory compliance, and market landscape. We have two extremely smart people on what the payments experience should be to really help us with lifetime value. Welcome, Sharon and Darryl.

Sharon:

Thank you, Kathy.

Darryl Hicks:

Awesome. Thanks for having us.

Kathy:

Absolutely. As we get started, we’d like to remind everybody, we are Subscription Insider, and we are focused on helping you grow profitable businesses. Today’s webinar is one of the many, many things that we do from our member portal, how-to information training, and conferences. Our upcoming events calendar, as you can see on your screen, you can access that at subscriptioninsider.com/events. Next week, we have a webinar focused on highly complex subscriptions, which if you have a business that’s like that, you know exactly what I’m talking about. We’re going to kind of focus on that next week.

We also have executive round tables coming up. One is focused next week as well on banking apps and engaging your customers where they are increasingly deciding to go to manage their subscriptions. We also have two other upcoming executive round tables, one on increasing the speed of subscriber growth, some tips and tactics, and then the third one I want to highlight today is how to grow subscription revenue with transaction and chargeback intelligence. You can find out more about those at subscriptioninsider.com/events. In November, I’m going to see you, Darryl. I’m going to see you, Sharon.

I’m going to see many of you at Subscription Show 2022. I am so excited for this year, November 9th and November 10th. We have an amazing program focused on what’s happening in the market that we need to understand, what’s happening with payments, retention, product, pricing, monetization, and so much more. If you would like to know more details, please go to subscriptionshow.com. I will be seeing you up on stage with my cohost Darryl, welcoming you all to New York. Let’s get to it. Let’s talk today about how to increase short-term gains in subscriber lifetime value. I’m going to actually stop my share today and what we’re going to do is have a conversation.

I would like all of you to ask questions. This is interactive. If you’ve got a question about what we’re talking about, ask it in the chat and we will answer it. As I mentioned at the top of my comments, we as subscription businesses, we are maniacally focused on creating relationships with our subscribers. That is what we do. The reason we have to do that is because we have to create trust and we have to prove ourselves each and every month, each and every renewal cycle. That’s something that no other business does. It drives what we do and how we do it, and it’s the difference between success and failure for so, so many businesses.

When you look at subscription businesses, so many spend enormous amounts of resources on product and customer support, but the payments experience is something that’s a little bit parked off to the side and not necessarily focused on as much. That’s really what we’re going to focus on today. Darryl and Sharon, I’d love to kick off, what is the payments experience? It might be a new concept for some people here today. If you can walk us through what that is, I think that would be a great place to start. Darryl?

Darryl Hicks:

For sure. Yeah, you want me to start on that one? I’m happy to. Yeah, you’re right, Kathy. There’s kind of three legs on the stool that builds a solid foundation of a really successful subscription business. Obviously we want a world-class product. We want world-class customer care whenever we need to interact with them on that level. But the payments experience, a lot of times what we find talking to subscription companies is they say, “Well, hey, all we got to do is connect into Adyen or Worldpay or Stripe, and then the payments just works.” We want to offer as many different flexible methods of payment for people to pay for the services.

The challenge is that the existing payments infrastructure in North America has structural problems inside of it that cause a lot of payment failure. The really sophisticated subscription merchants understand and see that and are actively working to manage it, but not enough in my experience. And then I think the ignorance or the lack of understanding of that structural problem and how deep it really runs kind of informs the solutions that subscription merchants go after when they do see that there’s a problem.

They say, “Oh, well, it must be my customers. Maybe I’m getting tapped into a subprime demographic here. There’s something wrong with the customers.” They end up putting it on the customer and they send out emails and text messages saying, “Hey, there’s a problem with your payment.” One of the things that we see is that when a payment fails, regardless of whether it is the customer’s fault or a result of this structural problem that exists inside of the card ecosystem, especially Visa and MasterCard and Amex particularly, you could artificially create a moment of truth is the way that we look at it with your customer and the way that you handle that.

It’s a deeply emotional thing, right? Like it almost doesn’t even make sense. Not to get too philosophical here, but I think that deep inside of all human beings is a need to be accepted and to feel worthy of their tribe, of their community. When you’re reaching out and telling people that their payment has failed, it’s almost like you’re saying, “Well, you’re unworthy. You’re uncreditworthy, or there’s something wrong with you.” I remember the first time that ever happened to me and I was 16 years old and I was at a hot dog stand using a debit card and it declined. I was super embarrassed and mortified, unreasonably so, in front of my friends.

And then when I found out that it was a problem with his terminal and I just needed to go do the pin and name again, I got really angry at that hot dog stand. I didn’t want to go there anymore because I associated that really negative, emotional experience with that merchant, with that vendor. When we, as subscription companies, are reaching out to our customers and saying, “Hey, there’s a problem and it’s with you and you need to fix it,” it goes way beyond what we might imagine as far as emotional impact. We have to be really, really careful in our approach. There are multiple things that we can do to manage the payments experience using the right strategy at the right time.

Is there an opportunity to do invisible recovery, or even when it is time to engage with the customers, how do we do that? I think that there’s a lot of opportunity. The merchants that get it right are the ones that are really winning. In fact, I would say that they have an almost unassailable lead in their vertical. I don’t know. I’d love to have your take on it, Sharon. What do you see?

Sharon:

Absolutely. We work with a number of merchants, albeit even very, very successful merchants, they might get a monthly report on sales and they might compare it to last month and then same month last year. It never really even occurs to them that the loss of members is even due to payments. It might even be, “Oh, we really have to turn up our membership drive or have to do a really special offer to get people back.” I think it’s just very common. Especially we see maybe startups, they’re really super focused, very high growth, everybody is hands on deck, let’s build the company, and payments are just in the background.

It’s just almost a necessary evil of doing business. What we like to really say is there are things in your control. There are things that could move the needle in the direction that you want them to. We just want to make sure that you’re aware of those tools that are available to you to take advantage of every opportunity to get that sale.

Kathy:

It’s interesting that you mentioned that, Sharon, because there are so many set it and forget it. It’s a payment stack. There’s nothing active that I could be doing to really improve the customer experience or improve financial experience on our own end. We’ll start with Sharon and then maybe go back to Darryl, we’ll go and forth here. What are some examples? What are some details that people should be looking at? Can you educate us on what those might be, the causes of poor payment experience?

Sharon:

For a poor payment experience?

Kathy:

Poor payment experience.

Sharon:

I can speak to an example of one of the merchants that we had worked with. This merchant sold a very expensive nutraceutical. A little bit maybe of a risky vertical, but that’s okay. When they established their products, they went out to the marketplace, one thing that they just didn’t even realize is that when the customer received the bill, on the billing descriptor, it had the legal corporate entity name that the business was doing it under some name that was never associated with the website and offered absolutely no way to contact the company.

When I tell you that it led to a tremendous amount of chargebacks on this merchant’s behalf, it’s because people really just didn’t know what the charge was. They didn’t know what it was for. They really had no other recourse than to go to their issuing bank to question it. One way that you could really avoid a poor payment experience is to all around from the moment you sign up through payment and confirmation is tell the customer exactly what they’re getting. What is the product? What are they paying for? When are you going to bill me? And then when are you going to bill me next? Sometimes I think as a marketer, our first intuition is to, “Let’s hide it, so nobody cancels.”

But you really don’t want to do that. It’s in your best interest at all times to really be forthcoming and give the customer a good idea of what’s happening.

Darryl Hicks:

I think even just calling more awareness to this, right? I love that example you gave, Sharon, like descriptor tests. It only happens to you once that you get it wrong and then it becomes immediately part of your ongoing process moving forward, like every time you get a new merchant account to run descriptor tests on it and make sure they come in. But it’s one of those things that if it has never been a problem for you, then you just automatically assume. There’s this assumption that, well, just like every time I hit the light switch in my office and the lights turn on, when I connect into my payment provider, everything is just going to work.

Unfortunately, that’s just not the case. There’s a lot more complicated things going on instead of the payment system than we would like there to be. In fact, as I talk to subscription merchants, obviously every subscription company is focused on churn, right? We all understand this concept that acquisition is the first inning of the game. Retention really wins the game. What I don’t see enough from subscription companies is really analyzing what’s going on inside a churn with dispositions and buckets, right? Well, first of all, the primary disposition is, what’s my voluntary churn versus my involuntary churn or passive churn?

This idea that there’s two kinds of churn. If you start to disposition all the reasons why people cancel involuntary churn, you’ll have all these different buckets and dispositions in there like unsatisfied with the product or they switched to a competitor or whatever. What you’ll realize is that actually the passive churn, involuntary churn, is this the single largest driver of churn, especially for high quality brands that have really high customer engagement. The single biggest reason why churn is happening is because of these failed payments. For most merchants that we see, it’s about 48% across the industry of churn is coming from involuntary churn, from this passive churn.

And then, of course, within the involuntary churn, there are also other reasons that happen. We look at those response codes that come in on our payment. There’s a difference between insufficient funds versus do not honor, which means you’ve bumped up against the fraud system somewhere on the issuing bank side versus lost or stolen card, a hard decline, where you’re clearly going to need to get a new method of payment or maybe you need to use account updater, right? Even within involuntary churn, there’s still are different buckets, and then each one of them requires a different strategy for how you’re going to be able to overcome it.

I wish I saw more of that. I think, again, coming back to the merchants who really do… Peter Drucker 101, what gets measured gets managed or what gets measured gets done. The merchants that are really measuring this accurately and doing the dispositioning properly are the ones that are coming up with the best strategies. It’s unbelievable what the impact that this has on their business and being able to break through and generate so much higher lifetime revenue than their competitors are.

Kathy:

Sharon, with your working with people, what are the KPIs you’re asking people to really look at on the payment side?

Sharon:

It’s interesting because I think a lot of… If people that are on this call are looking at these same KPIs and let’s say have been approached by acquirers or salespeople and there’s a constant talk about authorization rates, I think that could be kind of a little bit of a gray buzzword only because if I was a merchant and I attempted to sell 10 items and all 10 approved, then my authorization rate is 100%. Yay! But if I was a merchant and I attempted to sell a thousand items and only 50% approved, then I’m selling 500. We want to make sure we’re looking within your business and making sure that you are capturing every possible sale.

The authorization rate might fluctuate depending on your retry strategy, and subsequently, your retry strategy might change depending on who your customers are and how they pay and what the frequency is of your subscription. There’s a lot of different nuances to how we would measure success, but authorization rate is one of those factors. We also like to look at specific issuers that you’re working with. There are red flags out there to identify fraud even before it might make its way up to the surface. We ask that merchants really try to be aware of that because it helps prevent things in the long run like chargebacks and lost revenue that really can be avoided.

Some other things that we’d like to look at too is, what methods of payments are your customers using? Are they credit? Are they debit? Do you have a heavy American Express usage? Is there a higher order value for American Express and a lower order value for MasterCard? These are things that you can tune your billing strategy around to be the most successful.

Darryl Hicks:

I love that, Sharon, I think the curiosity of looking in and starting to analyze those things. I love how you’re talking about bucketing things up like, okay, I know that I have American Express that makes up 15% of my total portfolio, but what can I learn about those customers versus order value? How does that then in turn inform my marketing strategy, my sales strategy, and looking at different acquisition sources? Coming back to the payment side of it though, we see there’s a reason why some of the largest merchants in North America use multiple merchant accounts. It’s not just because of not having a single point of failure in your payment stack.

It’s also because it turns out that not all merchant accounts are created equal in the eyes of the issuers. The decision on whether to approve or decline a transaction is made by the issuer. That’s the name of the bank on the piece of plastic in somebody’s pocket. There’s more than 8,000 issuers just in America alone, and they’re all making decisions independently of one another on what their policy is going to be on what transactions they approve or they decline. There’s a myriad of inputs that go into their decisions on what they’re going to do. Some of them are common sense. Some of them make no sense whatsoever, but it is what it is.

Once you understand that there is a system out there that’s actually causing the vast preponderance of failed payments, like this fraud system, it’s not that the cards actually are broken or not working or that the account really was closed or it’s NSF. I mean, we see merchants even that get a hard decline back saying account closed and they resubmit the transaction a few days later and all of a sudden it goes through. Well, what really happened there? Was it really closed before?

There’s all kinds of these weird things going on, but that’s one thing, making sure that you understand the reputation of your merchant bank with the issuers, being able to leverage them intelligently so that certain issuers or certain card types go through. Certain merchant processing banks can be huge. Also, not miscoding your account. Your merchant category code, your MCC, is really, really important. It’s probably one of the single biggest drivers in what your approval rate’s going to be as you’re processing transactions. Certain merchants are forced into a certain MCC. For example, United Airlines has their own MCC 3000, right?

They’ll never be able to get anything outside of 3000 because they are United Airlines. But for a lot of other merchants, there’s maybe two or three different MCCs that you could qualify for. They might have very, very significant impacts on your approval rate by issuer, depending on how the issuer feels about that MCC or feels about that merchant. The timing of your transactions as well. All things being equal, we like to recommend to subscription merchants to be processing their batch transactions in the afternoon East Coast time on business days because they will by and large get a higher approval rate by doing that.

Who knew that that was a thing until you start looking at the data and really getting curious about it, or even just cleaning up data fields and making sure that everything that you’re sending through to the bank matches as closely as possible what they’re expecting to see. Are you stripping out special characters out of names and address fields? Should you be processing ZIP+4 or not sending ZIP+4, right? Are you sending this as a recurring transaction or an installment transaction or a telephone transaction? There’s all these various gateways.

You can go pretty deep down the rabbit hole and it starts to get really confusing, but that’s why there’s systems that exist that can kind of automate a lot of this for you and take care of it to reduce a lot of that friction, which, shameless plug, that’s why we ended up creating FlexPay. I created this for myself as a subscription merchant and for the clients that we were managing just because it was becoming untenable at scale and we knew that we needed a system. But there’s a lot of low-hanging fruit that even if you’re not using a system like FlexPay, that if you just go in and you’re measuring things and really being curious and looking at it closely, that you can start to optimize that again are just reducing so much of that friction, reducing what is really the largest driver of churn in your business.

Sharon:

And also just to add to that, merchants might not even know let’s say Worldpay is their acquirer. They might not even know that there is a platform from Worldpay that’s for recurring, and then there’s a platform for Worldpay that is for retail. You would hate to be a subscription merchant on a retail platform because now you’ve already put yourself behind the eight ball trying to be successful. There are these little nuances within the industry that you really do have to start digging into and looking at. There are vendors out there, partners out there that are specifically made for recurring billing, like FlexPay, that know what to be looking for and put those tools in place for you as merchant.

Darryl Hicks:

Sorry, I just wanted to jump in real quick on what Sharon was saying, because this is such an important point. You would expect that when you go open up a merchant account with Worldpay, that they’re going to put you in the right bucket. You cannot take that for granted. Just like that merchant that you talked about that had completely the wrong descriptor without even any contact info. Who in the world does that in their right mind? Yet it happens all the time. In fact, that seems to be the rule rather than the exception that these miscodings and these missed bucketings are happening all over the place. You’ve really got to go and pay attention to it. Anyway, sorry, I didn’t mean to cut you off there, Kathy.

Kathy:

No, all good. All good. The challenge with technology is many times we don’t know what we don’t know. We don’t that big eCommerce processor has two platforms, one for recurring and one for eComm, or maybe doesn’t have any at all. We don’t know that somebody put us on an MCC code that is costing us money or our retry strategy is super expensive. How do we know to ask? It seems to me that when you’re talking about the payment stack and the tech, if you’re starting out and you don’t know what you don’t know, you got to ask, you got to start asking smart questions. You can begin to ask yourself to begin to figure it out.

Where do you suggest, Darryl, people start to ask those questions and really sanitizing that what they have is really supporting a recurring business?

Darryl Hicks:

Yeah, it’s a great question. I think there’s a reason why companies like yours, Kathy, exist, Subscription Insider, right? People need to educate themselves, and not everything is as straightforward as we’d like it to be. When you go look these things up and just do Google searches on it, it’s incredibly difficult to find great repositories of information on this, or there’s a reason why Sharon’s business exists, right? Why do people need consultants to come in and walk them through this and advise them on it? Because it is really complicated and it’s really deep and it’s not straightforward and obvious.

There’s a reason why companies like mine have to exist, because it turns out that as insane as it is, there is something that needs to be managed inside of payments authorization. Maybe a software tool is going to be the right approach to kind of handle this for you and leveraging AI to be able to optimize that flow. Again, it might seem like a bit of a shameless plug, but I really do believe it’s extremely important. This one’s for you, Kathy. Going out there and making sure that you’re networking and engaging with people in your community and listening to the really great content from the experts of the speakers is going to be a big, big [inaudible 00:27:45].

It’s kind of the first step, right? Awareness and accepting that there is something going on and being aware that there’s a problem somewhere is the first step of being able to actually know what it is that we should be measuring. Once we’re measuring it, then we understand, okay, what’s the right strategy to be able to overcome the challenges that I have inside of my business, right?

Kathy:

Absolutely.

Sharon:

And if I could add, sometimes it can be scary for a merchant because I don’t know if anybody in the group has this experience, but we work with a lot of merchants where somebody has been hired, but there is a legacy system that’s been in place for seven years. That person hasn’t worked there in five years, who built it. We need this kind of service, so we’re just going to hire this company, hire a tech person to somehow integrate it and just slap a bandaid on it to make it work. And then we step back and we don’t touch it because we have other priorities. It is a commitment to say, okay, we’re going to take this seriously.

Payments are that third leg of our business. They’re a big part of the business. There is no business if we do not get the money. It is something that really should be elevated to the top of everybody’s awareness to do that thorough audit and investigation as to how things are working.

Kathy:

Let’s pretend we’re designing it from scratch and we’re designing the perfect payment system. Darryl, go, what should we be really be designing?

Darryl Hicks:

I think it starts with the billing system that we have and making sure that it’s one that’s flexible enough for us to be doing the dispositioning that’s required, right? Am I going to get the granularity of reporting back, that when there is a problem, I’m better able to understand why that’s happening and be able to bucket it up and to be able to report on it? Again, getting access to the data and being able to understand when and where there are problems and understanding the drivers of churn. And then once you understand voluntary churn and involuntary churn, what are the individual dispositions inside of those that are really driving it?

That’s one. Second is having a system that’s really modern and cutting edge. I don’t mean that to be buzzwordy, but are you on a system that’s going to have the flexibility to connect in by API to the various third parties that you need in order to optimize and solve for the problems that you have. Are you on a modern tech stack or are you on a very closed ecosystem that they’re like, “No, no, no. We’re going to do everything for you,” and you can’t leverage third party vendors, right? Because there’s a lot of things that you should be doing internally and there’s some things that really it’s going to be best to work with a third party, the whole buy versus build conversation.

I think you really absolutely need both. You need buy, you need build, and you need partner in a lot of cases. And then it’s the education piece of like, okay, well, what’s the right merchant bank for me to be working with? Do I need more than one? Yes. By the way, you need more than one. You absolutely should have more than one. How can I intelligently leverage those assets once I have them? I’m building it from scratch. That’s what I’m doing.

I got this system that is giving me the granularity of reporting and the ability to disposition, has the flexibility to connect in by API to third party vendors, and then selecting the merchant banks and the vendors that I need to really automate the things that I should be outsourcing so that things are just running as smoothly and as fluidly as possible, so that we’re not creating that friction inside of our relationship. I mean, it’s unbelievable how many businesses out there are just failing at managing relationships. It’s terrible and it’s unnecessary if they just understood better what they were doing and then had the better platform.

Sharon:

I’d like to add too, for some merchants, I think it’s also just good to know who you are and what your needs are. Maybe if you’re a smaller merchant, a third party billing vendor is good for you. There’s no development work. As you grow, if you have complex product offerings, add-ons, things like that, you might want it in house so you can maintain control all the time. Are you a domestic merchant? Do you want a powerhouse in the United States to handle your authorizations? Do you have international business and you need somebody that can handle local acquiring to maybe help with those authorization rates?

Do you sell physical goods that have to integrate with a fulfillment center, that you have to worry about fraud and people stealing your stuff? Or is it digital goods and there are some more flexibility with how long you can retry, the cost of the good if you let people have the entitlement for a little bit longer? There’s a lot of different things that just have to add into the equation as well.

Kathy:

Absolutely. I have to say, asking those smart questions and looking at the reports. Sharon, you and your colleagues, I’ve seen some amazing heat maps on retry success. I’ve seen analysis of payment types from debit versus issuing banks, success rates, the cost of doing that. These are all really, really important. And then what you just said, data and reporting, so that’s point number one from Darryl, if your system can do it versus manually, that’s a win. Flexible APIs, that’s so important, really, really, really important in the merchant bank. Absolutely. There’s a question in here that I’d love to ask.

I think it came in. It’s like with all the processor and acquire combinations and the acquisition of your customers, is there one that’s heads and shoulders above the rest?

Darryl Hicks:

That’s a great question. I think the correct answer to that is obviously it depends who you are as a merchant, right? Some acquirers are really ready, built, and have a deep understanding from an underwriting perspective for a certain vertical. They really love a certain vertical. They get it. They understand it. They onboard it really well. They set it up in the correct MCC. They do a lot of the basic things, and they also have a decent reputation with the issuers. It’s hard to say that there’s a one size fits all here, but I would say maybe my top three favorite, depending on which vertical you’re in, probably number one for me is Checkout.com.

I’m not a shareholder in Checkout.com, though Guillaume Pousaz, the CEO and founder of it, is a good personal friend of mine, but I just absolutely love what they’ve built over there. I feel like they’ve done it right, where they have a deep direct integration into the Visa, MasterCard infrastructure, taking out as many middle men as possible, getting the granularity of reporting. Again, they’re not going to be a perfect fit for every merchant, but I really like what they’ve built. Adyen has really been catching my attention lately.

Again, very modern, very holistic approach to understanding their reputation of the various BINs that they have inside of their merchant bank. If you ask the right questions and you kind of hold their hand a little bit, you can make sure that you get into the right BIN inside of Adyen, not all Adyen merchant accounts are created equal. Kind of like what Sharon was saying that even within Worldpay, there’s different buckets, or BINs as they call them, that you can get set up in, but I really do like Adyen. And I do Worldpay as well. I think that they’re a really good, more modern acquirer. They’re a little bit older.

They’re a little bit challenged… I’m going to get in trouble for saying this probably, but the challenge that the really large processors like Worldpay and FIS is that they’re too big to kind of be nimble anymore and sometimes they can’t even get out of their own way in order to get the things done that they need to. But that said, they have built something really solid. I’d say those are probably my top three, but really it depends. It depends on you, the vertical that you’re in, the type of merchant that, and then also the BIN that you end up in within some of those larger banks. Sharon, I’d love to hear your insights on it, because I’m sure you got some favorites.

Sharon:

Absolutely. To what you were saying about the merchant’s needs, if you are let’s say a smaller company starting out, you might want an acquirer that just offers you all-in-one, let’s say a Stripe. They do your billing. They’ll do your processing. They can do revenue recognition. They could do all these little other services. And not only that, but they just bundle a rate for you and hand it to you at the end of the month. For some merchants, that’s just very easy to understand. It’s a very nice invoice, and you can work with it and move forward. As you get a little bit bigger, you might say, “You know what?

There’s some room for me to save money if I move to let’s say Interchange Plus as a business model. Maybe I don’t need to rely on Stripe billing. Maybe I want to take it back.” Now it kind of opens up the door to me to look at some direct acquirers. Those acquirers are the ones that do have the direct relationships with the card networks. There’s nobody in between them and the network. And that’s important because as a merchant, you want to get back as much information as possible as to what’s happening with your transactions and working with those acquirers, like a Stripe, a Chase, a Worldpay, Adyen, a Checkout.com, they’re going to give you the actual decline codes that the issuer told them.

Whereas sometimes just for the needs of the merchant, you might be working with a gateway or a PSP because they have other services that you need. They could be your CRM is in there. There could be some fulfillment that’s being done through them. In that instance, you were just kind of falling back on who they use as a processor, which could work also okay, but you’re not going to get any of the detailed information back anymore because they have to really pick and choose how they use their resources for reporting, for processing, whether it’s putting up batches, however they do it.

They’re going to try to do the cheapest way possible, so they might not give you all the details that you might want to look at for making your business decisions.

Kathy:

I think that’s really, really great. Understanding based on your stage of business what you need to be looking at is so important. But even more that I take away from that comment, Sharon, is we got to ask questions. To quote Darryl, we’ve got to be curious. We’ve got to see examples of the reports, and we’ve got to really dive into those details and not be shy about that.

Sharon:

I think somebody within the merchant’s company has to also take ownership of it. I don’t know about, Darryl, but I can tell you, I work with people from every department in companies. Sometimes I do work with a CFO, sometimes I work with a CEO, but then sometimes I work with somebody in membership and marketing that, to be honest, doesn’t really care so much about the nitty-gritty about payments, but they just want to save their subscriptions. If we can do that, then that’s all they need to know.

I think it’s also important to say, okay, within this company, this person will be in charge. Maybe they can kick off whether it’s requesting some information from companies, having some meetings, and starting the dialogue,

Kathy:

We’ve got some more questions coming in. Everybody, thank you so much. Great questions coming in. Keep them coming. Here’s one. If a merchant wants to increase their payment success, should they expect to plug and play a certain set of rules or best practices, or should that merchant expect to evolve specific rules that are unique to them? How long should that evolution take before it returns good ROI? Wow, that’s a great, great question. Who would like to take that first?

Sharon:

I’ll start with that. If you can get to the level that you have a different strategy, depending upon decline code, that’s like the top place you want to be. But it is more work, especially because if you have… All of a sudden, let’s say Visa comes in and they say, “Okay, we’re not going to call this decline this anymore. We’re moving them all over into something else. And now the rules for this particular decline are do not retry, retry this this many times,” and now the issuers have to conform, then that forces you to go back and redo your entire retry strategy.

Sometimes just starting off, it might just be beneficial to say, “Let’s have one across all declines.” There might be some that we’re overdoing it that we know will never ever come through, but it allows us to get all the other ones that we know can secure the business.

Darryl Hicks:

I’d add to that. I really love the point that you brought out earlier, Sharon, about it depends on what stage you’re at as a merchant. When you’re just starting out, sometimes Stripe is a really great, easy place to start. But then as you grow, you almost always end up switching over to something that’s going to be a little bit more nuanced, a little bit more specific, that’s going to give you some opportunities for optimization. The reason why that happens is because you can’t optimize a trickle, you can only optimize a flow, or as I like to say, percentages don’t pay bills, dollars and cents do, right? There’s a lot of solutions out there that are good enough when you’re a small merchant.

When you’re a small merchant and you look at your failed payments and it’s only $1,000 a month and you say, “Well, I can roll out this good enough sort of set it and forget it rules-based strategy and it’s going to recover 25% of my failed payments or 30% of my failed payments. I know that I could go and connect into a third party and a suite of APIs and put maybe a team on analyzing it. I could get that up to 50%,” but is that extra 25% of $10,000 a month really worth it? Well, maybe not for you. Maybe it is, maybe it isn’t. But certainly we have merchants on our platform that are running consistently 11, $12 million a month in failed payments.

Well, in that case, having the best strategy is critically important. Every little fraction of 1% that they can get better at improving their process around failed payments is going to give them massive ROI, not just in that month, but also the future lifetime value of those customers. Because when the payment fails, you’re not just losing this month’s revenue, you’re canceling them out in your books and you’re losing potentially all that future downstream revenue. There’s a real exponential effect on getting it right and on getting it wrong.

A huge sort of pivot here on a line that can bring you like this, or a line that can bring you like this, or maybe just kind of middling around and very, very mediocre, which a lot of merchants are struggling with. To kind of answer the question, there are some best practices that you can start with, and I talked about some of them, right? If you’re batching your recurring payments, make sure you’re on a system that allows you to control when you process those transactions. Don’t be running it overnight at 2:00 AM just because the servers are less stressed out at that time, because you’re going to artificially drive your decline rates up, because decline rates are always higher overnight than they are during the day.

There’s things like that that you can do that will help you to kind of be good enough. But to Sharon’s point, the shifts are constantly shifting underneath of our feet. The networks are constantly updating their decline codes. They’re bucketing. They’re aggregating. They’re shifting things around. There’s a whole bunch of new penalties that are going to be rolled out on merchants starting in January of 2023 based on retrying certain decline codes. Do you have someone on your team that’s really staying up to date with that, or does it make sense for you work with a software vendor or with a consultancy that will help you to stay up to date and make sure that you’re staying nimble?

The answer is that once your business gets to a certain volume, it makes sense for you to be working with a solution that’s going to really be staying up to date. I mean, that’s one of the reasons why I didn’t decide to use AI and machine learning in FlexPay because it’s cool. It literally was we were driven to it. We needed to. Because things are changing so often, we needed something that could kind of keep up to date and not just have a one size fits all approach to things, but really be nuanced and look at individual customers and individual transactions with the best strategy. That’s probably overkill if you only have $200 a month in failed payments.

But again, when you got million dollars a month or somewhere in between of failed payments, it becomes critically important. It’s game changing.

Kathy:

I’m curious, Darryl, if we implement some of these strategies and things like that, how much ROI or extension of lifetime value could we expect from focusing on this?

Sharon:

Man, we have some merchants who are using our platform that after two years, they’re now at about 42% of all of their recurring customers were at some point touched by our platform, which means that 42%, a good chunk of it, would probably be gone. Because at the time that that payment failed, it was churned. You can just imagine after two years, over 40% of all of the subscription customers. Now, some of those might have come back and self-cured. Some of them might have come back and signed up or put in a different method of payment, or maybe your customer service would’ve been able to reach out to them and take care of them.

But even that is expensive and cumbersome and creates friction. But that number should really grab everyone’s attention. Because I’m telling you, the merchants who get this right, they really do have what feels like an unassailable lead in their industry. There are subscription companies out there that are just head and shoulders above everyone else, but it’s because they are so focused on these drivers of churn and making sure that they’re really optimized. And then what happens?

All of a sudden, because they’re driving so much more revenue per customer acquired, they’re able to spend more on marketing, which gives them a huge competitive advantage overall to competitors in their landscape for acquiring new customers. There’s now new cohorts of customers that previously weren’t profitable enough. But because they’re so optimized in getting the maximum amount of lifetime value in reducing friction, now all of a sudden, those cohorts become viable. They can now market to new cohorts. Their addressable market is expanding and their marketing budget is expanding.

There’s all these hidden advantages that come to the business just by fixing this one thing inside of the payment stack, which is why I get so excited about it.

Kathy:

You are excited about it, which is great, which is absolutely great. Sharon, did you want to add anything to that?

Sharon:

Just to Darryl’s point, it is a tremendous amount. It’s nothing that should just be kind of lightly breezed over. We see merchants lose on average let’s say 15 to 20% of their file a month on involuntary churn. It adds up. Even if you can make a dent in it, even just a little bit, that lifetime value will really add to your bottom line.

Kathy:

It’s so critical and things are changing each and every year. I mean, it’s really imperative for everybody to make sure you’re almost auditing what you have and set up every year from those billing descriptors, to everything, the communications that are going out to your customers, to understanding what the changes are in the compliance and the rules from Visa and American Express and the processors and everything, because it is a constantly changing environment.

I mean, the good news is for anybody that will be here in New York, we do have Visa and American express and some of the leading processors there to talk about a lot of the questions we’re talking about today. We’ll be talking a lot about best practices in this area as well.

Sharon:

Also, just the good news too in regards to this is that these customers want your service. They did not cancel. They signed up for it. They paid for it. These are just little things that are kind of happening on the back end. It’s not like you’re even doing some heavy solicitation to try and win them back or anything like that. They signed up for your product. They want to be a part of your organization and still keep receiving it. It is a big deal.

Kathy:

There’s a question here, which I love because it’s something we all deal with. I have a flip answer to it, but Darryl I think will probably have a very thoughtful answer to it. What stage of growth should a subscription merchant start to implement upfront risk management technology for reducing chargebacks and losses? I mean, as we all know, the bad guys are getting more sophisticated. They’re pressure testing stolen credit cards on small niche merchants. You need to implement it as soon as you see anything suspicious. I mean, it’s really that important these days is kind of my flip answer, but Darryl, what do you think and what’s your advice on that?

Darryl Hicks:

Yeah, I think you’re right, Kathy. You absolutely need to have this day one. You need a solution day one. What we’ve talked about here, both Sharon and I, is that there’s different solutions for different stages of your business, but I don’t think there’s any stage of your business where you say, “Oh, I don’t need any solution.” If you’re a small merchant, you might say a simple rules-based dunning approach to failed payments is good enough because it’s easy. It’s like there’s something built into Stripe that I can just flip a switch and turn on. Yeah, it’s expensive, but I just flip a switch and it’s done and it’s good enough.

It kind of solves enough of that problem for me. Same thing with the risk management for making sure. But I mean, is your business ever at a stage where you can afford to not have any risk management whatsoever and just let people use your merchant account for testing stolen credit cards? I mean, I’ve seen this happen to some merchants and it’s months, months before their merchant account approval rates will come back up. If your merchant account gets used for testing stolen credit cards, it immediately gets flagged across many issuers as a high risk suspicious merchant account, which dramatically lowers your upfront approval rate.

It can take you from an 88% approval rate or a 90% approval rate down to a 78 or 75% approval rate on fresh attempts. The system reacts very quickly to detecting problem merchants and very slowly to reinstating your account as a trusted account. It can take six to nine months. In fact, in some cases, we’ve seen, unfortunately, merchants have no choice, but to go scorched-earth and just shut down the merchant account and start fresh somewhere else with a new, basic reputation that they’re starting with. It can be absolutely devastating beyond just what you thinking like, “Oh no, it’s not good that I end up with all this fraud and end up with all these chargebacks.”

It can really, really damage your profile. A lot of people don’t even know that this is a thing, that you have kind of this credit rating inside of the Visa, MasterCard system with the issuers. I think that it’s table stakes 101 basics that you need a basic good enough solution even at the startup phase. And then as your business grows, it becomes critically important that you start to find little ways to optimize all of these different little elements. You find different vendors, better vendors, more sophisticated vendors that become kind of power tools for you to optimize the business. Because as your business gets bigger, you start to get the ROI off of doing that and it’s really important

Sharon:

To go back to what you’re selling, if I am selling a monthly newsletter, I know that nobody’s going to steal that. But yes, definitely there’s a lot of fraud against free trials, a lot of card testing there. But the risk for a digital newsletter is very different than if I let’s say am selling golf clubs online that costs $1,000 and someone does something where it looks like I’m ordering it, but they’re ordering it, but instead I’m shipping it to France, or I’m selling it on eBay. This is a real huge cost of goods to you, to your organization, that would probably need a much higher level of fraud protection.

Kathy:

Great, great point, Sharon. If you’re starting out, you’re still at risk because the bad people, they’re going to think you’re weak and they’re going to get something by you. And then as you grow your brand, the target on your back gets bigger and bigger and bigger. You just need to really get it all set up on day one, that good enough solution. Great, great question. We are getting towards the top of the hour. Darryl, what really do you recommend for people to get started? If there’s going to be a thing to get started with, what’s that one thing that everybody should be thinking about?

Darryl Hicks:

I think that, look, change is always hard. Sometimes I feel like what we’re competing against and sharing this information out with people is we’re competing against doing nothing, unfortunately. We’re not competing against other vendors and stuff like that. I feel like the single most important thing that gets people to move, kind of the lead domino that makes everything else easy or irrelevant is desire, right? Desire really comes from being better informed. What I usually encourage people to do is to find a way to measure. Go into your book of business if you’re running a subscription business and analyze how many customers you’re actually losing every month.

That’s your churn. Start to measure how much of that is voluntary versus involuntary. Look at the involuntary portion and say and model it out in a spreadsheet. You know what your churn rate is per month every single month. Like Sharon was talking about, many merchants are like 15%, 20% sometimes failure rate on just fresh attempts on sending transactions to the bank. What if you could bring that to zero, what would that do to your lifetime value over time, over the two, three years? What would that do to your gross margin? What would that do to your net margin?

If you sit there and you sit with those numbers and you look at them, especially as your business starts to scale, I don’t see any merchants who once they really look at those numbers and they go through that exercise themselves, that they walk away from that saying, “Oh, I don’t need to do anything about this.” They start to understand, whoa, this is everything in my business. Can I afford to not do anything about this? I’ve got to go find a solution for this, whether that’s talking to other mentors who can give me advice, talking to consultants, finding better software vendors and technology solutions.

That’s to me the lead domino, right? My urgent message and my ask of everyone is if this content resonated with you, go look at your own business and start to measure how much am I… Even if it’s only 6% of your customers that you’re losing due to failed payments, what would happen to your lifetime value and to that exponential tale of profit if that was zero? And then you’ll start to understand why you need to manage it.

Kathy:

Great, great advice, Darryl, Sharon, what’s your recommendation?

Sharon:

Similarly, to really start asking questions. We’ve worked with some merchants that if I were to say, “Who is your acquirer,” they say, “What’s an acquirer?” It’s really to understand just what’s happening within your own company, what does the process flow look like, and to know that there are a lot of tools out there in the industry to help you that are made for subscription merchants and to really start looking into those. They do difference. You’re not a regular eComm merchant. Most of your business is done without the customer present. You’re all alone. The customer’s not there. It forces you to look at things differently and make sure that you have up to date information on them.

Make sure that you do have a good communication with them and contact with them, and that you do everything possible to get that long-term value.

Kathy:

Wonderful advice. Darryl and Sharon, thank you very much. This has been a really great conversation. I want to let everybody know, we’ll be sending you an email to point to an on-demand version of today’s conversation. Also, you can listen to us again, if you’d like, to hear all this great, great advice. Keep an eye out on your inbox for that. Always be curious. Record. Challenge. Ask questions. That’s what I’m hearing, and that’s going to really have an impact on bottom line and profitability. I can’t think of better advice. Thank you, Darryl. Thank you, Sharon. Thank you everybody for spending your time with us today. And until next time, take care.