INTRODUCTION
Subscription businesses have rapidly grown in popularity, with growth rates outpacing the S&P 500 by 35%. This surge has led to over 12,000 subscription businesses worldwide. These companies, spanning industries like health and beauty, software, media, and retail, all face a significant common challenge: failed payments.
Failed payments, or declines in credit card authorizations, are a widespread issue within the subscription industry. Visa reports that an average of 24% of subscription credit card payments are declined, with two-thirds of these declines being incorrect decisions on valid cards.
So why are subscription payments particularly vulnerable to declines? The answer lies in the outdated payments system, which was designed for one-time, in-person transactions. It wasn’t built to handle the recurring, card-not-present transactions typical in subscription models. This outdated system often errs on the side of caution, declining legitimate transactions from trustworthy customers to avoid potential fraud. This systemic flaw disproportionately impacts subscription businesses.
This article sheds light on the industry-wide issue of failed payments, revealing the revenue, customer lifetime value (LTV), and profitability gains that can be achieved by addressing this problem. By acting quickly to resolve it, companies can unlock additional resources and gain market share, leaving competitors struggling to catch up. Sound too good to be true? Let’s dive in and explore.
The Link Between Failed Payments and Involuntary Churn
Visa’s data indicates that the average decline rate is 24%, but the actual rate varies depending on the business’s product, service, customer acquisition methods, and demographics.
No subscription business is immune to this issue, and it’s responsible for up to 48% of customer churn — churn that’s not due to customers actively canceling their subscriptions. This phenomenon, known as involuntary churn, is crucial to track and differentiate from active cancellations.
You may have encountered the problem of failed payments before, and perhaps your business already has some measures in place to recover them. You might even know that failed payments can lead to customer churn. However, most businesses don’t fully grasp the extent of the damage failed payments inflict or the tremendous opportunity that comes with solving this issue. Once you understand the full scope of the problem and the potential benefits of solving it, you’ll be driven to take swift action.
The Imperative of Failed Payment Recovery
The failed payment problem is so critical that within the next 2-3 years, almost every subscription business will have implemented a solution to reduce or eliminate it. Failed payment recovery will become an essential component of the subscription business model and a must-have in every payments tech stack.
As previously mentioned, Visa’s research shows an average of 24% of subscription card payments are declined. Analysis shows that up to 48% of all churn is due to failed payments, not customers actively ending their subscriptions. This leads to two significant insights:
- Up to half of all subscriber churn is not being mitigated by existing customer loyalty and retention investments.
- Resolving failed payments can reduce or eliminate up to half of your churn.
How Involuntary Churn Damages Your Business
Every subscription business struggles with involuntary churn, leading to diminished customer retention results and customer LTV across the industry. This, in turn, keeps overall revenue and growth artificially low.
The revenue loss from involuntary churn not only reduces overall growth and customer LTV but also limits the funds available for acquiring new customers.
As a result, the market share each subscription business holds in its category is determined by customer acquisition budgets and profitability that have been suppressed by involuntary churn.
Fortunately, there’s an upside: When involuntary churn is reduced, customer acquisition values can increase because overall customer LTV improves, allowing for higher customer acquisition budgets.
The Power of Compounded Revenue Growth
Reducing involuntary churn allows customers to continue being billed for months after they would have been lost to a failed payment. This recovery leads to compounded revenue growth, with the amount depending on the customer’s lifespan after payment recovery.
These new revenue and profit levels can be reinvested into customer acquisition and product or service improvements, further boosting growth and retention. This accelerated acquisition cycle, fueled by enhanced revenue growth, customer retention, and profitability, can increase market share at the expense of competitors still grappling with high rates of involuntary churn.
Seizing Your Window of Opportunity
Every subscription business has a chance to reduce involuntary churn immediately, gaining a substantial advantage. This is a unique opportunity to achieve significant improvements in financial performance and market share that competitors with unresolved payment issues won’t be able to match. Recognizing and addressing the problem of involuntary churn now gives you a clear edge over the competition.
Imagine the investments you could make in your business if you weren’t hampered by the financial losses from failed payments and involuntary churn. This could be a game-changer for your business!
By solving the involuntary churn problem with a failed payment recovery solution that maximizes both short-term recovery and long-term customer LTV, you can outpace your competition. This creates a competitive advantage that boosts your key performance indicators to the extent that late adopters won’t be able to catch up.
While every subscription company will eventually adopt this solution, only the early movers will secure the long-term competitive edge. Taking action now ensures you stay ahead for years to come.
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, customer retention, and profitability.