Subscription Business Economics
The Total Cost of Failed Payments and the True Value of Recovered Customers
MEASURING THE EROSION IN CUSTOMER LIFETIME VALUE FROM FAILED PAYMENTS
ROOT CAUSES OF SUBSCRIPTION CUSTOMER CHURN
Customer churn is the enemy of subscription businesses because each lost customer eliminates revenue from all future billing cycles.
- Customer fatigue The customer no longer sees value in the product or service and decides it is time to end the subscription
- Competitive loss The customer finds another provider they believe is better or finds a lower price point than their current vendor and decides to switch
- Customer service issue The customer has a negative experience with the product or brand and decides to cancel or not renew their subscription
Unfortunately, even well-run subscription businesses may not know that up to 48% of subscription customer churn is not caused by the customer cancelling their membership, but by failed credit card payments.
What is even more painful is the fact that most failed credit card payments are not declined for NSF or by authorization systems identifying fraudulent transactions, but by decline decisions made on legitimate transactions where the customer intends to buy the product or service and has credit to complete the purchase.
In these cases, the customer is ready and willing to buy but the card authorization system won’t let them complete the purchase. To learn more about the frictions and limitations in the payments system that lead to false declines, also known as credit card authorization declines on legitimate transactions, read the Payments Authorization Management eBook.
MEASURING THE TOTAL ECONOMIC COST OF FAILED PAYMENTS
The direct link between failed payments and customer churn is often not well understood. However, understanding the total economic cost of failed subscriptions payments is rarer still.
As you’ll see, there is an obvious direct link between customer churn and failed payments, plus a not-soobvious indirect cause that is also a significant driver of churn.
The obvious: Every failed payment from a subscription customer that is not recovered results in a churned customer.
The not-so-obvious: Subscription customer churn is also created when customers are made aware when their recurring payment is declined. Customer visibility into failed payments occurs when service delivery is interrupted or when the recovery methods a business uses force the customer to help solve the payment issue through customer service outreach or a dunning recovery method.
Asking customers to help fix a failed payment might not seem like an obvious contributor to churn, so let’sreview the typical ways a customer reacts when asked to help solve a failed payment:
CALCULATING THE ECONOMIC COST OF FAILED PAYMENTS
The equation used to calculate the Lifetime Value (LTV) of a customer can also be used to calculate the cost of a customer prematurely lost to a failed payment.
Monthly Billing $ Amount x Blocked Quantity of Billing Cycles = Total Failed Payment Cost
Let’s use an example of a subscription company with a customer who is billed $49.99 per month and experiences a failed payment in their third month of billing. The average lifespan of customers for this company is 10 months.
of Billing Cycles
CALCULATING THE ECONOMIC COST OF FAILED PAYMENTS
All Recovered Billing Payments
When the calculation of the full value of a recovered customer includes both the failed payment recovery and
the ongoing successful billing cycles following the recovery, two conclusions are clear:
- Failed payment recovery solutions must be optimized to deliver both recovered customers and overall recovery dollars
- Businesses must prioritize with the highest urgency the deployment of the failed payment recovery solution that delivers the longest post-recovery lifespan in order to maximize LTV
Conclusion: Subscription-based businesses must deploy a solution that delivers the highest recovery of customers lost to failed payments AND delivers the longest customer retention following recovery.
The FlexPay Invisible Recovery™ platform is an AI-powered solution that optimizes customer recovery from failed payments and delivers proven long-term customer retention following recovery.
Invisible Recovery™ delivers the highest rate of customer recovery by creating an individual strategy for each failed payment, resulting in optimal total customer and revenue recovery.
Plus, Invisible Recovery™ works quickly while completely avoiding customer visibility to the failed payment, thereby avoiding the customer churn created when subscription customers are made aware of the payment issue.
FLEXPAY RESEARCH SHOWS INVISIBLE RECOVERY™ DELIVERS THE HIGHEST RECOVERY, AND SUSTAINED RETENTION:
- Up to 70% improvement in failed payment recovery rates compared to other recovery solutions
- Up to 54% longer customer retention following recovery compared to other failed payment recovery solutions