Payment Declines Are the ‘Silent Killer’ of Subscriber Lifetime Value

A payment decline feels like a slap in the face to subscribers, especially when it’s the result of a processing mistake on the part of a merchant or issuer. Timing couldn’t be worse for such mishandling of these recurring subscription payments, so getting it right is a smart investment.

PYMNTS and FlexPay research in the “Optimizing Subscription Payments” study has found, for example, that 27% of subscribers have terminated their subscriptions because of a payment decline. Extrapolate that to the declines now rising across the subscription landscape, and the scope of the problem assumes fearsome proportions.

Saying he’s observed “a significant degradation in approval rates” in recent months, FlexPay Founder and CEO Darryl Hicks told PYMNTS’ Karen Webster that getting reacquainted with factors that make a successful subscription billing operation is mission-critical today.

“There are only three things that can give you an unassailable lead in the marketplace: how you sell, which is all about how you outthink the marketplace; how well you perform and deliver on your promise; and how well you collect the money,” he said. “Everything else is noise.”

In other words, business is fundamentally a relationship between delivering value and collecting the money. The delta is declines, which need close attention now.

Involuntary churn is the enemy here, as subscribers with valid payment methods on file take a dim view of payment declines and the merchants responsible, often leading to cancelations and loss of customer lifetime value that, left unattended, create a dangerous drag on merchants.

With over of quarter of consumers surveyed who experienced a decline saying they dropped the service that declined them, and with subscriptions of all kinds under close consumer scrutiny this year and likely into 2023, Hicks said the hardline approach is out of touch.

Put another way, get it wrong by declining customers and the “unassailable lead” is lost.

The Psychology of Declines

This gets into the psychology of payment declines. Hicks related how this recently happened to his wife.

“[They] didn’t tell her there was a problem … [they] just said the payment was declined,” he explained. “From the response and the attitude that she got, she was deeply embarrassed and mortified.”

That’s a visceral summation of how payment declines feel like a gut-punch to loyal subscribers, which is why Hicks said: “It’s more critical than ever that merchants really understand that this isn’t about a transaction. This is about a relationship with a customer, and you have to get this right in order to protect the relationship.”

Calling such situations a “critical moment of truth that’s been artificially, needlessly inserted into your relationship with your customer,” he said it often taints brand affinity and drains lifetime value (LTV).

It typically stems from a tug-of-war between chief financial officers watching out for their own profits and losses (P&L), IT departments that want to batch process transactions when easiest for them — even though that’s usually during the wee hours of the night when systems are more likely to err on the side of safety and decline — and the dejected subscriber in the middle enduring the humiliation.

This stands in opposition to “how well you perform and deliver on your promise” — one of Hicks’ three premises for a successful subscription business.

How that’s handled “can have all kinds of downstream benefits that either put you on a beautiful trajectory to this unassailable lead that we see for merchants who get this right, or one that’s really heading into some difficult times,” Hicks said.

Merchants “might understand that there’s a problem, but not understanding the drivers into it is leading to inefficient decisions that are exacerbating the problem dramatically,” he added.

See also: Payment Declines Drive Subscription Churn for 27% of Subscribers

Deal With It

Harmonizing internal stakeholders goes a long way in avoiding loss of LTV, of paying customers here on the probable brink of a recession, and as customer acquisition costs soar.

Here, Hicks pointed to “the emergence of this category of payments authorization management. It’s because there’s something that needs to be managed there. It’s not just a one and done structural play where you just choose a merchant processor based on pricing and connecting to their [application programming interfaces (APIs)] and you’re done.”

Rather, subscription merchants need to get finance, operations and IT singing from the same hymn book, using hard numbers that spell out the declines problem holistically.

“You need to get the right people around the room to start to measure what’s actually going on,” he said. “A question as simple as, ‘Of our churn, how much of it is voluntary versus involuntary? How much of it is passive versus active?’ That alone can be very telling,” given that FlexPay and PYMNTS research found 48% of all churn in America comes from failed payments.

That number goes higher the more recognized the brand, which is why Hicks said it’s vital to measure declines more accurately and intervene with failed payment recovery platforms like FlexPay.

Doing so surfaces important information like “what’s the downstream lifetime value effect on this because again, it’s not just that one transaction, it’s a relationship with a customer that’s been needlessly ended,” he said.

Only by properly quantifying the problem and modeling it out can a company select the right technology to prevent these declines and preserve more customer LTV.

“It really starts with measuring and understanding a little bit better,” he said.

“[Merchants] understand that there’s a problem with their failed payments, but I feel like it’s too superficial,” he said. “If they just bring those different departments and stakeholders together and start to calculate out the lifetime value, then they’ll have the data and the motivation … to fix it. It’ll be transformational to the business.”