Subscriptions-Formula
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Subscriptions: A Formula for Creating a Cash Cow

By: Jason Nyhus

Last modified: December 7, 2017


New study shows companies place more emphasis on winning new customers rather than keeping existing ones, leaving revenue on the table

This originally appeared in Direct Marketing Magazine

The growing influence of online subscription masters like Netflix – and many other new comers with products ranging from baby diapers to snowboards and luxury cars – are driving a clear shift in today’s approach to ecommerce and monetization. Traditional buy-to-own purchase options are taking a back seat to pay-for-access models like subscriptions. For consumers, subscriptions are more flexible and convenient. For most companies, however, subscriptions are more challenging and complicated. When not managed properly, subscriber turnover or churn can a leave a business open to risk and revenue on the table.

The subscription facts

An early 2017 Forrester Consulting study commissioned by Digital River evaluated the impact of mismanaged customer churn on subscription-based businesses. The results were clear; for long-term profitability, companies must maximize subscription renewals. The study surveyed 204 professionals in North America and Europe who were responsible for their company’s subscription and recurring payments customer retention strategy. Underscoring the importance of strong payment renewal processes, companies surveyed reported that, on average, 62 percent of their subscription revenue comes from renewals. Yet the average organization lost more than one-third of their customers to churn. And of the customers lost to churn, 34 percent left involuntarily, or not by choice.

The Forrester study suggests that businesses have put a greater emphasis on efforts that produce new organic sign-ups and are missing the multiplying negative impact involuntary churn can have on their business growth, profitability and innovation efforts. The fact is, there is very good motivation to address this issue of churn: losing customers is expensive. Forrester’s findings state that 91 percent of those surveyed reported that it costs them “at least twice as much to acquire a new customer as it does to keep an existing one.”  This figure says it all – for subscription-based businesses who want to maximize revenue opportunities, it is time to devote time and attention to actively managing down involuntary churn.

Voluntary and involuntary churn

Churn – voluntary or involuntary – happens when customers drop out of a subscription service for any reason. Voluntary churn refers to those customers who choose proactively to end their service.  Involuntary churn largely occurs at the moment of subscription renewal, leading to unexpected service disruption because of profile changes or processing issues like an expired credit card, a declined charge, or a changed mailing address. Whatever the reason, involuntary churn is can be prevented with some planning.

Churn impacts more than just profit

Loss of revenue is an obvious outcome of churn, but there is a hidden cost as well: stifled innovation. According to the Forrester study, more than one-third of respondents blamed fear of causing churn for their reluctance to spearhead new pricing and packaging models, putting them at a competitive disadvantage in a rapidly evolving industry.

The study also showed that nearly 50 percent of the survey’s respondents reported that increases in chargeback rates can result in missed revenue forecasts. And, without proper renewal management, costs to service at-risk customers can become increasingly more burdensome and impact profits.

Top culprits behind involuntary churn

Involuntary churn is most often the result of technology and communication failures, which can be minimized with the right tools and strategy. According to the study, recurring payment failures is one of the most common causes of lost renewals—whether by insufficient funds, credit card limits or credit card changes. Another major reason for attrition: relying too heavily on automated renewal methods. While convenient, the study shows that without sophisticated management, renewal problems can surface when customers change or close direct debit accounts, when a card expires or even when the card brand changes.

The winning formula for a cash cow

The results from this study suggest that managing a subscription model requires firms to undergo a fundamental shift of focus: from customer acquisition to retention and from selling products to selling experiences. Managing both voluntary and involuntary churn may seem difficult to influence, but it is certainly not impossible when you take a proactive approach.  The first step: don’t accept that involuntary churn is simply a cost of doing business. Organizations need to radically change their mindset from assuming involuntary churn will occur, to making a concerted effort to nurture the relationship with the customer from the initial payment moment and thereafter.

Second, adopt a holistic approach to subscriber retention, using the right tools and employing the right expertise to help examine the entire process, end to end, for areas that need improvement. Consider combining customer and payments data for better decision making and communications and use a full-service, integrated payments solution to ensure a seamless payment experience from the beginning to the end of the customer lifecycle. Working with a single, integrated solutions provider to manage online subscriptions is especially useful for new companies that are launching an ecommerce program for the first time, need help expanding into new markets but lack internal resources, are constrained on time, or have outdated or incompatible technology.

The combination of the right mindset with the right tool set will help subscription-based businesses minimize churn – both voluntary AND involuntary. It also can ensure money isn’t left on the table, profit goals can be achieved and opportunities to innovate are maximized.