Subscriber Retention: The Most Common Cause of Subscriber Churn Is Failed Payments

Customer retention is a vital indicator for subscription businesses that are meticulously managed, evaluated, and monitored.

Companies understand that stronger customer retention leads to higher customer lifetime value, MRR growth, and corporate profitability.

Furthermore, improved customer LTV can translate to greater acquisition budgets and new client cohorts who were previously unprofitable at lower LTV levels, resulting in another benefit that is often neglected.

Of course, lowering customer churn is the only way to improve client retention and LTV.

As a result, subscription businesses must comprehend the causes of client churn as well as the technological solutions available to improve customer retention.

Customer Churn Has Three Known Causes

Most subscription businesses are aware of and address three primary causes of customer churn:

Customer dissatisfaction

The consumer decides that the product or service is no longer valuable and that it is time to cancel the subscription.

Loss of competitive advantage

The customer discovers a competitor who they believe is better or offers a lower price than their present vendor and decides to switch.

a problem with customer service

When a consumer has a bad experience with a product or a customer service representative, they decide to cancel or not renew their membership.

These types of churn are referred to as voluntary churn because the client chooses to cancel their subscription with the company on their own.

Whether subscription-based or not, most businesses are looking for strategies to reduce churn and invest in their products and services in order to keep customers.

However, because direct churn accounts for just half of the problem, subscription firms have a big blind spot in their understanding of customer turnover causes.

Failed payments account for up to 48% of subscription churn.

There is a fourth factor of customer turnover that isn't actively handled or recognised, but it's the most important for subscription businesses.

Failed credit card payments or erroneous declines are the fourth factor that contributes to turnover.

According to FlexPay data, unsuccessful payments account for up to 48% of all subscription turnover; however, the good news is that the impact of failed payments, as well as the churn it produces, is mostly avoidable.

Payments-related churn is referred to as involuntary churn because subscription cancellation is caused by credit card payment issues rather than customers deciding to terminate their subscription.

The good news is that there are effective solutions available to assist subscription businesses in recovering failed payments and reducing churn.

However, in order to maximise both failed payment recovery and indirect churn, it's necessary to optimise the mechanism utilised to recover failed payments.

Before we get into it, let's take a look at what constitutes a missed payment.

What Are Failed Payments and Why Do They Hurt Subscription Businesses So Much?

Payment authorization systems incorrectly decline legal transactions, resulting in failed payments or misleading declines.

What causes this to happen?

Payment authorization systems must make millisecond choices to determine whether a transaction is accepted or rejected, and the payments ecosystem is tremendously broad and complex.

Banks and other authorization systems are confined and lack access to all of the data needed to make appropriate choices, resulting in valid transactions being refused.

Furthermore, because banks lose a lot of money when they allow fraudulent transactions, they become unduly cautious when determining which transactions to authorise, resulting in a lot of decline decisions on legitimate transactions.

Payments are declined in all types of transactions, however some transaction categories are impacted more than others.

According to Visa, whereas in-store transactions are only refused 1% of the time, eCommerce transactions are declined 15% of the time on average, and recurring transactions are declined 24% of the time.

Another way to think about it is that one out of every four recurrent billing transactions is incorrectly refused for recurring or subscription payments.

Churn is an undesirable side effect of illusory declines.

You've lost a customer if you don't recover a failed payment.

This link seems sense; yet, it turns out that when a consumer learns of a rejected payment, there is further churn.

According to a recent study by PYMNTS, when consumers were made aware of the payment decline, 27% of them decided to cancel their subscriptions or switch to a rival.

As a result, firms must adopt the correct strategy in their recovery efforts because awareness of the failure is also a driver of churn.

So, what options do subscription businesses have to address this issue?

Methods for Recovering Unpaid Bills

Subscription businesses can use a variety of strategies to recoup failed payments.

Recovery based on rules

This is based on a set of criteria that are applied when a payment fails.

It entails a number of actions, such as retrying the transaction on a different day or week in order to obtain an accepted authorisation.

Rules-based systems do not examine each transaction to determine whether or not it can be recovered.

Instead, they try to gain authorization approvals by applying a one-size-fits-all strategy or simple guidelines to every failed transaction.

The problem with rules-based systems is that the causes for failure are often complex.

A payment might fail for a variety of reasons, and in North America alone, there are over 8,000 issuing banks, each with their own set of regulations for making payment choices.

As a result, it's easy to see why rules-based recovery systems can't give ideal outcomes due to the vast number of permutations of failure reasons possible for each failed payment.

Many businesses begin by developing their own rules-based system, which is an excellent way to identify unsuccessful payments.

Businesses must realise, however, that more sophisticated and specialised technological solutions can provide significantly better recovery results.

Recovery of emails and text messages (also known as Dunning)

Companies also try to recover lost payments by sending consumers messages or emails informing them that their credit card was denied and asking them to amend their payment information or contact the company to make the adjustment for them.

The difficulty with this technique is that many customers have no idea why their payment was declined, requiring them to remedy a problem they didn't cause.

Fury and dissatisfaction are common client reactions, as are frustration and anger.

As previously stated, 27 percent of customers actively cancelled their subscription or switched to a new provider after learning of a missed payment, indicating that organisations should minimise exposure whenever possible to avoid this secondary cause of customer turnover.

In some cases, the client must be involved in the money recovery process, and email and SMS as outreach methods are two possibilities that can be effective.

If a credit card is reported lost or stolen, for example, the consumer must update their credit card information in order to continue using the product or service.

Email and SMS solutions can be used as part of a recovery strategy, but they should never be used as the initial step.

Recovering Customer Service

This is when a member of your customer support staff contacts a subscriber to discuss a rejected payment with the goal of resolving the issue directly with the client - usually by contacting them.

The consumer is informed of the unsuccessful payment, similar to Dunning outreach, which contributes to increased churn.

Furthermore, customer service (CS) outreach is costly and should be done only when other methods of recovery have failed.

Your customer service personnel has a limited amount of time, which should be spent answering customers' questions and creating a positive customer experience.

If a customer has misplaced their credit card and has not changed their details after receiving an SMS or email notification, the next stage in the recovery process is for your customer service team to contact them directly.

Your customer support personnel can assist in reinforcing the value of the product or service and attempting to save the customer.

Recovery of Artificial Intelligence and Machine Learning

Payment Authorization Management (PAM) is a type of FinTech solution that employs AI and machine learning to resolve failed payments and assist in the completion of more valid transactions.

The most successful PAM solutions optimise recovery methods for each individual transaction without involving the subscriber in the recovery process.

Invisible RecoveryTM is an automatic payment recovery solution that creates a custom recovery strategy for each failed payment, responding to the hundreds of reasons for failure to improve authorisation approvals.

It boosts recovery rates by up to 70% compared to other approaches, collects income faster, and makes the fewest number of tries to recover payments possible.

During the recovery process, Invisible Recovery does not interact with the consumer, avoiding visibility to the incident and removing extra churn factors.

When it comes to recovering missed payments, the first step should always be to find a method that is invisible to your consumer.

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 that if you don't recover the missed payment, you'll lose the customer and the revenue you should have earned from them.

Recovering the original missed payment ensures that the customer is kept and billed for many more months, as well as being available for additional upsell and cross-sell opportunities.

Customer retention should never be overlooked; it is a critical indicator that your firm should monitor closely because it has a significant impact on your company's growth and profitability.

If you don't know what your failed payment rate is, you should check into it right away and optimise your plan to incorporate a solution that prevents client visibility.

Speak with a failed payments specialist to learn more.