Webinar recap: How to recover revenue you didn’t know you lost

Editor’s note: Comments have been edited for length and clarity.

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Driving top-line revenue growth is more difficult than ever, thanks to increased competition and sky-high customer acquisition costs. In response, savvy subscription brands are laser-focused on decreasing subscriber churn. 

However, many subscription brands don’t realize that the best way to solve this issue is by curbing the impact of passive churn due to failed payments. 

In a recent webinar, Butter CEO Vijay Menon sat down with Subscription Insider to share why churn due to failed payments is such a massive problem and ways businesses can mitigate the issue.

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What is passive churn?

There are two types of churn: active and passive. Active churn is when a subscriber cancels their recurring order on purpose. Passive churn–also known as involuntary churn or accidental churn–occurs when a legitimate payment transaction fails, causing the subscriber's recurring order to be canceled even though they still want the product or service. 

The impact of passive churn cannot be understated—accounting for up to 50% of all churn. What causes passive churn? For the majority, failed payments.

“Most people don't understand that the number-one cause of churn for recurring revenue or subscription businesses is payment failure,” Vijay said.

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Impact of payment failures

Butter’s internal data shows that the average subscription brand loses 12%+ of annual recurring revenue (in some cases up to 35%) to failed payments, representing hundreds of millions of dollars. 

“Solving failed payments is the best way to drive revenue growth,” Vijay said. “I say that because if you're a $100 million business, you probably have a minimum of $10 million in failed payments.”

While the most apparent outcome of failed payments is the loss of revenue and subscribers, there is a less understood yet crucial aspect of failed payments brands often overlook. Payment health.

Payments are more than a single point of failure, it's a process. The health of that process can greatly impact your payment success. As passive churn rates increase, Transaction Authorization Rates (TAR) can be negatively impacted, ultimately impacting your Merchant ID (MID) score. Banks and processors are more likely to scrutinize every transaction more closely, raising the bar for a successful payment transaction, potentially causing even more failures. Now both acquisition and retention efforts are impacted.

Simply put, failed payments steal your subscribers—and your revenue.

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How do failed payments happen?

Failed payments happen for numerous reasons, but the most common causes are technical issues, fraud, insufficient funds, an expired card, and incorrect information. 

What makes the world of failed payments complex is that there are 128  data points associated with each payment, and there are more than 2,000 unique error codes. Furthermore, error codes are often rolled up into a related generalized code. For instance, “generic decline” makes up about 40% of all error codes. As a result, the cause of a failed payment is often opaque (at best).

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How to solve failed payments

Recognizing the revenue opportunity failed payments offer, subscription brands typically use one of three strategies to solve–or attempt to solve–the problem. 

The woodpecker approach

The most common approach is to rerun failed transactions in a scheduled way—a set number of retries over specified dates and times, known as woodpecker (think of a woodpecker in a tree, hammering away to get to its lunch). This aggressive strategy doesn't account for the unique reasons why a payment fails and can potentially cause more harm than good. Over-retrying failed payments can negatively impact your subscriber experience, lead to increased costs (every retry comes with an associated fee), more fraud flags, and negative impacts across key payment health metrics, kickstarting the revenue-loss flywheel discussed earlier.

“What you need to do is bring nuance,” Vijay said. “You need to look at the reason why the payment failed. You need to ask, ‘Is this a legitimate user who's trying to pay me?’”

Dynamic decline handling

Strategic brands use dynamic decline handling to address payment failures. These brands have analyzed their failed payment data and implemented unique retry strategies across decline codes. For example, brands that use this approach might study all failed payments due to insufficient funds and determine that they should retry on Mondays and Tuesdays for weekend workers.

“This is the level I'd encourage brands to aim for when they first start addressing failed payments,” Vijay said.

Sophisticated machine learning

To claw back the most revenue, Vijay recommends subscription brands partner with a third-party solution like Butter with robust machine-learning capabilities. Collecting and parsing large amounts of subscriber and failed payment data is resource-intensive. A dedicated third party will have the resources and domain expertise to analyze data and implement bespoke retry strategies quickly. 

“If you really want to take a quick stab at fixing failed payments, try to do some of the dynamic decline handling,” Vijay said. “If you want an A plus on the test, use a machine-learning cloud platform.”

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For more insights, watch the Payments Teardown on-demand webinar or book your consult to see how much revenue growth you can see with Butter.

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