One of the main challenges subscription businesses face is churn, which lowers the number of subscribers and monthly recurring revenue. The two types of churn are voluntary and involuntary, and because each is driven by entirely different things, as a subscription business, you need to take different steps to mitigate each type of churn.
Involuntary churn: what is it and why does it matter?
In one-time e-commerce, payments are straightforward: payment information is captured and authorized, with a high likelihood of success. But subscription commerce is more complex because the payment information captured during the initial sign-up transaction is held over the life of the subscription, and each renewal presents a chance for the payment to be declined. The more time that elapses since the initial transaction, the greater the likelihood that the payment for the recurring charge or renewal will return an error.
This is because over time, payment information, especially credit cards, can become outdated. Additionally, banks may decline transactions for other reasons, even if the information is not out of date.
In our experience processing recurring payments, an average of 13% of recurring revenue transactions are declined each month. See our industry research on transaction success rates for credit and debit cards for additional insights.
When a decline occurs, this results in an invoice becoming past due. If nothing is done to try to collect payment on that invoice (so that the subscription fee is paid) the business loses revenue. And if the invoice is never paid because, for example, the customer never updates their payment information, not only does the business lose revenue but the subscription churns as well. This means that all potential future revenue from that subscription is also lost.
This type of passive churn is called “involuntary” because it happens without the customer taking any action to cancel their subscription. In fact, it happens BECAUSE the customer does not take any action, i.e. because they do not update their payment information. As mentioned, businesses lose significant revenue every month due to involuntary churn. So, managing this type of churn is extremely important, and it requires very specific, targeted strategies.
Churn benchmark data
To get an idea of what normal involuntary churn rates look like for different business types or industries, benchmark data can be helpful. Recurly recently completed an analysis of comparative churn data—by industry, audience, and price point—which subscription businesses can use to gauge the health of their business. View the data here.
So what can a business do about it?
To manage involuntary churn, a business must address payment declines. This is also called decline management: the process which prevents credit card failures from turning into subscriber churn. Recurly effectively automates decline management in several distinct ways:
automatic service to update payment information
Expiration date forwarding
: automatic service to update card expiration dates
: contacting customers to have them update their payment information
: intelligently retrying failed payments
More to come!
Each of these decline management strategies deserves greater discussion, and this is just the first of a broader series of posts on decline management. In upcoming posts, we'll dive in and provide greater detail—including best practices and more information on all the ways that Recurly can help reduce churn.