The Failed Payments Recovery Missing Link

As more of 2023 is in the rearview mirror than in front of us, subscription businesses are having a tough time, according to FlexPay CEO Darryl Hicks.

From FlexPay’s vantage point, serving a slew of subscription firms across a variety of verticals, “we see quite a few of our customers struggling with volume,” Hicks told Karen Webster.

Volumes have been declining, and failed payments remain a steady challenge, he said. There are a few bright spots, as business has been good for business service providers.

But by and large, churns are rising as customers are voting with their feet as they seek to cut costs from their monthly expense roster, are turned off by failed payments, and head to the proverbial exits.

The money that’s left on the table is significant — to the tune of more than $141 billion in failed payments.

But as the old quote goes, you can’t manage what you cannot measure. And as joint research between PYMNTS and FlexPay has found in “The State of Subscription Business” study released earlier in the year, 91% of subscription merchants said they don’t measure customer lifetime value (LTV) and have no standards or definitions for doing so.

It’s a shocking finding, particularly given the fact that payments, churn — by extension, the financial performance of subscription firms — are inextricably linked, said Hicks.

Many firms may be caught by surprise by that linkage, particularly given the fact that many enterprises have been pivoting through the past few years toward subscription offerings.

The Easy Days of Making Money Are Gone

For the companies that have been in the game a while, it may be the case that some of them have gotten a bit, well, lazy.

In times past, making money from those subscription-based models may have seemed relatively easy.

Subscriber acquisition costs were not all that expensive in an age where the cost of capital had been historically low. And the pandemic drove consumers and all manner of daily activity online. But now, in the current inflationary environment, as households trim expenses and corporations find it harder (and more expensive) to spur new sign-ups, boosting the LTV is paramount.

As Hicks said, “lifetime value is everything to a subscription business.”

So, the 91% of merchants that do not measure LTV, churn and other metrics could learn much from the 9% that do. As Hicks recounted to Webster, these companies have dedicated professionals within the organization that are tasked with tracking those metrics, bringing other departments into the conversation to tackle the persistent challenge and threat of churn.

The positive ripple effects for companies that do track LTV can be significant, said Hicks. The companies that track the ratio of customer acquisition costs to LTV have two levers to pull: They can lower consumer acquisition cost (CAC) or boost LTV.

“There are all sorts of second and third order benefits that come of out this fundamentally important metric,” he said.

Addressing failed payments can lengthen LTV, blunt churn, drive revenues and improve the CAC/LTV ratio. As he noted, there are several third-party tools on offer from providers, including FlexPay, to help shore up and recover failed payments.

Addressing Failed Payments

The data shows, after all, that the top performers in our subscription pantheon are the ones that wind up recovering failed payments — 60% of those transactions — and Hicks was quick to caution that failed payments are not simply a result of technological constraints.

“The challenge is that many of these companies don’t really understand that there is something that needs to be managed inside of the transactions,” he said. It’s not always the customer’s fault, or something wrong with the cards.

He related that all too often, companies that are among the lesser performing subscription firms are the ones that may be neglecting customer service or reaching out to consumers when things go awry.

Data and analytics, he said, are key to measuring what happens after there’s friction after the payment issues have been resolved and how that LTV is trending. Recovering failed payments ultimately has a positive impact on the cash flow of the subscription firm.

There’s a long journey to bring that 9% number up, but Hicks said progress is indeed being made as more companies seek to measure and manage LTV as well as cut down on voluntary churn.

“There needs to be more emphasis on LTV,” said Hicks, “because the majority of subscription companies are missing out on the most valuable pieces of information as to why they’re even a subscription business in the first place.”