For software providers, churn is the enemy against which they are always fighting — in both its voluntary and involuntary forms.
That’s for good reason, Software-as-a-Service (SaaS) provider FastSpring’s Chief Financial Officer Sian Wang explained to PYMNTS in a recent conversation. Acquisition costs are high when it comes to subscription customers — and churn squanders all of that time, treasure and talent spent.
“Voluntary churn,” when the customer is choosing to abandon a product or service, is the more complicated issue to solve, noted Wang, insofar as one is essentially attempting to reacquire the business. Solving for it is something of the “holy grail” of the subscription business, he joked.
“Involuntary churn,” on the other hand, is equally prevalent, but simpler and, in many ways, more avoidable. The customer isn't actively trying to leave. Instead, something has gone wrong on the back end: The payment card linked to the subscription has expired, gone over its limit or been canceled, triggering a decline.
The reality, Wang noted, is that churn of both kinds is simply an inevitable part of the subscription business. The good news is that it’s possible to minimize them, mainly by working hard to get ahead of churn before it starts.
“I think No. 1 is to be as proactive as possible,” he said. “If at all possible, you don't want to wait for a denied transaction. It’s really about working with the right predictive tools to minimize churn before it happens.”
And although the tactics and tools are somewhat different between voluntary and involuntary fraud, he noted that both are focused on the consumers themselves — and on building a better, smoother and more relevant relationship over time.
Heading Off Involuntary Churn At The Pass
The problem with involuntary churn comes when instead of getting ahead of it proactively, a reactive response creates a bad customer experience. Customers’ cards get declined or their service is suddenly suspended, and that can turn an involuntary churn into a voluntary one, as consumers consciously decide they’re no longer interested.
That’s a particularly acute risk for B2C firms, where something like a software subscription is mission-critical. By contrast, consumers’ subscription relationships are generally less necessity driven. As Wang pointed out, a B2C customer who is hit with a card decline and then has an unpleasant experience restarting their service is more likely to just opt-out.
But the solution is often as simple as being ahead of a payment’s status before a transaction is attempted, he said. That might mean sending a notification of an upcoming credit card expiration date or letting the customer know about a decline while holding off on an account suspension, so they have a few days to rectify the issue. When those alerts and reminders are automated, involuntary churn never has to happen.
“I think the goal is to do anything possible so that we don't suspend the account too early,” Wang said. “That’s the No. 1 proactive portion, and then there’s the reactive portion, where we're giving them enough opportunity to resubmit the card so we can avoid losing the customer to a declined experience.”
And while providers might not be able to get ahead of voluntary churn in the same way, he noted that it’s possible to adjust their tools and techniques so that it happens less.
— FastSpring (@FastSpring) May 8, 2020
Voluntary churn is a more complex problem — and one the FastSpring team spends a fair amount of time contemplating how to head off, Wang said. Again, it’s all about staying ahead of things, although in this case, it also involves looking at the predictive data that signals a churn risk might be developing.
Complaints to customer service are one such predictor, he noted. Consumers being less than fully engaged with the tools available through a subscription is another.
For example, when data on software subscriptions shows a different penetration or utilization rate for different components of functionality, an interesting trend emerges. Subscribers to a software package that has, say, 20 different possible functionalities are more likely to stay with the package when they use more of those features, Wang said.
“If we see someone using only one or two of those elements of functionality, that person is more likely to churn than the guy who's using 10 to 12 measures of functionality,” he explained.
The key to retention — and to minimizing voluntary churn — is being keyed into those signals and responding to them before they inspire a customer’s defection away from the service, Wang said.
“The question is: ‘How can we be smarter and more predictive in a way that builds retention rates going forward?’” he said.
After all, retention will be an ever-more critical question as the subscription model becomes increasingly prevalent in the coming years, Wang pointed out. More consumers and businesses are transitioning to such ongoing relationships instead of one-off transactional interactions.
Last year, for example, was the first time the majority of software purchases were SaaS solutions, as opposed to one-off software products that firms buy and then pay to upgrade every few years. Subscription software may encompass 100 percent of the market, but Wang said he imagines it will get pretty close in the coming years because it’s a win for all sides. Software providers get a more predictable and renewable revenue stream, while the end-user gets to always work with the most updated and secure version of their software.
And while the trend might not be quite as stark in the world of consumer transactions, it’s a model that is on the rise across the board. Why? Precisely because of that win-win equation that offers more flexible, responsive models for consumers and more revenue clarity and a greater ability to experiment for sellers.