Subscription businesses must do a better job of locking in loyalty and rely less on tactics like auto-renewals that regulators dislike.
This, as the Consumer Financial Protection Bureau (CFPB) issued a stern warning to subscription merchants in a Thursday (Jan. 19) press release that opened with a swipe at “dark patterns and other tricks used by companies to confuse and deceive consumers enrolled in subscription services.”
“Deceptive practices that seek to trap consumers into subscriptions they don’t want are a violation of the law,” said Samuel Levine, director of the Federal Trade Commission’s (FTC) Bureau of Consumer Protection said in that statement. “Today’s circular puts companies on notice that there is a government-wide effort to stop these manipulations.”
With the ominous idea of “a government-wide effort to stop these manipulations” no doubt causing anxiety, more subscription merchants are pivoting to measuring customer lifetime value (LTV), which, according to a new study, is only done today by 8.5% of these firms now.
Analyzed in depth in the study “The State Of Subscription Business: Best Practices And Business Performance Drivers,” a PYMNTS and FlexPay collaboration, failure to measure LTV is one reason that many subscription merchants have become over-dependent on auto-renewals — often without notifying subscribers beforehand — leading regulators to react harshly.
Top Performers Do It Differently
Among key findings is that 58% of subscription-focused companies track either customer churn (36%), customer retention (28%), or both, and essentially stop there.
Compare that to the metrics monitored by top performers in the sector, 67% of which track failed payments (67%), with 40% focusing on customer churn rates and 33% on LTV.
PYMNTS found that over two-thirds of subscription-focused firms connect the dots between failed payments on customer retention, but just over one-quarter (27%) see it as the prime culprit in subscriber churn.
That’s even though the study found that fully half (50%) of subscriber churn is caused by failed payments, which can mean a card expired or a subscriber changed addresses.
Prompting subscribers to update stored payment credentials can mitigate involuntary churn. However, just over half (53%) of subscription firms even track involuntary churn, and just 20% of those that do track it consider it critical to retention LTV.
Regulatory Actions Get Serious
The CFPB is up in arms over so-called “negative option” subscription renewals it defines as “a term or condition under which a seller may interpret a person’s silence or failure to cancel an agreement as continued acceptance of the offer.”
It names Transunion, ACTIVE Network, and even credit card companies as targets of prior legal action for these practices, many if not most revolving on consumer’s informed consent to continue the subscription or not.
Last October, PYMNTS reported on actions the state of New Jersey is taking, saying a “New Jersey law is set to take effect on Aug. 1, 2023. It will apply to consumer service providers who offer New Jersey consumers at least a one-year term. The law is limited to contracts related to the maintenance, repair, or servicing of property for now.”
The law will come with several stipulations — covered businesses will have to acknowledge cancellation requests within five business days and process them within 10 business days. And consumers will have to be offered either an online method, a mailing address or a telephone number for people to use to cancel.
Also in October, Washington state Attorney General Bob Ferguson issued a consumer alert that said in part: “59% of Washingtonians may have been unintentionally enrolled in a subscription plan or service when they thought they made a one-time purchase, highlighting a problem that may be impacting millions of Washingtonians.”
To stay out of lawmakers’ crosshairs, subscription firms need to pivot away from the practice of auto-renewals without consumers’ informed consent, and measure metrics that matter.
“Recognizing that failed payments are a leading cause of involuntary customer churn and adopting methods to measure and analyze this metric can reduce a company’s churn rate and, by extension, improve LTV and revenues,” according to “The State Of Subscription Business: Best Practices And Business Performance Drivers.”