Saving Failed Payments Key to Securing Subscriber Lifetime Value

New research has revealed a staggering gap in the number of subscription companies that track customer lifetime value, which ironically is one of the key metrics for subscription success.

For “The State of Subscription Business: Best Practices and Business Performance Drivers,” PYMNTS surveyed 200 decision-makers at subscription firms in retail, health and fitness, media and publishing, home security, and online gaming. We found that 91% of subscription merchants don’t measure customer LTV and have no standards or definitions for doing so.

Darryl Hicks, CEO of FlexPay, which collaborated with PYMNTS on the study, told PYMNTS’ Karen Webster, “I was a little bit shocked to see that it was as high as 91%. There are probably a couple of reasons for that. It’s never just one thing. But for me, we’re coming out of a protracted bull cycle where money was free, and we could grow our way out of just about any problem.”

Hicks said customer acquisition has always held more attraction than retention as it’s about growth, but ironically it’s the companies with strong growth that tend to focus on LTV and its sworn enemy, failed payments, and the involuntary churn caused by them.

“If you’re tracking lifetime value, it’s because you’re focused on optimizing your business,” Hicks said. “You are making sure that your acquisition costs as a ratio of lifetime value is dialed in properly, and you are focused on minimizing all sources of churn.”

“It seems to be companies that have scaled that are focused on lifetime value,” he added. “This is sad because all subscription companies will benefit from this operational best practice.”

Now that capital is scarce and expensive, it’s much harder to throw money at customer acquisition, and pricey growth doesn’t necessarily yield the product-market fit that makes profitable subscription firms with an “insurmountable lead in their marketplace,” as he called it.

Among top performers, Hicks invoked the aphorism that “acquisition is the first inning of the game, retention wins the game.” The small cohort that thinks this way has dedicated teams — “unsung heroes sitting inside of them focused on the data, swimming through the SQL to find the drivers of retention, who have a real passion for optimization and efficiency” — measuring LTV metrics.

Metrics That Matter

Because growth has been the focus for years, Hicks told Webster there’s an awareness void, leaving subscription merchants to figure out the LTV problem themselves. Many don’t.

Sixty-seven percent of top performers were found to measure three metrics that put them at the top of the heap versus all others: failed payments, customer churn rates and customer LTV.

That didn’t surprise Hicks, per se. And involuntary churn is another critical metric as it measures subscribers who didn’t want to cancel but whose subscriptions ended because of an unresolved failed payment.

“Strategies around your voluntary churn might help you to recover a customer today, but they put your customers through an experience that increases the likelihood of they will churn out in the future,” Hicks said. “… These are people that have already expressed some dissatisfaction, whereas for the ones that are accidentally churning out, if you can come up with a sound strategy for fixing that problem, the future lifetime value on those customers is significantly higher.”

Failed payments are the result of issues like authorization errors, expired cards, changes of address and things that platforms are good at detecting and dealing with. More to the point, Hicks said actively tracking and addressing failed payments has “one of the most significant positive impacts on the lifetime value of your business because you’re recovering a customer that would have been lost to involuntary churn, and not just recovering that transaction.”

This creates positive downstream effects that feed into the long-term health of subscription businesses. Rather than just dealing with failed payments in the moment, observing this on a longer timeline shows how many of these customers are still active subscribers months later.

“I think that’s why we see top performers tracking failed payments much more than any other KPI or unit economic,” he said. “It’s because they’ve zeroed in on how this punches way above its weight. This is a hidden sort of issue that is a massive lever in unlocking value.”

It also feeds into another eye-opening finding from the research: Subscription merchants that track customer LTV recover 60% of failed payments on average.

The Unlock of Recovering Failed Payments

Harking back to the lack of knowledge or insight, Webster cited another stat from the study, which is that a whopping 85% of subscription merchants see failed payments as a cost of doing business, with no direct remedy.

This is a stunner given the existence of platforms like FlexPay that specialize in recovering failed payments chiefly to reduce churn and beef up customer LTV.

Hicks called this “playing not to lose rather than playing to win.” It’s a mindset that more subscription merchants need to be aware of in their approach to the market.

It’s understandable on a certain level, as he said “the current payments ecosystem was never really designed for card not present and recurring billing transactions. There’s a structural problem inside the ecosystem that is driving up failed payments, artificially inflating it. Awareness of the problem and a relentless focus on minimizing the impact of lost revenue and churn is vital for every subscription business.”

Another cohort of bottom- and middle-performing subscription companies recognize failed payments, but they have attempted to solve the problem with home-built solutions that use customer service outreach or rules-based retry systems. Of course, these home-built solutions lack the industrywide insights and specializations of third-party firms whose bread and butter is recovering failed payments to enrich customer LTV.

The study has confirmed that home-built solutions don’t deliver optimum results, finding that companies using third-party failed payment recovery solutions as part of a larger customer LTV strategy are 12 times more likely to be top performers than bottom performs.

Hicks chalked this up to merchants who believe they know more about their customers than anyone else.

“That’s true, but the third-party tools know more about what’s going on in the broader ecosystem, across all the merchants, across all the issuers, across all the acquirers than any single given merchant ever will,” Hicks said. “This is the value of specialized solutions.”

He joked that it’s also the Dunning-Kruger effect at work, a cognitive bias in which “the less you know about something, the more confident you are in what you think you know about it.”

What’s needed is the opposite: accountability and ownership, as personified by a chief subscription officer, an emerging new role in top-performing subscription companies.

“The underlying idea that there is a person who’s responsible in the organization for owning all the KPIs around subscription and making sure that they go cross-departmentally to bring in finance and tech, marketing and product so that we have the right cohesive solution to this was another thing that we saw in top performers,” Hicks said.