SaaS Involuntary Churn 101: What it Is, How it Hurts Businesses, and How to Reduce it
SaaS churn can have an extremely negative effect on your business and your growth plans.
When customers leave, downgrade or allow their renewal to lapse, your company loses money. Some estimates state that more than $136 billion in revenue is lost every year as a result of avoidable churn.
Churn is unavoidable, but in order to meet your revenue goals and growth targets, you should try to keep your churn rate as low as possible. The average benchmark for SaaS companies to follow is a churn rate of around 5-7% annually, or 1% every month. Early-stage SaaS companies may have higher churn that will improve over time (around 3-5% churn every month, or 10-15% in the first year), depending on your industry.
When evaluating churn in your business, it's important to understand how much of your churn is voluntary or involuntary. Churn refers to customers who stop paying for a service. Involuntary churn occurs when subscribers churn without intending to stop using the service. Whereas voluntary churn benchmarks are around the 4% mark, your involuntary churn rate shouldn't be higher than 1.5% because it's largely avoidable. In reality, it's often a much bigger problem.
One study by research group Forrester indicated that involuntary churn might even account for as much as 34% of a company's overall churn rate. Even a successful business can't afford to lose money unnecessarily. Unlike voluntary churn, you can determine the reason why a payment failed and can rectify it more easily.
The Difference Between Voluntary Churn vs. Involuntary Churn
There are many reasons why customers churn. Sometimes the pricing is outside of their budget, and sometimes the software just isn't a good fit or lacks a few of the features the customer is looking for. Voluntary churn is the purposeful cancellation of a subscription due to these underlying issues, i.e., when a customer actively decides to cancel their account because they are dissatisfied with your product or service.
There isn't a lot you can do to retain those customers, but you learn from the voluntary churn and make adjustments. If customers churn because of poor customer service, you can upskill your staff or introduce a self-service helpdesk. If your customers simply don't find the product useful or churn because they feel it's too expensive, you can adjust your pricing strategy or your marketing strategy to attract customers that are a better fit for your offering.
Involuntary churn or passive churn, on the other hand, occurs because of payment failures, which leads to their subscription being canceled. Failed payments mean that you lose your customers as well as the recurring revenue they may have brought to your business for months or years to come. There are a number of reasons why payments fail, including customers whose cards have expired or who failed to update their billing information, soft declines when cards max out, and hard declines when cards are reported lost or stolen. Involuntary churn not only has a negative impact on your revenue but on your customer relationships as customers have to deal with the consequences and hassle of losing access to your services.
While you can't always avoid voluntary churn, you can almost always avoid or rectify involuntary churn. In fact, when you successfully reduce involuntary churn, you can improve a number of key SaaS business metrics, including your customer lifetime value (LTV), your customer acquisition costs, customer retention as well as monthly recurring revenue.
Reasons For Involuntary Churn (and How to Address Them)
Subscription payments carry a high risk for churn because the payment information that is captured when customers sign up for the first time is held over the entire duration of the subscription. With every consecutive renewal, the payment has a risk of failure if the customers' details aren't kept up to date.
This can wreak havoc on SaaS companies that rely on renewals for 62% of subscription revenue, which is why it's in their best interest to address involuntary churn. Taking just a few additional measures and steps can reduce involuntary churn and improve subscription management and customer satisfaction.
Declines usually fall into one of two categories: hard and soft declines. Soft declines refer to temporary authorization failures that may be successful when payment is retried. These declines are often caused by insufficient funds when credit card limits are exceeded, when cards expire, or when payment processing times out. Cards usually expire within 36 months or because of upgrades due to new technologies (EMC, chip cards). Your customer may simply forget to update their details when they reach the expiration date or forget to update their new card number.
Unless they receive a fair warning, they may not even realize that their subscription is at risk.
Hard declines, on the other hand, are not always recoverable and shouldn't be retried immediately. Only about 10-20% of card declines are hard declines. Hard declines may be due to stolen or lost credit cards, invalid credit card data, or closed accounts. Informing the customer about the decline gives them the opportunity to select a different payment method.
How to prevent and/or reduce involuntary churn due to payment failures
It's clear that businesses should make every effort to prevent failed payments in order to reduce involuntary churn and maintain customer retention rates. Making sure that your client's payment information is up to date and that your payment processing partner is able to deploy automatic retries can already help businesses realize a significant improvement.
Automation capabilities have evolved significantly, including the recent addition of AI-based algorithms that can automatically update payment card information or use alternative cards to use if the payment fails. If these algorithms are designed and optimized correctly, a SaaS business can recover a lot of failed payments and reduce involuntary churn in the business. Customers can also send automatic notifications before their credit cards expire, e.g., by setting up notifications through a payment processing company to let customers know two weeks in advance that their cards are approaching their expiration date.
Companies can prevent payment failures by:
- Sending pre-dunning emails to customers to remind customers that their card details are going to expire soon and that they are at risk of losing access to their account;
- Setting up in-app or website push notifications reminding customers to update their payment methods;
- Use payment gateways like Stripe or Braintree and credit card issuers like Visa and Mastercard to update the cards in your system without customer intervention;
- Using a webhook to display card/account updater information on your website so your customers don't need to go through extra effort to update their payment details;
- Looking at backup payment processors to ensure smooth functioning of your primary processor fails for any reason;
- Using an intuitive and easy-to-use billing system that makes it easy for a loyal customer to settle their account on time;
- Flag payments on your payment gateway as recurring so that multiple charges on the same payment method aren't flagged as being suspicious. This can prevent payment failures and won't hold up your revenue unnecessarily.
Many SaaS businesses make the mistake of only sending a single message or email when a payment fails. Instead, try sending multiple dunning emails. Remember, every email you send is another opportunity to recover lost revenue. If you send customers five emails informing them that their payment has failed, and they still don't respond, you can safely assume that your customer has churned because they simply don't want to use your product anymore.
How to reduce hard vs. soft declines
Retries can often fix the issues that lead to hard or soft declines. You should segment your retry cycle for soft declines that occur as a result of temporary problems with gateways, payment processing issues, or network issues. Soft decline payment failures should be retried immediately.
Hard declines are harder to manage. If a payment fails due to insufficient funds, stolen cards, or other complex issues, it's best to retry the hard decline after two weeks or a month, depending on the size of the payment. It's also a good idea to notify your client of the reason for the decline so that they can possibly use a different payment method, especially if you've run into permanent authorization failures due to legislative restrictions. In countries like Brazil, for example, customers can't use their local cards to make international payments. This is yet another reason why subscription businesses should try to include as many payment methods as possible to prevent lost revenue.
Bear in mind that most clients won't be aware that their payment has failed until they lose access to your platform altogether. Very few SaaS companies will cut off a client immediately when a payment fails; it's a good idea to give a client a grace period while you retry their card. Setting up paywalls or in-app messages that let them know that payments are overdue when they login to your solution is a great way of bringing it to your customer's attention.
Analytics can be extremely helpful at this stage as well. Data from your payment gateway can reveal the best time to retry during the day or night. Nighttime payments tend to have a lower success rate, for example. You can't improve the situation if you can't determine what is going wrong, which is why transaction data and analytics can give you clear visibility into the transaction performance issues that are leading to failed payments and involuntary churn.
Sometimes your best defense against voluntary and involuntary churn is your customer relationships. Making contact when things go wrong, ensuring that they realize the day-to-day value of your product, and making sure that it's easy and convenient to make payments are part of that process. Make sure that you actively reach out to clients to find out why they churned and how you can correct the situation. This gives your subscription business an opportunity to improve the customer experience or product for at-risk customers and existing customers alike.
Using an Automated Payment Collection Service
Sometimes subscription services simply don't have the capacity to track down delinquent customers and reduce churn, and they may not even be aware of the methods their payment providers or the credit card companies they work with have to offer. An automated payment collection service can reduce involuntary churn rates without any manual input on your part.
Your automated payment partner will immediately be alerted when a customer churns because of expired credit cards, outdated payment information, or glitches during the payment process so they can address it quickly and efficiently. They can let customers know when problems are encountered, ask questions and help collect lost revenue.
Churn is part and parcel of every subscription business, but there's no reason to lose more revenue (and customers) than you need to. Reducing involuntary churn starts with addressing failed recurring payments in your business.
If you would like to know more about combatting involuntary churn in your business, speak to Subcovery. Our automated failed payment recovery system can secure up to 10% of your MRR that is currently at risk due to payment failures.