The Strategic Guide to Involuntary Churn
Getting new customers is harder than ever, making customer retention even more important. But even the most seasoned subscription professional is finding it more difficult to maximize retention numbers as consumers are having to make tough decisions to balance household budgets. Our latest research study completed in conjunction with PYMNTS found that 48% of study participants expect the cost of customer acquisition to be a challenge and another 37% believe retaining these customers will be difficult.
That’s a lot of lost revenue.
That means every subscription business needs to have a solution in place to close the gap to their potential retention rates and optimal customer LTV. This sounds obvious but it turns out that there are two types of churn — voluntary churn and involuntary churn — and most companies don’t understand the difference between them or the cause of each type. This critical gap means that most companies cannot realize their full potential customer retention and LTV.<?p>
The difference between voluntary churn and involuntary churn
Voluntary churn is customer loss that happens when customers choose to end their subscription. Many subscription companies invest significant time and money to improve the customer experience as a way to prevent this type of churn.
Involuntary churn causes customer loss when payment-related issues prevent legitimate recurring payments from completing successfully. Failed payments (also known as declined credit card transactions) are the real cause of involuntary churn. And filed payments are responsible for up to half of all involuntary churn. Fortunately, this passive churn is preventable, meaning it can be identified, managed, and reduced.
Tracking the problem of involuntary churn
Involuntary churn in particularly harmful because it reduces overall revenue, growth rates, and customer LTV, resulting in less money being available for new customer acquisition. But when involuntary churn is reduced, your customer acquisition values can be increased because overall customer LTV will go up.
Reducing the involuntary churn caused by failed payments means your recovered customers will successfully bill for many more months. These recovered customers are extremely valuable because they create a compounding revenue growth benefit month after month following failed payment recovery. This can help your subscription business realize its full financial potential, resulting in accelerated revenue growth and profit.
These financial gains can then be used to improve customer acquisition and strengthen your product or service experience, which increases growth and retention. This cycle of accelerated customer acquisition — fueled by higher levels of revenue growth, customer retention, and profit — can result in increased market share for you. While you’re seeing financial gains because you have dealt with your passive churn, your competitors will still be fighting suppressed revenue and reduced profit. This gives you a powerful advantage.
Recent research conducted by PYMNTS.com found that 58% of subscription-focused companies track either customer churn (36% of participants), customer retention (28% of participants) or both. But very few companies track more sophisticated metrics like voluntary vs. involuntary churn. You need to measure each type of churn separately to identify and manage the true source of the problem and use the most effective solutions for each type.
How to calculate involuntary churn
Solving the problem of involuntary churn begins by gathering data that every subscription business should be able to easily gather, although you may need additional data and reporting. Involuntary churn reporting and calculating the total cost of customers lost to failed payments is not difficult, but you do need to access and manage new data sources you may not have used before.
A great way to start is by establishing a small team of people from your finance, technology, and reporting departments who can help collect the necessary information and create reports for analysis.
Data to collect:
- Total churn, including all customers lost to voluntary churn and involuntary churn
- Customers who experienced failed payments and whose subscriptions ended as a result
It really is that simple.
Now divide total churn by the customers lost to failed payments and this gives you your involuntary churn rate. These 2 data points are needed to measure the percentage of your churn that is involuntary.
How to reduce involuntary churn
Let’s say a company measures customer churn at 25%. After gathering the data and running the calculation above, they learn that 48% of their churn is involuntary or caused by failed payments. We saw that from the survey that companies can recover 50% or more of this churn, so they would be able to eliminate 12% of all churn just by implementing a failed payment system. This calculation is based on the average rates found in the PYMNTS study. Recovery rates will improve if the failed payment system is high performing. This makes using FlexPay’s AI-powered solution so important.
Technology best practices
The ideal failed payment recovery solution is one that develops unique recovery strategies for each failed payment. As well, your recovery strategies must take into account the issuing bank that declined the payment request, the reason code given for the failed payment, and the type of credit card that the customer used on their account. AI-powered solutions are particularly well-suited to create individual solutions for each failed payment and typically deliver the highest recovery rates for failed payments.
Retention and LTV best practices
To be effective, failed payment recovery solutions must deliver high recovery rates and high customer retention following recovery. Since the duration of the lifespan of a customer following recovery determines the LTV of the customer, reporting best practices must include measuring customer LTV following recovery. Subscription companies must deliver a great customer experience during recovery in order to realize their full customer LTV.
Recovery best practices
Some failed payment reasons — such as hard declines caused by expired or invalid card numbers — will always need to be solved with direct customer involvement. Unfortunately, knowing their payment has failed can prompt a customer to churn. Some customers will choose not to engage in a recovery process when asked to help and this will mean a lost subscriber. This is why the highest performing recovery methods work directly with the payments system and avoid customer involvement and awareness of the failed payment. And when customer involvement is required, an empathetic, collaborative style is used that encourages the customer to solve the problem.
Only FlexPay offers an AI powered solution that optimizes recovery. Our platform solves most failed payments by working directly with the payments system — with no customer visibility to the failed payment — and engages with the customer in a collaborative way when required.
Solving the problem of involuntary churn with a failed payment recovery solution that optimizes both short-term recovery and long-term customer LTV following recovery gives you a window of opportunity to outpace your competition. Improving your core metrics will give you such a great competitive edge hat others who didn’t adopt a solution early simply won’t be able to catch up.