Why addressing failed payments leads to higher customer retention

Jan. 13, 2022
Why addressing failed payments leads to higher customer retention

It’s the question at the forefront of every subscription business: how can we retain more customers? Product teams can address the offerings and customer service teams can address the customer experience: both of which have a wide range of levers to pull. 

However, one lever subscription companies might overlook is churn due to failed payments - the process of losing their subscribers because their payment simply failed. Payments teams are often unaware of how significant this can be - often standing at 50%+ of total churn! Addressing subscriber loss due to failed payments, while less fun than optimizing the product and customer experience, significantly impacts customer retention and overall business revenue. 

The Business Risks of Churn Due to Failed Payments

Barometer measuring customer happinness

Failed payments often lead to churn — also called involuntary churn or accidental churn — for a few reasons. If the payment fails for reasons like an expired credit card, companies often rely on some type of customer interaction to fix the problem. In some cases, they’re unsuccessful and the customer never addresses the issue. 

In other cases, the customer simply experiences an interruption in their subscription and becomes frustrated by having to retry their payment, especially if the failed transaction is due to reasons outside the customer’s control. For example, their bank may have changed its data requirements, such as needing a zip code with the payment data when it wasn’t required previously. Banks can also incorrectly flag a payment as fraud, causing the transaction to fail. 

These experiences can negatively impact the customer’s perception of the company, potentially leading to voluntary churn. With the proliferation of subscription options, a frustrating experience might be enough for a customer to look for an alternative. Signup is easy and a frustrated customer may simply flip over to a competitor after even a single failed payment. 

Many subscription companies struggle to differentiate and earn customer loyalty in the first place. Losing customers to accidental churn makes it even harder to gain traction. 

Customer Retention: The Unrealized Benefit of Fixing Failed Payments 

a magnet attracting credit card payments

With such high stakes, fixing failed payments should be the most obvious problem to solve. After all, it costs four to five times more to acquire new customers than retain existing ones. The e-commerce industry alone has seen a 222% increase in customer acquisition costs over the past eight years. You’ve already put the money into acquisition, so it makes sense to focus efforts on retention. You can maintain the revenue stream you’ve already created simply by reducing payment failures. 

In addition, maintaining your customer base has long-term benefits. You can learn more about your customers the longer you retain them, with insights ranging from their preferences, needs, and behavior. This can help you refine your product offerings and marketing strategies. If customers are churning shortly after acquisition due to failed payments, you’re not developing a data-rich customer base that you can use to improve your company’s position in the market. 

You’ll also develop more brand advocates the longer you retain customers. These evangelists will willingly share their positive experiences with others, contributing to your organic growth through word-of-mouth. If a customer churns due to a failed payment, an otherwise satisfied customer has now disappeared from your customer base. You’ve also lost future opportunities to increase customer lifetime value, such as upselling additional products or moving to a higher-tiered subscription. 

All of this is to say that losing customers due to failed payments comes at a high price. The impact on MRR may be immediate, but the long-term impacts are even higher. Addressing payment failures has a linear path to improving customer retention.  

How to Recover Failed Payments

A maze where some payments fail and others do not

Accidental churn is a dynamic problem, making it tricky to solve. Most commonly, subscription companies approach it through client communications, their in house payments team, an outsourced failed payment solution or machine Learning. 

Customer account updates and engagement are often simple solutions to implement, since the messages can be automated. Customers might be quick to respond to issues like an expired credit card, particularly if they find your subscription product or service valuable and want to avoid an interruption. However, if you reach out due to other issues, such as data or a payment that has been inaccurately flagged as fraudulent by the financial institution, you risk irritating the customer — which could lead to customer churn. 

If you use your internal payments team or an external tool or vendor, payments are most likely retried in batches. This method attempts to solve all failed payments the same way. Batch processing retries the failed payments at specific intervals, at around the same time, which doesn’t always solve issues such as funds availability and leaves significant money on the table.

By contrast, machine learning technology looks at each transaction individually. ML can identify the specific reason the payment has failed and solve that problem, such as retrying the transaction at a specific time or sending additional data points to a specific financial institution. Companies see between a 20% and 200% increase in the lift in recovered payments when using machine learning. 

Retain More Customers and Increase Customer Lifetime Value

When subscription companies focus on customer lifetime value, they’re empowered to shift their focus from short-term gains to long-term sustainability, profitability, and customer-centric growth. They can nurture relationships with their customers, enabling them to count on consistent and predictable revenue.  

The longer a customer maintains their subscription, the more their spending will offset the initial cost of acquisition. When companies increase their customer lifetime value, subscription businesses can make the most of their marketing budgets by reducing the need for continuous high-cost customer acquisition efforts. 

When customers churn, it can often feel like your company is spinning its wheels: new customers come in, and existing customers leave. Involuntary churn due to failed payments is often preventable, with one of the most effective methods being machine learning technology like Butter Payments. On average, our customers see an average 5% increase in their revenue, simply by recovering more failed payments. 

To see how involuntary churn is affecting your business today, we offer a free, no-obligation Payment Health Analysis. In this analysis, we show you the number of recoverable failed payments that are occurring today and the key drivers behind these payment failures. Contact us today to get started.

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