10 Factors that Impact Customer Retention When Payments Fail
We talk about passive churn a lot here on the CB blog, and with good reason. It’s our bread and butter at Churn Buster. It’s also one of the most underserved aspects of most business stacks.
Thing is, a ton of different factors go into your overall passive churn rate. Businesses are often shocked by the amount of variance that they experience, even when other factors seem pretty much stable.
So let’s dig into that variance.
Understanding the different factors will give you a better overall picture of your churn, and help your brand to build a healthier growth pattern over time.
Gah, what a stodgy old word.
Once upon a time, this involved an envelope, a horse rider, and a reminder of a debt owed.
These days it commonly refers to emails sent after a subscription payment fails to process.
More advanced systems running dunning best practices will rely less heavily on email, prioritizing less intrusive methods to clear payments, and escalating past-due balances the longer they go unpaid.
That means looping in support teams, initiating lockouts, finding new points of contact, reaching customers by phone/SMS, and other tactics.
Failed payments account for 20-40% of overall churn on average, meaning that plugging leaks here can have a huge impact on revenue.
How huge? To approximate, it looks like this:
Imagine you had $10,000 in failed payments this month.
By improving your dunning process, you recover an additional 1% of those subscribers.
Don’t sound like much, but the math doesn’t stop there.
Subscription revenue compounds, and $100 a month can add up to $7,800 over the next year. Not bad!
And unless your dunning is already air-tight, everyone can find a 1% improvement and then some.
The reality is this: measuring a 1% improvement is really hard when there are other factors contributing to your passive churn rate each month.
Read on for the next 9 biggies.
2. Brand Experience
Passively churning out can be an easy exit for customers that are already feeling some level of dissatisfaction with your brand. It’s the “meh” factor- a subscription is nice, but if you aren’t regularly wowing your customers, they can find other routines to fill the same basic needs.
In a market as competitive as eCommerce, it’s tough to dominate based on price, novelty, or logistics for long. Things get replicated quickly, and groundbreaking approaches quickly become the industry standard.
Brand, on the other hand, is something that’s uniquely yours. A great brand experience is the key to building long-term loyalty, even when competition heats up.
For more on creating a standout customer experience, check out Kristen’s post on extending LTVs and reducing churn.
3. Customer Portal & Dashboard UX Issues
First thing’s first: you need to be auditing the backend experience of your brand consistently from the perspective of your customers. For a lot of brands, the focus tends to be on signup flows, ad copy, and other touchpoints they can audit and change pretty quickly.
But what’s the experience like when a customer wants to change their password? What if they need to pause a subscription or update credit card information? There’s so much that can go wrong in the portal if your team isn’t consistently checking in and exploring this part of the customer journey.
Even simple errors can have a big impact. 404’s on certain pages, customers struggling to log into their accounts, or having difficulty connecting with customer service can make it easy for them to passively churn.
In a nutshell: customer portals are really, really important.
Let’s say coffee Company A offers a clear CTA when a sale is made so customers create an account as part of their purchase. Company B also has a portal sign up, but it comes in an email directly after the purchase.
Less customers sign up for Company B’s portal, meaning they experience more friction when they need to interact with their subscription.
At this point, the added irritation undercuts the convenience of the subscription, making passive churn more likely.
So how do you test your customer portal? Try these steps:
- Create an account
- Make deliberate mistakes to check error messaging
- Submit a support request as a secret shopper
- Try to rush your next shipment, delay it, or add/remove products
- Update your billing information
Discounts are one of the most common ways that brands bring new customers into their subscriptions. Thing is, customers that initially connect with your business via a discount tend to behave really differently when it comes to churn.
This has to do with your customer cohorts. When a customer comes into your subscription at a discount, they can get sticker shock when they first experience the “true” price of the products.
It’s about the difference between the perceived value of your product and the actual value. Heavy discounting means that customers start with a “discounted” sense of what they’re receiving, and a failed payment can create the perfect opportunity to leave without hassle.
Take a look at subscriptions lengths, segmented by discount. You may find that groups that come in via a discount have significantly shorter lifespans, with a particular drop off once they get to the end of the discount period.
5. Sign Up Date
Again, we need to look at cohorts. If you’re seeing a lot of churn around specific sign up dates, you’ll want to investigate external factors around those periods. Did you make updates to landing pages? Your paid ads? Your site design?
For customers, this can come down to seeing different “promises” throughout their journey with your brand. If they feel an incongruence somewhere in that journey, it’s an easy reason to let that subscription lapse.
For example, let’s say Coffee Company A updates their landing pages in early March to highlight a quicker delivery experience for customers.
If there’s a lag in fulfillment early on in that period for any reason, that company could end up seeing higher churn during the April billing period. Coffee Company B, all other things being equal, probably won’t see the same kind of change.
We tend to imagine our subscriptions as exciting long-term commitments that really pay off over time. Thing is, that’s often not the mindset that customers have at the beginning of the relationship, and their approach to signing up (and level of long-term intent) varies a lot depending on the time of year.
Signups around the holidays tend to have particularly unique cohorts.
Why? Well, the person signing up for the subscription may be doing so as a gift, in which case the purchaser isn’t necessarily the customer (or the end user of the product). That disconnect means that the subscription has a way higher risk of passive churn.
Let’s say my parents give me the first three months of a coffee subscription as a gift, and they expect me to take over the subscription costs after that point. Unless I’ve already budgeted for that shift, this can be an easy drop off point.
Likewise, because my parents (whose card is on file for the subscription) aren’t receiving the product, they’re less likely to notice when the subscription lapses.
Coming back to discounts- Black Friday and Cyber Monday can also create cohorts with lower lifespans, leading to higher passive churn rates a few months later.
7. Billing Cycle
A lot of businesses love annual subscriptions, and it makes a ton of sense- after all, it’s predictable, locked-in revenue over a significant chunk of time. In theory, this can be a really solid retention tool as well.
That said, annual customers can also churn out at a higher rate when it’s time for a renewal, especially if a payment fails. After all, they’re probably not in the habit of regularly interacting with their customer portal, and, as they say- out of sight, out of mind.
So, for example, let’s say your annual customers are renewing 70% of the time and your monthly customers are renewing 90% of the time. If you aren’t segmenting these groups out, a preponderance of annual renewals in a given month can make it look like your churn rate is spiking.
8. Subscriber Plan
So much of what we’re talking about here comes down to segmenting your customers and understanding where they’re impacted by different factors.
Take a look at the data and ask yourself: do customers on specific plans have meaningfully different churn rates?
This can come down to the amount of product they’re receiving (too much, too little?) or a general value judgement on the cost-to-benefit ratio they perceive.
If you’re seeing higher drop-off rates on premium plans, it can be helpful to look at the value provided at each tier to see where customers might feel they’re losing. For a lot of them, it’s probably little issues adding up to an overall uncertainty about the real value of their subscription.
9. Customer Support Interactions
Great customer support teams can be an absolute game changer when it comes to passive churn.
Going above and beyond here makes customers feel valued and can really pull them back into the fold if they’ve been on the fence. Quickly answering a question or solving an issue can be all it takes to make the save.
Here’s how Taylor Holiday from Common Thread Collective looks at customer success and retention:
“Let’s say you have this theory that when people talk to our customer service department, they have an incredible experience. Well awesome, let’s prove that.
Let’s take everybody who’s ever spoken to your customer service department on the phone, and let’s look at their LTV relative to the general customer set.
Because if that’s true, let’s say it’s a 20% higher LTV when you get them on the phone, then guess what your new marketing tactic is? Getting people on the phone with your customer service department because that will arbitrage growth and you can create more value there.”
10. Product Quality
This is a hard one to talk about. We all want to believe that our product is the best option out there, right?
The real question might be product quality vs cost, relative to similar items.
So if you’re selling the best coffee out there, but it’s coming in with a higher price tag than similar artisan products, customers may decide that the convenience of a subscription doesn’t justify the expense.
It can also come down to your market focus. So if Company A markets their coffee as a convenient option for college students but offers the product at a premium cost, they will likely see higher churn rates as their customers try out a subscription, then let it lapse to shift to more affordable options.
Basically, passive churn is a lot more complicated than we often expect it to be. There are a ton of factors, and it can be tough to feel like you really have a handle on it.
The best advice I’ve got is to consistently come back to your customer experience. Audit regularly, with a focus on the entire journey a customer has with your brand.
From a data perspective, consistently segment your cohorts based on the range of factors we’ve talked about here- seasonality, discounts, plan tier, and any other data unique to your business.
Your passive churn will fluctuate over time, but understanding it and building a clearer picture of the how and the why will make it a lot more manageable.