For Subscription Businesses, Fewer Failed Payments Means Better Customer Retention

Subscription businesses know that if a payment is failing, it’s bad for them and bad for the customer, though many may not realize just how bad it actually might be.

Beyond the lost revenue from the failed payment, the business may also lose the customer and, in turn,  the lifetime value (LTV) of that customer, which also means the business loses that contribution to the marketing budget for going out and acquiring more customers.


“But there’s a lot of other things hidden underneath the hood that go even beyond that,” Darryl Hicks, founder and CEO of FlexPay, told PYMNTS.

Handling the Problem

Even if a business cures that failed payment with best-in-class digital outreach or customer service, he explained, the visibility of a failed payment will take a customer who is somewhat satisfied with the product or service they’ve signed up for in a subscription and tip them into just dissatisfied enough that they become voluntary churn.

See also: Subscription Payments Declines Are Usually Random, Often Costly, But Largely Avoidable

“So, it’s not just the failed payment that’s a problem, but also what we do about failed payments actually has a really big impact on it,” Hicks said. “The way we handle this problem inside of a business, the tools, tactics and strategies that we’re using to optimize for this involuntary churn, actually has a significant impact on lifetime value.”

Businesses can act more assertively to manage their failed payments. An emerging topic here is payment authorization management (PAM), which includes solutions that can solve for a large percentage of failed payments and has the opportunity to dramatically improve customer retention results.

Managing Failed Payments

The first step is to remember the Peter Drucker quote, “What gets measured gets managed.” Hicks explained businesses must understand that managing failed payments is an important component of running a healthy, profitable subscription business. It will open up more marketing budget and turn into more profits, yield and satisfied customers. But it has to be measured.

“Typically this ends up being someone on the finance team or maybe someone on the product team who is responsible for optimizing the P&L, but either way, there has to be someone accountable within the organization to say, ‘OK, I’ve got this, I own it, I’m going to be tracking it and really monitoring it,’” Hicks said.

Once it’s being measured, the business can look at the strategies and tactics they want to deploy to better control it. A business can do a lot internally with its own customer service team and its own payment people but there are also several third-party solutions dedicated to solving the failed payments issue.

Using the Single Biggest Lever

“We really need to deploy a PAM strategy as part of the customer LTV initiative and increase our failed payments recovery,” Hicks said. “It’s the single biggest lever that subscription companies have to increase customer retention, customer lifetime value and revenue.”

When the company generates more cash, he explained, it can invest more into acquisition, open up new markets and create competitive advantages.

Businesses need to care about this more in the coming year because right now there is a tightening in the growth of subscription businesses. That’s being driven by the winding down of government subsidies as well as concern about inflation and its effect on customer sentiment. As a result, there’s a trend toward a reduction in first-time subscription customers entering the market.

See also: 80% of US Consumers Have at Least One Subscription

Retaining Customers

“What we’ve seen emerging clearly is that the only growth in subscription companies is people changing from one subscription to another subscription but net new people entering into the market is really slowing significantly,” Hicks said. “So, that means that it’s going to be more important than ever before to really focus on retaining the customers that we have, increasing that lifetime value.”

To do this, subscription businesses will need new technology solutions that can deliver substantial business improvements but at the same time are easy to deploy, operate and optimize.

“As we see that it’s getting more difficult to attract new customers through our marketing, we’re going to really make sure that we’re focused on the profit levels of our business and running a properly efficient and optimized business,” Hicks concluded. “And I think strategies like PAM are going to play a really big role in that.”