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The 3 biggest hurdles for subscriptions: friction, churn, and fraud

Achieving scale takes more than just good product design. Overcoming these 3 payments-related challenges are key to helping subscription businesses scale.

March 15, 2022
 ·  6 minutes
Two people playing video game

It’s easy to see why the subscription model is becoming increasingly popular. Revenues are more predictable, customer lifetime values tend to be higher, and acquiring new customers is easier. Consumers’ acceptance of the subscription model is also only continuing to rise.

The opportunity offered by the subscription model is immense. But capitalizing on it to reap the benefits of scale is getting tougher by the day as more businesses pivot toward this model. And while the product or service itself is the critical success factor, it is not the be-all-end-all.

A man looking at his phone

Don’t forget the “payments factor” in scaling your subscription business

Every company recognizes the importance of payments. But in our experience, they tend to underestimate the effect that the payments process can have on their ability to scale. And this is only amplified when it comes to subscription businesses, where recurring payments are their lifeblood.

In this article, we are spotlighting three key payments-related challenges subscription businesses must solve to reach sustainable scale. They are friction, churn, andfraud. We go in-depth on all these challenges — and more — in our new special report:Scaling in the new subscription economy.

Challenge #1 — Removing friction

Today’s consumers want convenience — even more so when it comes to their subscriptions. And when convenience is the priority, friction is the enemy.

Screenshots with multiple payment options

One major point of friction is immediately before the first payment, right at the threshold between prospect and customer. Missing out on the sale here means losing a customer at the last step of the conversion funnel — wasting acquisition costs and failing to realize lifetime value. And the numbers are huge. Cart abandonment is estimated to cost merchants over $300 billion in lost revenue.

Cart abandonment = $300 billion lost revenue

What causes this friction? Lack of choice, which is the opposite of convenience. In this specific context, it is the lack of local payment methods. Yes, credit cards are a globally accepted method. But only focusing on this majority risks neglecting a significant minority. Consider for instance that:

  • Digital wallets accounted for about 60% of all e-commerce payments in the Asia-Pacific region
  • SEPA (Single Euro Payment Area) payments are extremely popular 
in the European Union

The takeaway — when you maximize the number of payment methods, you maximize global scalability.

How can you efficiently cater for a wide range of local payment methods?

The question is how to offer a large variety of local payment methods without also piling on the costs. And it’s not just financial costs (for example, through higher processing fees). Managing multiple integrations and API calls constantly drains resources.

The answer — look for an “all-in-one” payments provider with a true global reach. The Zuora/Adyen integration not only fits the bill, but also allows mixing and matching payment methods for real operational flexibility.

Challenge #2 — Reducing churn

A subscription business is a bit like a leaky bathtub — there’s always going to be a bit of water flowing out. The rate of that outflow is churn, and every subscription business is hyper-aware of this metric. The lower the churn, the higher the customer lifetime value.

Screenshots with ways to update payment information

Of course, reducing churn rates is a complex, multi-faceted issue. For instance, active cancellations may only be solved by significant product changes (if at all). But there is an “easy win” for subscription businesses — tackling passive or involuntary churn. We estimate that a full 40% of all churn is passive, meaning this easy win can lead to big results.

The standard protocol for combating involuntary churn is a combination of payment retries and direct customer outreach (dunning). But the question is:

How optimized are your payment retry and dunning strategies?

Payment retries may appear to all be the same on the surface. But payment retry strategies are not created equal. The major differentiating factor is timing. When you decide to retry a payment matters — a lot.

Two people looking looking at a laptop screen on a virtual call

If you’re not optimizing your payment retry strategy based on what the data says about ideal timing, you’re leaving money on the table. There’s a reason Zuora uses a machine learning model that evaluates over 15 transaction characteristics to determine the optimal payment retry window. This model is also continually refined thanks to an ever-expanding dataset already comprising hundreds of billions of dollars in transactions across a variety of global subscription businesses.

With such a model in place, dunning strategies can comfortably remain
a backup option — minimizing effort on the customer’s part. And of course, these are also fully automated and synchronized with the payment retry schedules.

Challenge #3 — Blocking fraud

If churn is the leak in the bathtub, then fraud is someone trying to contaminate your tap. The challenge stems from keeping the bad actors out without stopping the legitimate customers from flowing in.

Screenshots showing status and identity risk score

It’s a fine line to walk. Too much manual review can create unacceptable opportunity costs, especially for high-volume businesses. But automation — if not properly calibrated — can block too many legitimate customers and degrade the customer experience.

To add to the challenge, what may be the norm for one industry may be a complete anomaly in another. As the subscription model continues to gain popularity, the variety in industries will only increase. Finally, individual businesses also have their own characteristics.

The question thus becomes:

How can we implement automated yet customizable fraud detection systems that also account for industry-level differences?

Scaling implies exponentially increasing volumes, meaning automation is a must. But instead of a blanket “one size fits all” strategy, the ideal risk management system should already account for the different “baselines” in various industries. The business must also be able to customize it further to account for its own company-level insights.

This is the core of Adyen's dynamic risk management solution — striking that balance through industry-optimized risk templates combined with convenient customization. The threat of fraud will never go away. But it is possible to always stay one step ahead.

Explore how to scale by delivering seamless subscriber experiences

Everything comes down to the customer experience — especially when you need them to make recurring payments. And while the quality of the product is the core, subscription businesses should not discount how much the critical payments step contributes to the overall customer experience.

Adyen’s integration with Zuora is designed for subscription businesses to ensure their payments experience is as seamless and optimized as possible. To find exactly how this unique combination of features can help your subscription business achieve its goals, download the full special report —Scaling in the new subscription economy.

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