Failed payments account for almost half of the churn – or account cancellations – in subscription businesses, yet they still don’t get the attention they deserve.
Darryl Hicks, founder and CEO of credit card recovery solution provider FlexPay, told PYMNTS that when he asks the leadership of large companies what they’re doing to fix their churn problem, he usually hears the wrong answer.
“It’s so often about down-sells, up-sells, cross-sells, emails, promotions — and we just don’t hear as much as we should about what they’re doing around payment authorization management,” he said.
While awareness of the importance of payment authorization management, or PAM, exists among the top decile of performers — the companies with the highest lifetime value and lowest churn ratios — within the remaining 90% of businesses, it’s just not being handled the way it should. Considering that 48% of churn in subscription businesses comes from failed payments, you’d think it would be a top-of-mind priority, but it isn’t.
Losing a Customer
A failed payment has an impact beyond losing that one subscription. “You’re losing this customer potentially for life,” Hicks said.
It also affects acquisition costs. If a company’s PAM is on point and its lifetime values are higher, it can afford to pay more in acquisition costs. In today’s highly competitive market for reaching customers through digital means, the business is more likely to be able to outbid its competitors.
Customer satisfaction, too, is affected by PAM. A merchant with a solid PAM strategy will earn higher customer satisfaction because it is not needlessly annoying customers with failed payments. “It seems intuitive when you hear it, but unfortunately not enough merchants really think about it in advance,” Hicks said.
Picking Low-Hanging Fruit
When merchants are looking to optimize payment recovery, they can start with a lot of low-hanging fruit. One easy fix is the timing of the transaction; processing subscription payments during business hours in the early afternoon on the East Coast tends to be a good strategy for slightly higher approval ratios.
Other strategies of top performers include optimizing the merchant category code and making sure all data fields and gateway flags are configured just right. “Beyond that, there’s a lot of technology, expertise, data and processes that can help take it even further,” Hicks noted.
Leveraging a Specialist
While firms with smaller-scale challenges can focus only on those easy fixes and get results that are “good enough,” larger firms with millions of dollars in failed payments will need to go deeper into the problem and leverage a third party that specializes in PAM.
Things are changing now, with first-time subscribers accounting for a smaller share of the market and adults who have at least one subscription continuing to add more.
“This is telling us that the growth in the overall pool of consumers for subscriptions is slowing, which means retention is more critical in order to protect your margin as a subscription merchant,” Hicks explained.
Failed payments not only cause churn, but also create a negative experience for the customer, which means they are damaging to the brand. Any email, text, call or direct mail is then likely to be seen as an irritant to the customer.
The Importance of Invisible Recovery
The merchant, then, must focus on avoiding initial payment declines. However, when declines do occur, preventing visibility to the customer and optimizing recovery rates are both critical.
“This is why payment authorization management is so important – because it ends up being invisible recovery,” Hicks said. “No interaction with the customer is required, and quick recovery means service suspension can be avoided. It’s so much more seamless.”
Each failed payment carries the risk of churn. For example, if a customer has stopped using the service but hasn’t stopped their credit card from billing it, a failed payment may spur them to end the subscription. And even if a customer is satisfied with the service, a failed payment will embarrass and irritate them.
“This is why we like to focus on invisible recovery, and get into the payment rails without having to engage the customer at all,” Hicks said. “You’re never going to be able to solve 100% of the failed payment problem, but you can solve a really significant chunk of it.”
Preventing Problems in the First Place
Making a 1% or 2% improvement in some key metrics on retention turns into an exponentially greater number over time. Businesses that invest in a proper PAM solution, use invisible recovery and follow other best practices are able to boost their margins by optimizing their churn.
“You have these two buckets: the voluntary and the involuntary churn,” Hicks concluded. “The [businesses] that are really focused on the involuntary churn and using best practices on that component tend to get outsized rewards downstream, resulting in a much more efficient and well-run business where they don't have hese problems in the first place.”
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