“You cannot manage what you do not measure.” This familiar saying is especially true for the subscription industry, which loses hundreds of millions of dollars each year by failing to track one key metric: customer LTV.
The State of Subscription Business: Best Practices and Business Performance Drivers — our brand new study completed in conjunction with PYMNTS — takes a deep dive into what top performing companies are doing to manage churn, retention, and customer LTV.
Customer LTV Secrets of the Top Performers
Subscription providers that track and optimize customer LTV are five times more likely to be top performers — which the study defines as those that minimize revenue loss due to failed payments. But our research finds that only two in five subscription firms even recognize the connection between failed payments and LTV. This connection has a profound impact on the financial health of the 200 subscription businesses surveyed for the study and it’s logical to presume it affects every other subscription business too.
The Customer LTV Gap
PYMNTS’ research found that while 58% of subscription businesses track metrics that measure the outcome of the customer’s relationship with the business — customer churn or retention — only 8.5% measure customer LTV. This sizable gap can be partly explained because there isn’t one clear consensus on the definition of LTV and the metrics for measuring it. Basically, you can’t measure what you don’t understand.
Which leaves one huge question: How much is this gap costing your subscription business?
Only two in five merchants recognize failed payments as a strategic driver of customer value and business performance.
Taking Action to Improve Customer LTV
Another key discovery in the study was the fact that top performers leverage LTV to guide their strategies and take action to retain customers before they become missed opportunities. And not acting is costly. In the sectors studied, subscription companies lost an average of 9% of sales to failed payments, totaling an estimated $278 billion in the last 12 months. Top performers, however, recover 60% of failed payments that would have otherwise been lost. That’s a lot of money back in their pockets.
Customer LTV matters for all companies, but it plays an especially critical role in the profitability and growth of subscription-based companies. Yet only two in five merchants recognize failed payments as a strategic driver of customer value and business performance. It’s obvious that most subscription businesses don’t understand how much failed payments contribute to customer churn and the resulting impact on the success of their business.
The Connection Between Failed Payments, Churn, and Customer LTV
Previous research found that Involuntary churn caused by failed payments accounts for approximately 50% of total customer churn — yet our latest research found that only 53% of subscription companies track involuntary churn in the first place. And even among those businesses that track total customer churn, only 20% identified it as the most important metric for improving business success. This is huge gap in performance measurement.
Top-performing subscription-based companies recognize the connection between failed payments and customer LTV., however. On average, 30% of these firms track and analyze failed payments to improve customer LTV, while none of the bottom-performing companies did.. This shows how important it is to track LTV and improve failed payment recovery rates.
To maximize profits and stay ahead of the competition, subscription businesses must understand the links between failed payments, involuntary churn, and customer LTV. Failed payments are the top cause of involuntary churn, which wipes out hundreds of millions of dollars in revenue annually by reducing LTV. While most subscription providers do track churn or retention, only a small fraction measure customer LTV — and even fewer focus on the direct relationship between failed payments and involuntary churn.
This disconnect is costing your business. Download our report to learn what top performing subscription businesses are doing right and how you can leverage these insights to guide your own customer retention strategies.