How Involuntary Churn Threatens the Growing Subscription Payments Model

The allure of subscription payments has captured the fancy of merchants and payments companies alike, but churn—the loss of a paying customer—may not only affect revenue, but hamper innovation, finds “The Art and Science of Reducing Involuntary Subscriber Churn” report released Wednesday by Digital River Inc.

The report, which canvassed more than 200 subscription and recurring payments professionals and was conducted by Forrester Research Inc., found that payment-related failures are the most common reason for involuntary churn. In these cases, the recurring payment fails because of insufficient funds or a technical reason. Overall, 66% of the surveyed companies are able to retain 66% of their subscribers, but lose an average of 34% to churn.

In addition to Digital River, other payments companies court subscription payments, such as independent sales organization Fattmerchant, Recurly Inc., and technology behemoths like Apple Inc., which now counts more than 165 million paid subscriptions for its services and content from third parties.

“Historically, a subscription offering was used largely by brands selling in the digital space–the ability to download software upgrades each year or a monthly membership to a music service, for example,” says James Gagliardi, vice president of solution innovation at Minnetonka, Minn.-based Digital River. “However, as consumer preference has shifted from a desire to own something outright to a desire to have access to the latest and greatest, even brands selling physical products are turning to subscriptions as a way to increase access to their products.”

Indeed, when asked about the primary causes for involuntary churn, 59% said insufficient funds, followed by 42% who cited a credit card limit. Other reasons include: changes to a card, such as a different expiration date on a replacement card, 40%; technical issue with a payments processor, 32%; credit card restrictions, 30%; and other technical failures, 29%. Early in the U.S. transition to EMV, new chip card issuance was also causing headaches for subscription-based businesses because the cards often came with new account numbers or expiration dates.

In addition to the revenue loss, there is the potential that managing churn will detract from what Forrester calls innovation. “Over a third of those surveyed are reluctant to pursue new, innovative subscription pricing and packaging models due to churn,” the report states. “Payment professionals need the right tools and strategy that afford them the time and appetite to focus on keeping up with the ever-changing demands of digitally empowered customers.”

But more—80%—place a higher priority on managing their voluntary churn than on handling involuntary churn, 62%. As Forrester says, the natural focus is on acquiring new customers. “However, involuntary churn, which is difficult to influence, is a challenging culprit of lost profitability. If involuntary churn isn’t managed proactively, it gets harder and harder to replace the volume of lost customers needed to keep growing.”

What to do about it? Forrester cites a number of steps that payments companies can take.

Technology that enables an ongoing review of credit card data with automatic system updates prior to the renewal date is one option. A majority of respondents—51%—said that would have a significant impact on their efforts to reduce involuntary churn. Other steps might be better communication with customers and automatically extending expiration dates for expired credit cards.

Subscription payments have a lot of viability for many merchants, Gagliardi says. “As this model continues to mature, we expect these lines between physical and digital commerce to continue to blur,” he says in an email to Digital Transactions News. “Companies with physical products will build out accompanying digital subscription offerings and vice versa. We’ll continue to see a rise in popularity of surprise boxes (Loot Crate, for example, was named last year’s fastest-growing company in the U.S. by Inc. magazine), sampler boxes, and replenishment solutions. We also expect more acquisitions of successful subscription-based companies by large retailers seeking to buy their way into the subscription business.”