How payments help subscription businesses grow
It’s no surprise that subscription models are growing, considering the benefits for merchants – predictable revenue, increased lifetime customer value, and stronger customer loyalty.
But benefits are one thing, implementation is another. So, for those who couldn’t make it to the Merchant Advisory Group’s (MAG) tech forum, here are three implementation takeaways for merchants offering (or looking to offer) subscription models.
The panel, Recurring Payments and Subscriptions, brought together senior payments executives from Mastercard, Netflix, Microsoft, and Zillow to share their insights on this increasingly popular model. According to Zuora’s Subscription Economy Index, subscription companies have seen their sales grow by 17.8 percent a year from 2012 to 2020 – almost six times faster than both S&P500 company revenues and US retail sales.
Panelist Josh Karoly, Payments Director at Netflix, summed up the role of payments in the overall customer experience the best. “I don’t want payments to be the reason you didn’t sign up, and I don’t want it to be the reason you leave.”
Merchants thus place heavy focus on reducing friction at signup and checkout, essentially making it as easy as possible for the customer to “set it and forget it.” But many merchants may overlook that it’s just as important to make it as easy as possible to cancel their subscriptions.
Although seemingly counterintuitive at first, this makes sense once you think about it from a customer experience perspective. Have you ever searched, exasperated, on a website for the elusive cancel service button?
From an operational standpoint, a painless cancellation can help mitigate chargebacks. And in the longer term, it can also improve customer retention – by generating positive word of mouth and making the overall customer experience better. Just ask yourself, how do you feel about gyms who make cancelling your membership more difficult than a high intensity workout?
The idea here is to be as open and transparent as possible. Customer retention should come from the quality of the product and its support – not from onerous cancellation policies.
Every subscription business knows the pain of a declined transaction that leads to a subscription cancellation. Often, such declines happen without the customer intending it, known as involuntary churn. It’s a silent revenue killer, which is why merchants invest heavily in trying to rescue these declined transactions.
This is both helpful and necessary. But as the saying goes, prevention is better than a cure. Before looking at how to rescue declines, merchants should first review their card lifecycle management strategies. Panelist Kevin Maxham, Director, Cyber & Intelligence Solutions at Mastercard, shared that as many as 40 percent of declines they see are lifecycle related.
You can’t rely on a customer proactively updating their subscription payment details when they get a new card. As a business, you must help shoulder that responsibility through a robust card lifecycle management strategy. An established way of doing so is through automatic, real-time updating of account details directly with the card networks. A more nascent technology is network tokens, where card updates occur “behind the scenes” to ensure the token a merchant uses stays up to date.
If you are a subscription business, you need to think about your lifecycle management strategy from day one. Additionally, it’s important to understand what the common refusal reasons are for your specific business. This understanding will save you a lot of trouble down the line.
No matter how good your lifecycle management strategy is, some transactions will still fail. When that happens, the goal is efficiency – minimizing the time to rescue the billing while maximizing the amount of subscriptions collected. Remember that each retry has a cost, both payment fees and cash flow management implications for your business.
The optimal strategy here is – there isn’t one. There is no “one size fits all” retry approach. For one, not all retries may be worth the cost. Business nuances also matter. For example, panelist Vanessa Culver, Senior Manager of Payments at Zillow, shared that their retry strategy is based on their customers’ access to credit and cash flow. For them, it doesn’t make sense to follow the standard approach of retrying every 15 or 30 days.
That’s why we advocate a data-informed approach, which we built into our Auto Rescue feature. Based on our customer data, we are constantly optimizing retry logic to maximize efficiency for our customers.
Finally, remember that it is impossible to recover 100 percent of declines through payments. Direct customer contact is useful in some cases. But you shouldn’t let perfect be the enemy of good. Declines will never be eliminated, but they can be reduced. And that’s enough to make a big difference.
The overarching takeaway is that every business is different, even if they all follow a subscriptions model. This makes it crucial that merchants use a flexible payment solution that can support a variety of use cases, payment methods, and optimization strategies. At Adyen, we build to benefit all merchants. Contact us to learn more about how we can help your business optimize your subscription payments.
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