Traditionally, subscription models have been used for newspapers and telecommunications. In the past few decades, we’ve seen an explosion of subscription-based business models due to consumer demand for convenience and predictabilites.
This model ensures a steady revenue stream for businesses and aligns with the digital era's emphasis on continuous services. It also allows companies to leverage customer data for tailored offerings, reflecting a shift in consumer preferences and a desire for invisible payments.
From entertainment streaming services, to computer storage, to software, to weekly groceries, subscriptions are everywhere.
The market is huge. According to recent estimates, the subscription economy is currently at USD 650 billion and is expected to double by 2025 to USD 1.5 trillion. Online subscription growth is expected to continue in the coming decades.
Successful digital subscription businesses focus on providing excellent products and services, expanding their user base, and setting the right price. Understanding the high cost of acquiring new customers and retaining existing ones is crucial. Prioritizing customer retention is now a cost-effective strategy for sustaining subscription-based models, considering the impact of churn on lifetime customer value.
In this blog, we’ll discuss subscription churn challenges and how the right financial technology, such as Adyen, can improve retention. We'll highlight reliable solutions to reduce involuntary churn and build trust in your subscription business's payment systems.
What is subscription churn?
Subscription churn refers to the percentage of paid subscribers who cancel their subscriptions within a specific time frame. It serves as a vital measure to evaluate the health of the subscription model. Calculated as a percentage, the churn rate reveals how many customers end their subscriptions compared to the total number of subscribers at the start of the period.
A high churn rate signals potential issues with customer retention, while a low rate indicates successful subscriber retention.
Subscription churn can happen for a few reasons. Some subscribers actively cancel their subscriptions, where others might churn involuntarily.
Voluntary churn happens when a user actively decides to end their subscription. Subscribers unsubscribe because they no longer see the added value of a service, have a better offer from a competitor, can no longer afford the service, or have other frustrations.
Involuntary churn happens without the user making an active decision to cancel their subscription. Even though a user might still have a use for a service, the subscription can be canceled automatically as a result of a failed subscription renewal due to insufficient funds or outdated card details or other payment-related failures.
How to reduce subscription churn
In order to reduce your churn rate effectively, it’s necessary to look at both voluntary and involuntary subscription churn separately and adopt tactics to reduce each.
Addressing voluntary churn
The best way to avoid voluntary subscription churn is to create a service your users can’t live without. The better your product-market fit, the stickier your service will be, making it less likely people will cancel.
Other than creating a great product, there are other tactics you can employ to address churn.
Transparent pricing and billing: Subscribers want to know exactly what they are paying for and when they’ll be billed. If you’re transparent about your pricing structure and billing schedule, you can avoid confusion and chargebacks.
Offer flexible subscription tiers: Subscribers needs or budgets can change. Offering flexible subscription tiers can give users at least some functionality depending on their needs, which can retain them.
Continuous value addition: Regularly updating and adding value to subscription offers ensures that customers perceive ongoing benefits. Whether through new features, content, or improvements, maintaining a sense of freshness and relevance discourages subscribers from seeking alternatives.
Enhance customer engagement: Regularly communicating with subscribers through personalized content, updates, and feedback requests keeps them engaged and less likely to discontinue their subscriptions.
Incentivize loyalty programs: Loyalty rewards, discounts, or exclusive perks to long-term subscribers encourage customer loyalty. These incentives create a sense of value and appreciation, making subscribers more inclined to continue their subscriptions.
You can offer different subscription levels, allow subscribers to pause or cancel their subscription without a penalty, and allow subscribers to pick the renewal date.
Addressing involuntary churn
On average, renewals account for 62% of subscription revenue. Subscription businesses must take a holistic approach to tackling involuntary churn, considering payment and customer life-cycle needs.
However, it's surprising that few businesses utilize a full-service provider. Addressing involuntary churn is crucial. While a common tactic involves issuing a retry of the subscription payment before canceling the subscription, it's important to note that retries are not free and can even be penalized by banks if done too often.
In order to optimize retry logic, you need to make a cost-benefit analysis of retrying payments. Since not all declines have the same reason, the first step is to analyze what declines you receive.
Payment failures can be categorized into 6 groups:
The decline reason will let you decide whether a retry is worth the extra cost. If a card account has been closed or has been marked as stolen, retrying the payment will only cost your business a fee before failing again. If you categorize your payment failures, you can separate hard and soft declines to quickly remove unnecessary retries and costs.
Optimize to reduce churn with financial technology
Subscription businesses face many challenges, from competition to ensuring quality service and customer satisfaction, along with addressing voluntary churn. Our single financial technology platform can help you reduce involuntary subscription churn by delivering an exceptional service, fostering loyalty, and exploring cost-effective strategies.
Our suite of products, including Account Updater and Network Tokenization, plays a pivotal role in managing recurring payments and mitigating the reasons for payment failures throughout the lifecycle of a recurring shopper.
With our proprietary retry tool, Auto Rescue, we automate the retry process, strategically choosing different times, and ensure the use of up-to-date card information upon expiration. You can leverage our data-ecosystem and recover revenue from payments with fewer retries. We identify the best days and times to retry payments using machine learning to minimize the risk of failed payments.
As a global partner, we specialize in navigating the intricacies of subscription payments, focusing on credit and debit card issues—the primary culprits for payment failures. Recognizing the substantial variations across regions, we streamline this complexity, enabling you to leverage our expertise. Our goal is to reduce involuntary churn and mitigate other transaction risks by ensuring the provision of optimal payment methods and a seamless authentication process, particularly during the critical first transaction.
Subscription churn is a critical challenge for your business in the digital era. As the subscription economy grows, focusing on customer retention through transparent pricing, flexible offerings, and loyalty programs is key to reducing voluntary churn. Additionally, addressing involuntary churn, primarily caused by failed payments, requires a strategic approach and the right financial technology tools.
Merchants rely on Adyen's best-in-class products and leverage expert knowledge to maximize their subscription Key Performance Indicators (KPIs). Our platform, equipped with features like Account Updater, Network Tokenization, and Auto Rescue, simplifies these complexities, offering a global solution to reduce involuntary churn and optimize subscription retention strategies.
Want to learn more about how we can help you reduce subscription churn and protect your financial results? Contact sales.