How Roku and Output turn failed payments into a subscription growth catalyst

Amidst a sea of competition and consumer choice, payment strategies are a transactional necessity and a powerful lever for growth and loyalty. Beyond processing payments, businesses can leverage them to create a seamless experience that can influence consumer behavior significantly.

Roku VP of Payments, Commerce, and Customer Care Jason Korosec, Output VP of Business Development Brian Zarlenga, and Optimized Payments Head of Recurring Services Melanie Stout sat down to discuss how subscription payments are a growth catalyst rather than an operational component.

How do payment methods impact churn rates and how do you optimize them?

When customers sign up at Output, they’re presented with a card entry or PayPal. Before this, Output offered direct debit with ACH and SEPA, which taught the company a lot about failed payments.

Output was initially looking at the card category as a single category when, in fact, there are many other payment methods within, such as credit, debit, prepaid reloadable, and prepaid non-reloadable. It was crucial to understand the churn rates and identify the trends between them.

Customers demanded PayPal when the platform was first launched, and now, it has become a significant portion of its payment mix. Churn rates for PayPal are lower than debit and help the brand connect with the young musician user base.

What are your thoughts on prepaid cards for subscriptions?

Output experienced high involuntary churn rates with prepaid cards–a sign of potential trial fraud. The company analyzed the difference between prepaid cards and decided that non-reloadable cards don’t align with the strategies of a subscription business. While not desirable, prepaid reloadable is the predominant payment method in several parts of the world, like Italy. The solution was to create a strategy around prepaid reloadable specific to this country.

Understanding the type of card you're working with is critical to retry strategies. Korosec shares, “Why retry a non-reloadable prepaid card if there are insufficient funds?” For Stout, it’s important to know the industry you’re working with. For example, free trials are popular in the gaming industry, and accepting non-reloadable prepaid cards doesn't make sense.

However, industries like nutraceuticals, insurance, and telcos could have people on Social Security, which is administered by a reloadable prepaid card. Understanding these by bank, BIN, and payout schedule is key. 

Korosec shares that Roku accepts prepaid cards–and they’ve done a lot of consumer research to find three hypotheses as to why consumers use this payment method:

1. Trust: If the consumer trusts you, they might not use a prepaid card. If the consumer doesn't trust you and thinks you'll bill them forever with no way to cancel, they’ll opt for a prepaid method. 

2. Unbanked or underbanked populations: If a company doesn’t accept prepaid cards, it would eliminate an entire segment of customers who like to watch television.

3. Gaming: Consumers take advantage of free trials to save money on monthly subscriptions and sign up with different email addresses, creating fraud trials over time.

What are your thoughts on virtual cards?

Zarlenga points out how new banks like Cash App or Chime allow users to create virtual credit cards inside their bank accounts and are becoming more popular with younger customer bases. While they’re flagged as prepaid, they operate like a debit card.

Korosec underscores Roku’s hypothesis around trust–if consumers don't trust you, they're not going to share their card numbers. Instead, they'll go to their bank and get a virtual card. 

Some banks set up a virtual card number that leads to a regular account, and if a customer is upset, they turn off the virtual card–what Roku deems a “passive cancellation.” Companies must differentiate this behavior from other types of involuntary churn and work towards a strategy to prevent it.

What is the role of pricing and billing flexibility in reducing churn and improving customer retention?

At Roku, it’s all about the consumer and ensuring there's a price point at which they’re willing to buy. The streaming service offers many different products users can choose from, depending on how much advertising they want to watch.

The billing date is largely artificial; it's when the consumer decides to start a streaming subscription that is important. If you've discovered that a particular card method works well in the first half of the month, for example, you could change the billing date to optimize successful transactions. 

Other tactics include allowing customers to downgrade or customize their plans or offering the ability to pause a subscription when they want to pay less. Pricing and billing decisions should be made around consumers and their needs, allowing them to move up and down tiers seamlessly.

For Output, annual plans see a dramatically higher retention rate than monthly plans, so the sign-up process becomes key. The brand has a questionnaire to determine user intent, whether it’s a beginner who might benefit from the monthly service or a professional who can take advantage of the annual plan.

“Understanding your customer and knowing what each customer wants is important. And you can get a lot of information from your payment data,” says Stout. 

What are some best practices for data analytics and how can you leverage data to improve retention?

Data is critical to all the decisions and testing at Roku, says Korosec. Being able to slice data in different ways, such as by card types, response codes, and issuers is crucial to optimizing recurring payments and minimizing payment failures.

For example, Roku found a bank with high approval rates in the first half of the month and low approval rates in the second half. While it could be related to the consumer's financial health or the bank's authorization policies, pragmatically, the company knew payments in the first half of the month would have a higher success rate.

Zarlenga shares how data is also key to Output’s decision-making. His team gathers data from all platforms–like Recurly and their payment processors–then analyzes it to get a bigger picture and identify consumption patterns.

What are the most effective strategies to manage failed payments and involuntary churn?

Building a business around subscribers and providing incentives for consumers to correct the problem is key. For example, when Roku suspends service because a payment method has failed, the customer has a natural incentive to fix the problem if they want to watch the content.

Moreover, leveraging data is non-negotiable. “Data for data isn't worth anything, right? It’s the action you take once you learn insight from that data and analytics,” shares Korosec. 

At Output, the best payment strategy is bringing in the right customer. Zarlenga shares an example where advertising wasn’t reaching ideal customers. After changing the ads strategy, churn rates decreased because segmentation was more effective. 

While insufficient funds are Output’s biggest challenge, the company has seen improvements in fraud rules and testing, its custom retry logic, and dunning campaigns thanks to Recurly. 

According to Stout, many organizations still believe that payments are only an operational component. “The whole company has to look at payments as being a critical element. You could take the data and make your marketing strategies better, more robust, more effective, and then continue through to making your customers happy and delighting them with their payments experience.” 

Learn more about Output’s journey with involuntary churn

There are over 2,000 things that can go wrong when processing a payment, such as out-of-date or inaccurate card information, insufficient funds or temporary hold, gateway issues, and fraudulent activity.

With Recurly’s critical payment features and ability to test and understand how to improve decline rates, Output has drastically reduced involuntary churn. Read their story.