The subscription economy has forever shifted the way we buy. Whether in music, movies, clothing, or shaving kits, companies built around recurring payments have sent a ripple of disruption through countless industries. The market size of the digital subscription economy worldwide amounted to US$650 billion in 2020. Meanwhile, the market size of the e-commerce segment was forecast to reach US$687 billion by 2025.
The world’s best-known recurring and subscription brands — Stan, Spotify, and LinkedIn among them — know the critical role payments play in the success of their business model. From making sign-ups easier to minimising failed transactions, here are the top tips for optimising your subscription payments, improving the customer experience, and driving revenue.
Subscription vs one-off payments: Why payments matter
At its core, the success of a subscription business model rests on customer retention over customer acquisition. Instead of requiring an upfront one-off payment, you’re asking your customers to lock into an extended, continuing relationship. This includes, of course, multiple payments in return for prolonged access to your product or service.
To maximise customer lifetime value, that experience must be as frictionless as possible.
As Andy Wiggan, former Head of Payments at Spotify, said: “It’s important for us as a subscription business to make sure that recurring payments are successful. So we need to minimise involuntary churn – that is to say, churn that happens due to payment failure.”
“We do this in a couple of different ways – one is by having rules in place to retry transactions that fail and then retry specific transaction failure reasons, and the other is by relying quite heavily on Adyen’s internal retry logic to maximise our retry success rates. We’ve seen significant improvements in our overall authorisation rates on recurring subscriptions through that combined approach.”
Payments play a big part in the success of subscription businesses in two key areas:
Optimising the sign-up: Leading businesses maximise success at checkout by removing all possible points of failure in the sign-up process, not just through checkout design, but also through a number of back-end tools.
Delivering uninterrupted access: The goal is to do this for as long as your customer wishes, ensuring that there are no disruptions for reasons related to payments, technical or otherwise.
Making sign-up a breeze
When optimising sign up, most businesses think about how to minimise steps — asking customers for as little information as possible. While this is crucial, what goes on under the hood also delivers significant gains.
Go local with payment methods
In order to capture your market, it’s crucial to offer the most popular local and prepaid payment methods. In Australia, North America, or the UK, for example, the majority of transaction volume is via debit or credit cards. In markets like China, Germany, and Russia, credit cards are less common. But local services like Alipay in China support recurring and subscription payments and are used by a significant number of potential customers.
For markets that require 3D Secure, or where local services do not support recurring payments, some subscription businesses are tweaking their models to accommodate prepaid options. Typically, this involves a longer access period than a regular monthly subscription — where businesses must optimise the balance between the length of time and a transaction amount that is reasonable for the maximum number of subscribers.
Ferret out fraud
Subscription-based businesses are particularly susceptible to two types of fraud — card testing and reseller fraud.
Fight card testing
In card testing, fraudsters test stolen card details to see if they can be used to buy physical goods online. Criminals know that subscription businesses often offer easy sign-ups and low transaction values, making it easy to set up servers and scripts for a high-volume approach to card testing.
You can identify card testers by the following characteristics:
On-page behaviour that’s too rapid to be humanly possible (such as zipping through checkout and entering strings of credit card numbers in seconds)
A high number of unique credit cards per shopper entity, which are often connected by multiple data points such as IP address, machine, email address, or other defining characteristics
Leveraging virtual machines, proxies, TOR nodes, or other tools to obscure identity
Watch out for resellers
In reseller fraud, criminals sign up for trial periods and then sell them on to unsuspecting consumers for small amounts of money. This delivers a negative customer experience and damages brand perception.
Be careful what you block
The traditional approach to minimising fraud is stopping suspicious transactions. But blocking all suspicious transactions is a grave mistake, since you will also block legitimate customers.
Screen for automated accounts
Once the handiwork of advanced fraudsters, automated account creation is now easier for amateurs, thanks to readily available software. Creating thousands of emails and user accounts also makes card testing easier, as each attempt will come from a unique account and email, plus a seemingly separate IP address.
Many risk mitigation platforms work under the assumption that a transaction exists in isolation, and therefore can’t identify this kind of fraud. More advanced risk systems cluster transactions based on the user’s login credentials or credit card number. But fraudsters know how to circumvent these clusters, usually by using new compromised credit card numbers and changing devices and login identities.
Keep customers happy
Once your customer is signed up and validated, your goal is to deliver uninterrupted service for as long as possible. Minimising payment failure is key to this effort. The first problem: involuntary churn, where your customer’s subscription is unintentionally cancelled due to payment failure.
A ‘dun’ deal
One technique to help prevent churn: dunning, which means sending an alert of some kind to a customer to ensure payment collection. In fact, if 10 percent of transactions fail, a sophisticated approach to dunning may save up to half these failures.
Opt for account updating
A key cause of subscription payment failure is when cards expire, are lost, or change for other unforeseen reasons. This can trigger a decline in the next payment, often without the business or customer realising it.
Fortunately, there are tools to help. Card networks offer services – Account Updater for Visa, Automatic Billing Updater for Mastercard, and Card Refresher for Amex – which automatically update card-on-file account information. Card networks gather relevant updates from participating issuers daily.
Normally when an on-file card stops working, you will need to reach out to the cardholder for card information. Account Updater services decrease costs associated with customer service.
Let data drive retries
In addition to card expiration, transactions fail for a number of technical and non-technical reasons that will not be picked up by Account Updater. For these situations, a percentage can be saved by retrying the transaction.
You should approach a retry according to the reason for the failure. For example, if a transaction fails due to technical reasons, our data shows that best practice is to retry immediately. But if a transaction fails for non-technical reasons, such as insufficient funds, it may be better to retry over a longer-term period.
Rinse... but don’t always repeat
Repeatedly retrying failed transactions can lead to issues with the card networks. Furthermore, while you may make incremental gains by retrying over long periods of time, the success rate inevitably decreases.
A smart approach is to see what you can save while staying compliant with the card networks, and continuously fine-tune. The below graph shows retry success rates against the number of retries using data from Adyen. For most businesses, successful retries occur in the first few attempts.
Adjust your billing intervals
Billing your subscriber at regular intervals after the day of sign-up may be tempting, as it is the easiest thing to do — but it will cost you in conversion.
Factors such as market, time of day, day of week, and day of month can have a significant impact on transaction success rates. In Australia, where people tend to be paid monthly, there tends to be one spike at the end of the month, making it the opportune time to schedule a payment request. By analysing transaction success rates across individual markets, you can make data-driven decisions about optimal times to bill your subscribers. Consider asking customers what intervals and times they prefer to be billed.
From cost centre to strategic growth driver
Until a few years ago, payments were widely regarded as a cost centre. Now, leading subscription companies are taking a granular approach to improving their payments flow, using data to make decisions around areas like checkout design and retrying failed transactions.