For subscription businesses, customer retention is a key metric that is rigorously tracked, analyzed, and monitored. Companies know that increased customer retention delivers higher customer lifetime value, growth in MRR, and higher company profitability. Plus, another overlooked benefit is created indirectly when customer retention is increased because higher customer LTV can translate to increased acquisition budgets and new customer cohorts that were previously unprofitable at lower LTV values.

Of course, customer retention and LTV can only be increased by reducing customer churn. Therefore, subscription companies must understand the root causes of customer churn and the technology solutions available to optimize customer retention.

Three Known Drivers of Customer Churn

There are three common drivers of customer churn that most subscription companies understand and manage:

1. Customer fatigue
   • The customer no longer sees value in the product or service and decides it’s time to end the subscription
2. Competitive loss
   • The customer finds an alternate provider that they believe is better, or a lower price point, than their current vendor and decides to switch
3. Customer service issue
   • The customer has a negative experience with the product or customer team and decides to cancel or not renew the subscription

These causes of churn are known as voluntary churn because the customer actively decides to end their subscription with the company. Whether subscription-based or not, most companies are actively searching for ways to mitigate these churn drivers and invest in their products and services to retain customers.

However, subscription businesses have a large blind spot in their view of customer churn causes because direct churn only accounts for half of the problem. 

Up to 48% of Subscription Churn Caused by Failed Payments

There is a fourth driver of customer churn that is not actively managed or recognized and is, in fact, the most significant driver of churn for subscription businesses.  This fourth contributor to churn is caused by failed credit card payments or false declines. In fact, FlexPay research shows that failed payments cause up to 48% of all churn for subscription businesses; however, the good news is that the impact of failed payments, and the churn it causes, is mostly preventable.

Payments-related churn is known as involuntary churn because credit card payment failures cause subscription cancellation rather than customers choosing to end their subscription.

The good news is there are powerful solutions available to help subscription companies recover failed payments and reduce the single largest source of churn. However, it’s critical to optimize the method used to recover failed payments in order to both maximize failed payment recovery and indirect churn.

Before we get into that, let’s review what failed payments are. 

What Are Failed Payments and Why are They so Painful for Subscription Companies?

Failed payments, or false declines, are legitimate transactions that are falsely declined by payment authorization systems. Why does this happen? The payments ecosystem is enormously large and complex, and payment authorization systems must make millisecond decisions to determine if a transaction is approved or declined. Banks and other authorization systems are constrained and do not have access to all the information needed to make accurate decisions, resulting in declined legitimate transactions.

Additionally, banks incur enormous losses from approving fraudulent transactions, so they end up being overly cautious in deciding which transactions to approve, resulting in large quantities of decline decisions on legitimate transactions.

Declined payments occur across all transaction types, but unfortunately, some transaction types are more significantly impacted. According to Visa, while in-store transactions only decline 1% of the time, eCommerce transactions are declined an average of 15%, and recurring transactions are declined an average 24% of the time. Another way to look at this is; 1 in 4 recurring billing transactions are falsely declined for recurring or subscription payments.

The unfortunate outcome of false declines is churn. If you fail to recover a failed payment, you have lost a customer.  This relationship is logical; however, it turns out that there is also additional churn created when the customer becomes aware of a failed payment.  A recent study from PYMNTS found that 27% of consumers decided to cancel their subscriptions or switch to a competitor due to the payment decline when they were made aware of it. This means that awareness of the failure is also a driver of churn, so companies must choose the right method in their recovery efforts.

So, what options are there for subscription companies to solve this problem?

Methods to Recover Failed Payments

There are various methods that subscription businesses can deploy to recover failed payments.

Rules-Based Recovery

This is based on a set of predetermined rules that are applied when a payment failure occurs. It involves a series of steps where, for example, the transaction is retried on a different day or week to get an approved authorization. Rules-based systems do not look at each transaction to evaluate how it can be recovered. Instead, they apply a one-size-fits-all approach or simplistic rules to every failed transaction in an attempt to get authorization approvals.

The challenge with rules-based systems is that failure reasons are complex.  A payment may fail for hundreds of reasons, and there are more than 8,000 issuing banks in North America alone that each uses their own rules for payment decisions.  Thus, it is easy to understand that the large quantity of permutations of failure reasons possible for each failed payment is simply too complex for rules-based recovery systems to deliver optimal results. 

Many companies start by using their own rules-based system, which is a great first step to recognizing failed payments. However, businesses need to understand that more sophisticated and specialized technology solutions can earn much higher recovery performance. 

Email and SMS Recovery – also known as Dunning

Companies also attempt to recover failed payments by sending texts or emails to customers, alerting them that their credit card was declined, with requests for the customer to update their payment details or to contact the company to make the change for them.

The challenge with this solution is that many subscribers don’t understand why their payment failed, forcing the customer to solve a problem they didn’t create. The typical customer reaction ranges from annoyance and discontent to frustration and anger. As mentioned earlier, 27% of consumers actively canceled their subscription or changed to a different provider after awareness of failed payment, so it is clear that companies must reduce visibility when possible to avoid this secondary cause of customer churn.

There are circumstances where the customer needs to be involved in the payment recovery and using email and SMS as an outreach method are two options that can work. An example of this is if the credit card is reported lost or stolen, the customer will need to update their credit card information to continue using the product or service. Email and SMS solutions can be used as part of your recovery strategy but should never be used as the first step in recovering failures.

Customer Service Recovery

This is when your customer service team reaches out to the subscriber to discuss the failed payment with the goal of trying to resolve it by working with the customer directly – usually by calling the customer.

Similar to Dunning outreach, the customer is being made aware of the failed payment, which contributes to more churn.  Plus, customer service (CS) outreach is costly and should only be used after other types of recovery have been attempted. Your customer service team has limited time, and it should be spent on answering customers’ inquiries and ensuring you are delivering an exceptional customer experience.

If, for example, the customer has lost their credit card and has not updated the information after receiving an SMS or email notification, the recommended next step in recovery would be to have your CS team contact the customer directly. Your CS team can help reinforce the product or service’s value and try to save the customer.

AI and Machine Learning Recovery

A category of FinTech solutions called Payment Authorization Management (PAM) uses AI and machine learning technology to solve failed payments and help complete more legitimate transactions.  The most successful PAM solutions create optimized recovery solutions for each individual transaction and do not engage the subscriber to assist in the recovery efforts.

Invisible Recovery^TM is an automated recovery solution that establishes a unique strategy for each failed payment, adapting for the hundreds of failure reasons to increase authorization approvals. It typically improves recovery rates by up to 70% over other methods, collects revenue faster, and uses the fewest possible attempts to recover payments.

Invisible Recovery does not engage with the customer throughout the recovery process, thereby avoiding visibility to the failure, and eliminating additional drivers of churn. A solution that is invisible to your customer should always be your first step to recovering failed payments. As we learned above, engaging with your customer unnecessarily, or creating visibility to the failed payment, results in a range of adverse outcomes, including increased customer churn, and is essential to avoid when possible.

Remember, if you do not recover the failed payment, you lose the customer and the cumulative revenue that should have been earned from the customer. Recovering the initial failed payment also means the customer is retained and continues to bill for many more months, and is still available for further upsell and cross-sell opportunities.

So, customer retention should never be an afterthought; this is an essential metric that your company needs to be diligently watching as it has a tremendous impact on your company’s growth and profitability. If you’re unsure what your failed payment rate is, you must start looking into this immediately and optimizing your strategy to include a solution that avoids visibility to the customer. To find out more, speak to a failed payments expert.