To effectively measure the impact of involuntary churn on your business, follow these essential steps:
Part I – Analyzing Churned Customers
Track Active Customers: Calculate the number of active customers for each of the last six months.
Identify Churned Customers: Determine the number of customers who churned each month during the same period.
Calculate Monthly Churn Rate: Divide the number of monthly churned customers by the total number of active customers. This gives you your monthly churn rate.
Determine Involuntary Churn Percentage: Identify how many customers were lost due to failed payments. Then, divide this number by the total number of churned customers each month to find the involuntary churn percentage.
Estimate Revenue Losses: The potential revenue loss due to involuntary churn can be calculated by forecasting the Lifetime Value (LTV) of customers lost to failed payments. This helps you understand the financial impact of losing customers prematurely, before they would naturally end their subscriptions.
Part II – Analyzing Failed Payments
Compile Failed Payment Data: Gather records of failed payments, including customer ID, billing amount, payment decline date, and card details, for the past six months.
Assess Customer Lifespan: Match the customer IDs to the month they started their subscriptions. Calculate the duration of their active period before churn and record it for each customer.
Calculate Average Customer Lifespan: Determine the average customer lifespan in billing cycles to use as a benchmark.
Measure Lost Billing Cycles: For each customer, calculate the difference between their expected lifespan and the actual time they were active before a failed payment. This indicates the number of billing cycles lost due to payment failure.
Estimate Lost LTV: Multiply the lost billing cycles by the customer’s monthly billing amount to estimate the total LTV lost due to failed payments.
Track Failed Payment Rate: Create monthly reports that divide the total billing requests by the number of failed payments. Alternatively, calculate the percentage of total billed dollars lost to failed transactions.
Summarize Lost LTV: Generate monthly reports that sum the lost LTV value for all customers with failed payments. This provides a clear picture of how much revenue is lost each month due to involuntary churn.
Part III – Evaluating the Value of Recovered Customers
Optimizing the Benefits of Involuntary Churn Prevention
Forecast Recovered LTV: For each recovered customer, multiply the number of recovered billing cycles by the customer’s billing amount. This gives a forecast of the LTV following recovery.
Consider Recovery Method Impact: While recovery efforts can affect customer lifespan, this initial forecast helps gauge the value of preventing involuntary churn.
Track Customer Lifespan Post-Recovery: Monitor the billing cycles for each recovered customer and sum their payments to determine the true LTV.
Report Recovered LTV: Generate monthly reports to track the forecasted LTV recovery for each customer. This helps quantify the value of your recovery efforts over time.
Measure Revenue from Recovered Customers: Calculate the percentage of total revenue derived from recovered customers each month. This metric offers insight into how much your business relies on retaining customers who initially experienced payment failures.
Account for Recovery Cohort Lifecycles: Keep in mind that the revenue percentage from recovered customers may change as you track their entire lifecycle.
Monitoring the Success of Payment Recovery Efforts
To accurately assess the effectiveness of your payment recovery strategies:
Update Billing Systems: Add data fields to track the date of failed payments and the date of recovery.
Monitor Customer Lifespan Post-Recovery: Begin measuring the lifespan of customers after they’ve been recovered from a failed payment.
Calculate Recovered Revenue: Multiply the number of billing periods between the recovery date and subscription end date by the billing rate. This calculation reflects the true value of avoiding involuntary churn.
Additional Metrics to Consider
- Monthly Revenue from Recovered Customers
- Total LTV of Recovered Customers
- Percentage of Total Revenue from Recovered Customers Each Month
These insights can help you understand the financial impact of retaining customers who were at risk of being lost due to failed payments, thereby enabling you to fine-tune your strategies for minimizing involuntary churn.
Is your business experiencing failed recurring payments? Contact us today to explore solutions that will recover up to 80% of your failed recurring payments, increasing your cash flow and profitability.