Dose #91: Millions Lost to Hidden Churn

Matt here with your weekly Subscription Prescription 💊

This week’s dose is all churn from failed payments. If you’re new to subscriptions, we’ll explain what makes payment processing complicated. For larger brands, we then dive deeper into the complexities and how you can manage them. There are three key components of fighting failed payments: at the point of capture, active churn, and hidden churn.

This week’s dose is distilled from an incredibly insightful interview on payment failure and recovery with Vijay Menon, the founder of Butter Payments. Listen to the full interview here:

Payment capture is one of the most critical parts of subscriptions. Getting that payment and having it processed successfully on each renewal is the lifeblood of your business.

Yes, we make great products. Customers do churn for a variety of reasons. We can’t have problems at the point of payment processing. But they do happen, creating involuntary, accidental, or hidden churn.

This dose is designed for two things. First, to give you a better understanding of the payments space. Second, I will arm you with some insights on how you can improve this. As businesses cross from a few million in annual revenue into seven and 8-figures, the cost of failure is millions of dollars in lost revenue.

Thank you to Vijay Menon the founder of Butter Payments for his interview and for educating me on this topic.

How Payments Gateways and Processors Work

Fraud prevention is typically how we think of payment failures. Someone suspect is attempting to run a card, it gets flagged and then fails. The potential bad actor stopped in their tracks.

The algorithms or methods to make this happen try to identify suspect behavior. The problem is that with subscription payments, you have a subset of people who have agreed to the transaction; it has successfully been processed at least once but still ends up declined.

Why does this happen? 

When a payment fails, your dunning system attempts to process the payment again. Think of this like a woodpecker - it didn’t work, but then tries and tries again to have it go through. Tap, tap, tap.

Sometimes this works. Someone may not have had funds loaded onto the card, or something happened at the company. A card needs to be updated.

The downside is that the woodpecker method can cost you a lot of money. Trying repeatedly when the bank or card has rejected the payment will drive down your payment profile, lowering your chances of future success across the board.

It doesn’t do anything to be more successful, like discovering why it was rejected or failed and changing how it processes. It either gets it from the over-and-over method, or it doesn’t.

Why Good Payments Fail

The complexity of payments is astounding.

Issuing banks across the globe have their own rules and regulations. Card companies have their own as well. Payment gateways have rules on top of that. All are designed to protect themselves and you from fraud.

One of the simple examples of why cards get declined comes down to timing:

Imagine someone in Florida bought something from your brand out of California. They made a purchase, and the card was processed successfully. In a month, you go to process again, but your automatic system processes orders at 10 pm. That’s midnight in Florida. Gets flagged as suspicious and denied.

Woodpecker method kicks in, and you try again at 10 pm two days later. Then again, and again. The customer still gets churned.

There are over 1,000 issuing banks across the world. They all have differences in what matters for fraud and for what they flag. The same thing goes for gateways and card companies.

Not to mention, some cards are debit versus credit, prepaid, or reloadable cards. A lot goes into this!

How You Can Fight Failed Payments

When you’re small with few subscriptions, this isn’t a problem to worry about. But as you grow past 1,000 subscriptions, involuntary churn starts to rear its ugly head.

There are three pieces to an effective process for fighting churn:

1. Upstream activity, which is how you collect payments

2. Active churn engagement, like reaching out before a credit card expires

3. Dynamic processing, like running cards at different times

Upstream activities are all about ensuring a clean payment process the first time, which usually means data. Thankfully, on Shopify, you’re getting a lot of information like zip codes and addresses at the point of payment capture. It may seem nice to skip all the info you could capture to drive a conversion, but skimping on that information may cause a failed payment now - or worse - in the future.

Active churn engagement is all about getting in front of problems. If a card is set to expire, you reach out ahead of time for an update. If a payment is declined because of the card expiration, you reach out to have it updated by the customer. Churnbuster is a good example of software that automates this.

The final piece is a bit tricky, and there are some things you can do yourself. You can spend time building dynamic rules for the different error codes you get back. For example, if the payment processor refuses to attempt the card, the woodpecker method will only worsen things.

This final piece is what brought Butter Payments to life. They’ve built an algorithm around the best times and processes to attempt payments. Butter can review your past 12 months of read receipts on payments to see what they could have saved for you.

Big Impact Over Time

Remember that a failed payment doesn’t just hurt you now; it hurts you over time. Every lost subscription payment is one that you won’t have next month or the month after.

Even more so, however, are the compounding externalities that come from processing payments the right way. The woodpecker approach means your payment profile just gets worse and worse, making it less likely you’ll get the benefit of the doubt on payments that are in the gray area.

Getting more efficient at processing failed payments will create a compounding positive effect. More and more payments will be processed successfully, including those that might not have been in the past.

Payments are tricky, and there’s a lot to be done, but you don’t have to do it alone!

That’s it for this week’s dose. If you have any questions, let me know, or I’ll be happy to connect you with Vijay and his team. Stay tuned for Dose #92 next Tuesday.

- Matt Holman 🩺

The Subscription Doc