Measuring the Costs of Involuntary Churn and Value of Recovered Customers

Identifying and Measuring the Cost of Involuntary Churn

The New Reporting System to Measure the Full Cost of Involuntary Churn
To measure how much involuntary churn you have in your business, you can follow these steps:

Part I – Churned Customers

  1. Calculate the quantity of active customers over each of the past 6 months
  2. Calculate the quantity of monthly churned customers over each of the past 6 months.
  3. Divide the quantity of monthly churned customers by the quantity of active customers. This is your total monthly churn rate.
  4. Take the quantity of monthly customers lost to failed payments (calculated in step 1 above), and divide this by each month’s total lost customers. This is your monthly involuntary churn percentage.
  5. The forecasted revenue losses caused by involuntary churn is equal to the forecasted LTV of customers lost to failed payments. This value is appropriate because involuntary churned customers are lost prematurely, or before the customer would have chosen to end the subscription. This forecast reveals the scope of the problem in your business.

Part II – Customers who experienced failed payments

  1. Create a file containing all records of failed payments (card authorization decline decisions) on your payment submissions for the past 6 months. This file should include the customer ID, billing amount, date of payment decline, and a way to identify the card number.
  2. Take the customer IDs from step 1, find the month each started their subscription, place into the file, and calculate how many months the customer was active. Store this value on each customer record.
  3. Find your measurement of the average customer lifespan in months

Part III – Average customer lifespan (in billing cycles)

  1. Months of billing lost to failed payment:
    • Create a calculated field value for each customer ID, that measures the difference between the average customer lifespan (in months) and the value at the time of the failed payment.
  2. Total LTV value lost to failed payments:
    • Create a calculated field value for each customer ID, that multiplies the months of billing lost to failed payment (created in step 4) by the monthly billing amount for that customer.
  3. Create a report for each month that divides the quantity of total billing requests by the number of failed payments. This is your failed payment rate. Alternatively, you can calculate the percentage of total billed dollars divided by the total declined transaction dollars, which gives you the failed payment dollar rate.
  4. Create a report that sums the value calculated in step 5. It is recommended that this lost LTV value be measured on a monthly basis for all customers with a failed payment in each month. This format provides an easy way to quantify the LTV lost each month.

Measuring the Compounded Value of Involuntary Churn Avoidance

The New Reporting System to Measure the Full Value of Customers Saved from Failed Payments
  1. Forecasted total LTV value recovered from failed payments:
    • Create a calculated field for each recovered customer number that multiplies the value calculated in Step 4 by the customers’ billing amount. This will provide a forecast for each recovered customer’s LTV following recovery
      • This forecast is calculated with simplified assumptions on the lifespan of the customer following recovery. The method of failed payment recovery can have a negative impact on the lifespan of a customer following recovery. However, this is a good starting point to fully recognize the value of failed payment recovery.
      • We recommend tracking the lifespan in billing cycles for each customer recovered from a failed payment and summing the total value of all subscription payments made following recovery. While it may take time to measure the accurate LTV of each recovered customer, it will provide an accurate measurement of the value of each recovered customer.
  2. Create a report that sums the value calculated in step 10. It is recommended that this recovered LTV value be measured monthly for all customers recovered from a failed payment in each month. This format provides an easy way to quantify the forecasted LTV recovered each month.
  3. Monthly percentage of total revenue from failed payments should also be calculated. While this number seems simple, it is a very useful metric that provides direct visibility to the % of total revenue the company earns from failed payments. This value can be measured monthly by dividing each month’s total subscription revenue by the total of all successful billings of customers who were recovered from previous failed payments (regardless of which month the failed payment occurred in).
    • This calculated percentage of revenue from recovered customers won’t be an accurate calculation at first, since it will take time to track the cohort groups of recovered customers over their entire remaining lifecycles. Of course, the percentage this measure calculates will likely continue to grow until the average number of months of billing past recovery is reached, at which time it is likely to plateau.

Tracking the value of your failed payment recovery efforts

  1. Update your billing system by adding two new data fields:
    • Date of failed payment and date of failed payment recovery
  2. Start measuring the lifespan of customers following failed payment recovery.
  3. You can now begin tracking the total LTV of customers recovered from failed payments. This snapshot can be measured monthly by tracking the lifespans of active customers, but it can’t be fully calculated until the customer voluntarily ends their subscription.
  4. Complete this calculation: (Number of billing periods between cancellation date and the failed payment recovery date) * billing rate.
  5. This value provides the true measurement of recovered customers after a failed payment and measures the revenue dollars you gained by avoiding involuntary churn.
  6. Other suggested measurements:
    • Monthly revenue from recovered customers
    • Total LTV of recovered customers
    • Percentage of total revenue each month from recovered customers