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Deep Dive: How to Prevent Involuntary Churn
The ultimate guide to understanding and preventing churn from payment failures.
👋 Hey, I’m Ben! I write monthly deep dives on how to grow products and companies. I go deep on growth strategies, how to build products users love, and what actionable lessons can be learned from what best-in-class companies are doing.
You could have the most incredible product in the world and you will still lose customers over time. The reality is that customers leave for any number of reasons and not all of them are in your control. It can’t be eliminated, but it can be mitigated
Businesses obviously don’t want their users to stop using their products so they closely monitor how many users do leave through a metric called churn. Churn is typically represented as a percentage of users who cancel their membership within a given period of time and is calculated via a simple formula:
churn rate = (users at beginning of period - users at end of period) / users at the beginning of period
Typical churn rates vary widely based on industry and type of business but generally sit between 5-10% for consumer subscription businesses (revenue retention data from Profitwell). That’s a lot of users leaving!
Ok, so I know how many people are leaving. What do I do about it?
When trying to understand what is causing the churn for your business, it’s important to know where to look. Churn can be broken down into two primary buckets: voluntary churn and involuntary churn.
Voluntary churn occurs when a customer decides to stop using a product or service. This is a user intentionally going into your app and canceling, writing into your support team and asking to be canceled, etc. Voluntary churn represents roughly 75% of churn according to a study done by Recurly. There are a myriad of ways to reduce voluntary churn, but I’ll get into those in a separate article.
Involuntary churn, sometimes referred to as passive churn or delinquent churn, is when a member churns for any reason other than their actively seeking out a cancellation. This is almost exclusively caused by payment failures. The aforementioned Recurly study found that involuntary churn represents 25% of churn on average. More people fail payments than you’d expect!
All churn is difficult to prevent, but involuntary churn is particularly tricky to solve for. The remainder of this blog post focuses on involuntary churn, so read on if you want to learn about the causes and how to mitigate them!
But why are people involuntarily churning?
Involuntary churn usually happens by accident. Failing a payment could happen for any number of reasons:
The user doesn’t have a payment method on file.
The user’s card on file has expired.
The user got a new credit card.
The user’s card has insufficient funds.
The user’s card was declined for some other reason.
When digging into involuntary churn within your business it’s helpful to understand the primary drivers for your user base. Examples of ways that you could cut your data to better understand your drivers include:
By failure message - what is the failure reason the bank gave for why the payment failed?
By currency - is there a particular currency that has lower success rates for you than others?
By payment method - Is there a particular payment method type that has lower success rates? For example, users with a bank account tied to their subscription are less likely to fail a payment than someone with a card tied to their subscription.
By funding type - do members that use certain types of cards (debit, credit, prepaid) have payments succeed at different rates?
By user cohort - does the plan that someone signed up on make a difference? Maybe your $200 elite tier members fail payments more often than your $49 basic tier due to the higher price point.
Understanding and monitoring the primary drivers of involuntary churn within your business can help you identify anomalies that should be investigated and prioritize churn-prevention strategies appropriately.
What should I be doing to prevent involuntary churn?
Knowing that your users are involuntarily churning and knowing what to do to stop it are two vastly different things. In this section I’ll introduce a number of strategies to reduce involuntary churn that will help you get yours under control.
Approach involuntary churn with a user journey mindset. There are three primary steps when it comes to a payment failure user journey:
Before a user fails a payment
After a user fails a payment
After a user has churned
By targeting and strategizing around each of these steps individually you can significantly lower your involuntary churn. I will break down the methods you can use to reduce payment failures at each of the stages in detail below.
How to prevent users from failing payments
Most companies only recover 30% of customers who fail a payment (data from Profitwell). Considering how low that resolution rate is, it’s important to take proactive steps to prevent users from ever having the opportunity to fail a payment.
Use a payment processor that supports automatic card updates. Remember that time your old credit card expired and your bank sent you a new one in the mail? That could potentially cause payment issues for subscriptions, but there are certain tools you can use that have got you covered; these tools partner with card networks to automatically update a customer’s saved card details whenever a new one is issued to them. Stripe is an example of a payments platform that supports this and you can read their documentation on it here. Other payments solutions like Recurly and Braintree offer this functionality as well.
Proactively identify users that will likely have a payment issue and inform them ahead of time in your app ONLY. You have users’ payment information as well as details on when they will be billed next; by combining the two you can take proactive action to notify users that have an upcoming bill but don’t have a payment method on file or have one that is expired or expiring before that bill. Note that these types of proactive comms should only occur within your application; notifying this cohort via email, SMS, or other channels could drive higher levels of voluntary churn. At WHOOP we built a series of alert states into the homepage of the app that proactively called out when a member had a bill within the next 30 days and we knew they would fail that payment if they didn’t proactively take action. These notifications were highly successful in preventing the members that saw them from failing payments.
Choose the payment methods you support intentionally. Not all payment methods are created equally. Prepaid cards, for example, have significantly higher payment failure rates. Depending on your business model, you may want to consider preventing your customers from using them. Alternatively, direct connections to bank accounts have extremely low payment failure rates and you would benefit from your users being able to pay that way. Additionally, it’s important to consider the nuances in payment method preferences across regions. The US is largely a card economy but that’s not true of European markets where alternatives like PayPal, Sofort, and other methods are more popular. Allowing customers to pay the way they want to is helpful in preventing payment issues from ever occurring.
Validate cards when a user updates them in the system. When a user updates their payment details you naturally want to validate that the details contain real card information. Beyond standard validations, you can also do a $1 temporary hold charge to confirm that the card works before saving it to their account. This can help you prevent any unexpected issues and can help prevent fraudulent activity.
Require users to have a payment method on file. Some companies choose to require all active members keep a payment method on file at all times. This means that users are not able to remove their payment method without first canceling their subscription which has implications on the user experience and user perception of your brand. That said, payment failures are tangibly reduced by ensuring that users have a way to pay when their next bill rolls around.
How to resolve failed payments when they do occur (the dunning window)
Once a member has failed a payment there is a period referred to as the “dunning window,” in which you have a window of time to recapture that payment before you cancel the member’s subscriptions. Traditionally dunning windows are two weeks long and there are various strategies used within them to attempt to get the failed payment to succeed. The below strategies help you maximize your payment recapture rate during your dunning window.
Use automatic retries to recapture the failed payment. Most modern-day payment processors support automatic payment retries once a payment fails. These tools leverage machine learning models to attempt to reprocess a failed payment at optimal times where there is a higher likelihood they will succeed. Usually a payment will be retried around five times during the dunning window. Using Stripe as an example again, they support smart retries and have documentation on it here.
Make the user aware they failed a payment. Use dunning communication methods and strategies to ensure that users are aware that they have an outstanding failed payment and will lose access to your service if they don’t resolve it. These communications should come via multiple channels including push notifications, in-app notifications, emails, and SMS messages. You should also send a series of these comms throughout the dunning window, not just one set when the initial payment fails. Test different messaging within these comms and find what works best for you, or partner with a company like Profitwell that optimizes your dunning comms timing, messaging, and more for you. You can also take additional methods like using sticky in-app alerts (vs. one-time pop ups) when someone is in a failed payment step. We implemented this at WHOOP and saw a significant impact from it.
Reduce friction in resolving payment failures. Resolving a payment failure is generally a low-intent action for your users. The majority of your users that attempt to fix a failed payment will balk at the first sign of a hassle when it comes to updating their payment method. Make sure that the process to do so is simple, seamless, and intuitive. For example, your dunning comms should auto-authenticate a user and allow them to input their card information. Your in-app payment method updating flow should be native rather than opening an embedded web view. The native alerts within your app should be clickable (and designed so the user knows they are clickable) and should bring them directly to the update payment method screen. When it comes to fixing payment issues, the key is to make it easy and fast.
What should I do with the customers that churned due to a payment failure?
Well, that’s up to you. It stands to reason that these users aren’t good users of your product and that it’s not worth your time to pursue them to recapture them. That said, you can find success in offering them a re-engagement offer to come back to your product. You can set up automated workflows that target involuntary churners and offer them some percentage off your service as a one-time “we’re sad to see you go” type of offer.
You can also enter these members into the campaign funnels you use to retarget other canceled members. These types of campaigns tend to highlight new feature releases and target the users with personalized offers to come back to the product. Partner with your customer relationship management marketing team to help design these campaign funnels.
Building a business is hard. Building a business while having churn problems is harder. Considering involuntary churn represents 25% of churn on average, taking the right steps to reduce it can have a tangible impact on your business. If you follow the steps outlined in this post, you should be able to make a substantial dent in your involuntary churn numbers. Good luck and thanks for reading!
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