How Payments Can Reduce Churn for Subscription Businesses

Payments

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Not long ago, signing up for a “subscription” likely meant getting a monthly magazine in the mail or paying a cable premium to get HBO. But the business model that once applied to a limited number of products and services has been revitalized in the age of e-commerce.

From streaming services and video games to beauty boxes and pet food, the subscription business is burgeoning and entrepreneurs have harnessed this model as a way to generate revenue – specifically, dependable recurring revenue.

Subscriptions have become an increasingly common way to buy products and services online. The trend leans into today’s consumer preference for straight-to-your-door convenience while also getting a personalized experience and curated products – all at a lower cost. In the last several years, subscription businesses of all types have cropped up – from razors to meal kits and everything in between. The result? The e-commerce subscription market has grown by more than 100 percent year over year, with the largest retailers generating more than $2.6 billion in sales in 2016, up from $57 million in 2011 – a fivefold growth in just five years –  according to a 2018 report by McKinsey.

Subscriptions for digital goods have also gained significant popularity in the last decade with companies like Netflix, Spotify, Apple and Amazon offering unlimited streaming media for a monthly fee – Amazon being the exception, offering both digital and physical subscriptions. Netflix now has 139 million paying subscribers in 192 countries and is expected to pull in nearly $16 billion in revenue this year.

In the gaming world, major publishers have taken the same approach with subscriptions by letting players access premium games for a monthly fee. According to SuperData, Sony’s PlayStation is leading in subscription revenue, earning $143 million of the total $273 million generated by top publishers in Q3 of 2018 – the highest of any game subscription service. In the music world, the scales have tipped in favor of streaming with 255 million users globally who have paid subscription streaming accounts. The report also found that revenue from streaming music accounted for nearly half (47%) of the $19.1 billion in total global recorded music revenue in 2018.

The other side of the story

As with any business, however, there lies its own set of challenges. Under the subscription model, companies are primarily concerned with how to keep these paying subscribers around for longer, also known as mitigating churn. According to the McKinsey report, over one-third of consumers who sign up for a subscription service cancel in less than three months, and over half cancel within six, with some categories experiencing cancelation rates as high as 70%.

Marketing strategies like free trials, discounted first orders, gift with purchase, and compelling social media ads are great for attracting customers and getting them into the system for automatic enrollment, but retaining them after the promotional period is the tricky part. In addition to organic churn, companies now also have to contend with enhanced consumer protections like California’s Autorenewal Law (ARL) which “sets rigid rules about transparency for subscription-based business” and Mastercard’s latest protection policy which require merchants to gain cardholder approval before they start billing at the end of free trials compromising the revenue strategy long-held by subscription businesses.

Retention strategies like email marketing, promotions and discounts can be effective but there’s one strategy that many companies may be overlooking when it comes to increasing retention – payment optimization. Here are some ways your payments partners can help reduce churn and maximize your revenue:

1. Customer Acquisition

Getting a customer to complete the sign-up process is the first and most important step, so make the onboarding process as painless as possible. Minimize friction with easy sign-up forms, smooth checkout flows and offer a wide range of payment methods that align with how your customers want to pay. Including security badges on your payment page can also establish trust and drive more conversions.

Make sure your site is mobile-optimized and has a dynamic design for both smartphones and tablets to capture more mobile shoppers. Of all retail e-commerce sales in 2017, nearly 60% of revenue came through purchases made from a mobile device and that figure is projected to reach 72% by 2021, so be mobile-ready.

2. Account Updater Service

Cards are being reissued more frequently nowadays, especially in light of increasing data breaches and fraud, and your customer may not remember to update their information in your system when their new card arrives.

Checkout.com’s Account Updater service can reduce churn and maximize revenue by automatically updating these new cards for you. Checkout.com works directly with the major card networks to fetch the updated information and will automatically update your cards in our card vault so you don’t miss these recurring payments. It will also save you from having to reach out to your customers to collect the new information – an outreach that could risk you losing that customer altogether if they decide to cancel their service at that time.

3. Use Clear Descriptors

Consumers make so many transactions a month that it can be easy to forget what they bought weeks earlier, so make sure your business name matches what appears on their statement. When possible, include useful descriptions of the transaction like dates, time of the transaction, location, or any other details that will “remind” customer about their purchase to curb knee-jerk disputes.

For added measure, make your contact information available and easy to find. If the customer has questions about a charge, they can call you directly for clarification or arrange an exchange. This improves your chances of keeping the sale rather than having the customer dispute the charge with their credit card company and getting a refund – a double penalty for your business since you will have lost the sale and may also be penalized for the chargeback by your acquirer.

4. Use Proper MCC Classifications

Merchant Category Codes (MCC) are 4 digit numbers used by the payments industry to classify businesses by the type of goods or services they provide and are assigned to merchants by the acquirer based on codes provided by the card schemes (Visa, MasterCard, American Express and Discover) when a business first starts accepting these payment methods.

When an MCC code does not match the goods and services that you’re selling, you risk losing trust with your issuing banking which may result in lower authorization rates and lost sales. As an acquirer, Checkout.com works with merchants to ensure that the MCC codes assigned are suitable for your business model.

Businesses that sell multiple products or have shifted their business model should work closely with their acquirer to ensure that they have the right MCC codes assigned in order to maintain high authorization rates and avoid interruptions in service.

5. Use Visa Token Service (VTS)

Integration with tokenization services will streamline recurring payments and will help protect your customers against fraud.

With Visa Token Service, tokens can only be used for specific, intended scenarios and payments made using these tokens are considered more secure by the cards schemes and therefore have higher approval ratios than traditional cards. When generating a token, parameters such as the merchant name and device type can be set to help minimize the risk of fraudulent payments.

If a card expires or is lost or stolen, Visa has the ability to change the underlying card that the token represents which means it can be replaced and reconnected to the token without impacting the payments on it, helping to reduce missed payments. Checkout.com currently works with Visa Token Service and supports secure element tokens, device-based wallet tokens and card-on-file tokens.

6. Recurring Transactions

Everyone knows to flag recurring payments, but did you know that you may have better results with the previous transaction ID?  For Visa, it’s now mandatory in certain circumstances to pass the previous transaction ID in order to benefit from higher authorization rates. For Mastercard, there is no requirement to submit previous transaction ID, only proper recurring flagging. Make sure your PSP understands these scheme nuances to ensure proper setup and configuration to reduce both technical and customer-driven churn.

Whether you’re selling a digital or physical good, employing these payment tactics to your subscription payment processing can significantly improve your retention rates. To learn more about how Checkout.com can help your business, contact our team of payment experts today.

Keep up-to-date with all things payments

Written on Apr 25, 2019 by

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Lindsay Walker

SVP, Customer Success

Keep up-to-date with all things payments

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