Two things can happen when a customer’s payment fails: either your customer retention efforts are successful, or the customer churns. If they’re retained, you continue to generate revenue over the remaining lifespan of that active customer. But in the case of churn, you lose the customer and all their future revenue and LTV.
Obviously, it’s important to focus on customer retention because it delivers an ongoing stream of revenue from future billing periods. And measuring the full value of a customer saved from churn is the proper way to assess the value of your churn reduction initiatives. Maximizing customer retention should be your focus, instead of simply trying to reduce costs. This isn’t the time to start pinching pennies.
Voluntary churn and involuntary churn
As you may know, there are two types of customer churn. The first is voluntary churn, where the customer actively chooses to end their subscription. The second type is involuntary churn, when a subscription is forced to end because of a failed payment. When you measure each type of churn separately, you’re likely to find that involuntary churn counts for up to 50% of your total churn.
Many subscription companies first try to solve their involuntary churn problem with an in-house solution — either a simple retry routine or a customer service outreach program to engage with customers and get an alternative form of payment.
Unfortunately, many of these companies mistakenly believe their solution doesn’t generate any costs to operate, so they keep using it even though they aren’t getting the highest recovery rates. When these companies consider working with a specialized solution, they are often looking just for incremental recovery on transactions they couldn’t get back on their own. They’re focused on minimizing the cost of recovery rather than getting the full potential customer recovery — and revenue — that could be created.
That’s not ideal.
The value of specialized third-party recovery solutions
Our 2023 State of the Subscription Industry report found a direct connection between top performing subscription companies and the use of specialized third-party solutions to solve failed payments. It turns out that top performing subscription companies are 12X more likely to use a specialized failed payment recovery solution than bottom performing companies.
These top performing companies see failed payment recovery as customer recovery and not just the recovery of a transaction. They understand all the LTV recovered customers bring to their businesses and focus on increasing this revenue rather than cutting costs.
Using a third-party solution on your fresh declines dramatically improves your net revenue
Use the most effective recovery method first
When working to recover failed payments, it’s vital to use the most effective recovery solution first. That means using a specialized payment recovery solution as soon as a payment fails. Why?
- The probability of a successful recovery goes down with each additional retry attempt
- The probability of a successful recovery goes down as more time passes after the initial decline date
Using the recovery solution that delivers the highest recovery performance on failed payments as soon as they occur will provide the best recovery results and generate the most revenue, even after accounting for recovery fees. FlexPay’s data proves that our recovery is superior for each retry attempt in a series following initial decline.
But don’t take our word for it — test it for yourself by following these steps:
- Use a specialized third-party solution like FlexPay on your failed payments immediately after they happen
- Measure the number of customers and the amount of revenue you recover, minus recovery fees
- Calculate the LTV of recovery customers (sum of successful billing cycles * billing rate)
- Compare the net LTV revenue earned to the LTV results you got from your own internal solution and determine which created the highest LTV from recovered customers
Fresh declines get the best payment recovery results
See the difference? Even after taking recovery fees into consideration, using a third-party solution on your fresh declines gives you a dramatically higher net revenue than if you had only given the specialized solution your leftover scraps of unrecovered customers.
There’s still a place for internal recovery methods, don’t get us wrong. But use these as a last resort for the few customers the specialized solution couldn’t recover.
Remember, fresh is best!
Read our case study to learn how Hooked On Phonics improved their failed payment recovery rate by 45% and blew past their expected ROI by 150%.