Roadmap to Increasing Subscription Customer Retention
Customer retention and customer LTV are critical metrics for subscription businesses to optimize because increasing these metrics directly increases revenue growth and profitability. Successful subscription businesses work to reduce customer churn and extend the length of the customer relationships by managing customer satisfaction and delivering great experiences. Of course, measuring these key KPIs is important, but implementing successful strategies and programs to deliver improvements in these metrics is the goal. These strategies are the key to increasing subscription customer retention.
Importance of Customer Retention
The key to growing revenue and profitability
Subscription businesses must place a heavy focus on increasing subscription customer retention because it has such an impact on growth and profitability. The recurring billing model subscription businesses use creates opportunities for high lifetime value (LTV) potential, but you also incur high acquisition costs for every new subscription customer. Each company varies of course, but it is common that subscription customer acquisition costs an average of 2.5 times the monthly billing amount or more. To ensure you are maximizing this revenue potential, it is critical to recognize the unique relationship subscription customers have created with you and reward your subscription customers by treating them with respect and trust. By doing so, you can establish a strong customer relationship resulting in less churn and increased LTV and revenue.
Two Sources of Subscription Customer Churn
Manage each type to ensure best results
Voluntary churn is caused by customers actively cancelling their subscriptions. This is the type of churn most subscription companies are familiar with. Involuntary churn is caused by frictions in the credit card payments system that prevents good customers from completing their subscription payments. Many companies don’t realize that up to half of subscription churn is actually caused by involuntary churn, which means that churn reduction programs aimed at reducing voluntary churn are only solving half the churn problem.
Recommendations to reduce Voluntary Churn
Create Meaningful Customer RelationshipsIf increasing subscription customer retention is your goal, your customers need to feel their relationship with you is meaningful to them and they are continuing to receive value month after month. Subscription customers are trusting merchants with a very special, ongoing relationship that extends more deeply than the typical merchant experience with its infrequent, once in a while purchases. This means you need to deliver real convenience and value every month and the subscription must continue to provide what the customer expected. Customers are putting a lot of trust in you and expect you to deliver on your promises. Products and services need to arrive when they are expected, because you want customers to feel excitement and anticipation, not frustration.
One way you can be sure you’re providing value is by following up with your subscriber after an inquiry to poll them on their experience. This gives customers the chance to share their experience and provides valuable information that you can use to make positive changes and enhance the customer experience. And of course, listen to customer feedback, and take action as appropriate.
Provide pricing flexibility for customers with financial challenges
Your customers need payment options that will give them flexibility. You can provide this by offering several service or product tier levels so customers can choose a way to stay with you while saving money. Don’t assume your customer’s needs and wants won’t change — proactively create alternatives that might suit certain customer segments better. Give your customers options that offer more or less value, or higher or lower pricing commitments and let them decide which one to go with. One easy way subscription box companies can do this is by offering a new tier of service with delivery every two months, instead of every month. Customers may not want to end their subscription relationship with you but are forced to do so because of their changing finances. Providing options that allow them to reduce their monthly billing amount while maintaining the relationship is important for increasing subscription customer retention.
While this may feel counterintuitive to the revenue growth plans your subscription business may have, offering this flexibility does help you maintain more customer relationships and reduces overall churn levels. This increases your net revenue retention even if customers are spending less. Remember, because of the high cost of customer acquisition, it is still more profitable to keep your existing customers than it is to replace ones who have churned.
Recommendations to Reduce Involuntary Churn
Avoid payment friction
While the relationship between payment authorization system errors and customer churn may not seem obvious, inaccuracies in payment system authorization processes are one of the largest drivers of customer churn for eCommerce, subscription businesses, and companies with a recurring billing model. Subscription companies must recognize this connection and take steps to reduce payment friction in order to reduce the largest single source of subscription churn.
A research study by FlexPay has found that up to 48% of customer churn is caused by failed payments. This means that almost half of all customer churn is caused by declined payment issues and not by the customer proactively ending or cancelling their recurring services.
Why do failed payments occur?
Banks and payment authorization systems face the perfect storm of stressors:
- Growing fraud losses ($26.8B annually)
- Cybercriminals targeting the payments system with increasingly sophisticated fraud methods
- Massive growth in purchase transaction volume across digital channels (card not present transactions)
The payment authorization systems have responded to these stresses in their efforts to avoid fraud losses. Unfortunately, the resulting impact to merchants is a rapidly increasing percentage of decline decisions on legitimate transactions. Of course, an increase in failed payments on subscription billings leads directly to an increase in involuntary churn.
Having a smooth, pain-free payment process is a key part of increasing subscription customer retention. If payments stop — either because the customer no longer wants to continue the relationship or because of a problem that prevents a willing customer from paying their bill —the outcome is the same: a lost customer.
Avoid payment friction
Of course, all failed payments that cannot be recovered lead directly to involuntary churn. However, a study by PYMNTS validates that customer visibility to failed payments is a secondary driver of involuntary churn. While this may not seem immediately intuitive, customers are forced to make a choice when they are asked to help solve a failed payment whether they want to continue with the subscription or simply end it by not helping to resolve the payment issue.
The ideal failed payment recovery technology works directly with the payment system itself, and works quickly, so the customer is not involved in the recovery process and delivery interruptions are avoided.
FlexPay’s AI-powered Invisible Recovery™ solution works without any customer involvement, building individual resubmission strategies for each failed payment and managing all the countless variables involved, such as the individual bank that declined the payment, failure reason codes, what time of day the payment failed, and certain geographic variables.
Focus on collaboration not confrontation
However, some failed payment causes, such as hard declines, require customer involvement. This can happen when a customer has a new card number, but they haven’t given you this new information. In this situation, collaborating with customers to solve the issue as partners is crucial, rather than confronting them with accusations. Dunning and collections-based approaches are examples of confrontational strategies that put the customer on the defensive. These approaches can create negative feelings about the company, which leads to churn, and this negativity doesn’t help when increasing subscription customer churn is your goal.
If you’re concerned about customer churn and want to optimize subscription revenue, this would be a great time to schedule a consultation to get feedback on your current customer retention strategies and try our Revenue Recovery Calculator to forecast how FlexPay can help your business grow and become more profitable.
