Payment Declines Drive Subscription Churn For 27% of Subscribers

At a high level, the healthiest, most sustainable subscription businesses with the happiest customers tend to focus obsessively on reducing churn.

And churn correlates directly to failed payments.

Successful churn management can take a cue from Adam Smith’s Invisible Hand, FlexPay Founder and CEO Darryl Hicks told Karen Webster.

A refresher to the economist’s musings back in the 18th century: Smith’s “invisible hand” refers to how free markets in pursuit of profits are led, as if by an invisible hand, to do what’s best for those markets. Extend that the 21st century, and subscription commerce companies, by extension, will be guided by an invisible hand to do what’s best for the consumer.

The problem confronting subscription firms — chiefly through involuntary churn — is in acute need of fixing.

PYMNTS research in collaboration with FlexPay has found that payment declines prompted 27% of subscribers to terminate their accounts or switch to competing services. Given that the average U.S. consumer has around 8 to 10 subscriptions, that’s a lot of revenue to leave on the table.

The declines? Well, they happen fairly frequently as 28% of payments are declined on average, Hicks noted. For some merchants, the tally is as high as 60%. This indicates that all too often, every single interaction with a consumer is a chance to get it wrong — or, ideally, get it right. Throw in the fact that 38% of consumers who experience declines are “on the fence” about staying or going, and it’s crystal clear that every second counts.

In one telling stat, consider the fact that all baby boomers who had a false decline voted with their feet and left their providers. All of them.

Hicks recounted that the consumers on the fence are especially inclined to bolt when the decline is tied to nonsufficient funds. This leads the company to approach the consumer, signal the decline (and the reason) and demand the individual fix the problem.

“This can be very embarrassing,” Hicks emphasized.

Critical Differentiator

Thus, in a way, when it comes to subscriptions, how firms deal with failed payments is a critical differentiator.

The path toward getting it right is made a bit easier, said Hicks, with the data subscription-based companies can use in a strategy he billed as “invisible recovery” — which he estimated can save half of the firm’s payment declines.

At a high level, Hicks said, “The more we can do to solve the issue of involuntary churn without having to annoy the customer or having to make them get involved — especially with new payment data,” the better. Ideally, there’s no reason to make the customer aware there’s been a problem with payments at all.

Current Systems Aren’t up to the Challenge

Crafting the invisible recovery strategy hinges on recognizing the fact that subscription commerce is tied to a particular type of payment, and Hicks acknowledged that this complicates the mix. Accounting for PC and mobile payment, along with the Internet of Things (not to mention countering cyberthreats), has made it imperative for subscription firms to adapt to a changing commerce landscape.

That’s easier said than done, considering the existing payment rails that power the economy at large have not had a meaningful update since the late 1980s, Hicks pointed out.

“These are old legacy systems,” he said. “It’s very difficult to make changes and upgrades to them because of the sheer volume of transactions they’re processing.”

And the windows of time in which decisioning about transactions can be made is closing. Creaky infrastructure and mounting fraud attacks are translating into higher losses that the banks must swallow, he said — $30 billion worth.

The only tool those banks have had at their disposal has been declining suspicious transactions, said Hicks. The 8,000 issuers across the U.S. make decisions, independent of one another, about which transactions to approve or decline.

They get it wrong a lot of the time.

And that translates into the false declines and the involuntary churn that has so bedeviled the subscription commerce sector.

But as Hicks said, “You don’t just have to take these losses. You don’t have to just take these declines or suffer through all this friction that’s happening inside of your business with your customers.”

Tech Enables Smoother Customer Experiences

The key strategy of the invisible recovery, he said, rests with not asking customers to fix the problem. Instead, the payments rails need to be fixed, in part with cutting edge, artificial intelligence (AI)-driven digital engagement tools. That can lead companies away from the age-old — and irritating — practice of suspending a service and then moving on to see what the problem was.

Suspending the service, as Hicks noted, gives consumers time to mull whether they really need what’s on offer, and whether the provider is as flexible as they would like. The answer tends to be, “no.” And the result? Cancellation.

“We don’t want to be notifying our customers except as a last resort,” he said.

Payment authorization management entails that invisible recovery strategy, followed by digital engagement, which in turn is followed by customer success, he said.

Subscription firms must start by getting reliable metrics on just how many false declines are impacting their business.

“Go in, take a look at it, quantify it, look carefully at the strategies you’re using now and make sure they are ideal,” Hicks said. “And there’s more than likely an opportunity for upgrading the way that we’re approaching this problem.”

In embracing the invisible recovery strategy, he said, solutions can be built into platforms, processors or third-party solutions. FlexPay’s own offerings through its failed recovery platform operate on middleware that can be connected via application programming interface (API) in the cloud, supporting any processor downstream and multiple platforms upstream.

Eliminating half of those payment declines would have an exponential effect on subscriber retention and thus renewals of recurring revenue streams and a reduction of marketing spend, which boosts operating income.

Money saved on churn gives subscription commerce firms the chance to put more money into the product innovation that keeps consumers engaged, he said.

“What we see is in each market segment, there’s usually a few leaders that have come to the top and have separated themselves from the pack,” he said. “And they’re always the ones that are extremely dialed in on operational efficiency. You’re not just fixing that one transaction when it’s a subscription — you’re actually ‘fixing’ a customer.”