By Gen Furukawa
Introduction To Delinquent Churn
Involuntary churn, also referred to as Delinquent Churn, is when customers end their subscription due to failed payments. The customer does not actually make the active decision to cancel their subscription, hence the “involuntary” nature of the churn. Instead, the churn occurs due to failed payments and their subscription is canceled after repeated attempts to receive payment. The failed payments can be caused by expired credit card information, maxed out credit limits, fraud, or more.
Involuntary churn is a problem that plagues many subscription businesses, and the impact can be significant. According to payment processor Cardless, SaaS companies lose 1-4% of customers due to delinquent churn every single month. And ProfitWell has found that up to 20%-40% of SaaS customer churn is due to delinquent churn.
That is a significant chunk of business being lost due to failed payments!
And when incorporating the compounding impact of that customer churn has on recurring revenue, a 1% improvement in churn can have up to a 10% improvement on recurring revenue.
There is no doubt that delinquent churn is a problem that can undermine the success of your recurring subscription business. However, the good news is that this involuntary churn can be addressed and remedied with the proper strategies.
Ever heard the proverb, “The best time to plant a tree was 20 years ago. The second best time is today”?
You can be assured that the same concept applies to understanding and addressing delinquent churn! If you don’t already have a system in place to reduce these failed payments, then now is the time to get it lined up.
The problem, and solution, of getting customers to keep updated payment information is relatively straightforward, and the upside is tremendous: reduced churn, increased recurring revenue, and increased customer lifetime value. All just by setting up systems to identify, prevent, and fix the problem of declined payment.
Let’s dive in to learn more about delinquent churn and how it can be remedied!
What Causes Delinquent Churn?
Credit card transactions can fail for a variety of reasons. Here are a few of the most common reasons:
- Expired cards. Credit cards expire every few years, so every month there is a portion of cards that are set to expire. If the credit card information is not updated (by your customer or the credit card processor like Stripe), then this will likely lead to delinquent churn. Lost customers, lost revenue, unpleasant situation.
- Limit failures: All credit cards have a maximum limit that can be spent on the card. Of course the limits vary, but once the spending limit is reached, then the card will fail when used for additional transactions.
- Fraudulent cards: Credit card fraud is a problem.There are fraud prevention programs in place, though they are not perfect and can sometimes flag charges as fraudulent, even though they should go through. These charges end up being declined transactions.
How Do You Reduce Delinquent Churn?
Dunning is the act of repeatedly requesting payment for unpaid debts. It comes from a 17th century term, Dun, but it may as well be an acronym for Delinquent User Notification.
Your users are not able to pay due to incorrect card card information, so your top priority is to get that resolved. Your dunning process is how you communicate with customers to get paid.
The interesting thing about dealing with delinquent churn is that users may be unaware that their payment is not going through, so it is best to start by giving the benefit of the doubt and simply ask for updated information, and increase the urgency if the issue is not resolved after repeated outreaches.
The success of the dunning management system can ultimately be measured by the number of customers and revenue recovered.
A typical Dunning Process will include the following:
For customers who have credit cards that are expiring, these notifications are a proactive way to urge the customer to update their credit card information before the card is actually expired.
This can be a series of emails, set to begin a pre-determined number of days before the expiration (say 30 or 60 days). The customer may not open or act on the first email, so sending a series of pre-dunning emails can be effective in ultimately getting the updated information that you need.
Here is an example from Lyft that maintains a friendly and simple message to update payment information.
It should be noted though that these may be unnecessary, as it is now a standard feature in payment processors (like Stripe and Braintree) to automatically update credit card information from the credit card companies. So there’s a good chance that the notification is unnecessary, as payment would automatically update anyway.
Automated Retries and Payment Failure Notification
If the card information was not updated, and the transaction failed, the dunning system can automatically retry the transaction a predetermined number of times.
At the same time, the customer is notified of the failed payment and that it will be retried in the future.
Reattempting the payment can lead to successful transactions (bank processes, false positives in fraud detection, and credit limits could all have lead to the initial fail).
You can set up the frequency of retries, and the maximum number of retries. According to ChurnBuster, about 20% of failed transactions will actually be successfully charged within the first 5 days after failure.
Here is how Spotify notifies customers of the failed transaction and retry attempts:
KISSmetrics provides a good example of a failed payment notice in the following email. They offer a link for the customer to update this on their own, a phone number in the footer, and also the option to update via email. And this is all personalized by an actual human (nice to meet you, Nick Chmura), instead of being sent from an anonymous Support email address:
Moreover, a high volume of failed transactions can flag your account for potential fraud from the credit card network, which can ultimately lead to your account being shut down. This means that you wouldn’t be able to process payments, which is not a scenario anyone wants to be in.
While transactions are not going through, the dunning system will send notifications to the customer to urge them to update their payment information. These can increase in urgency and include mention of unpaid balances and the consequence of a canceled account.
The New York Times has a great example of post-dunning emails to drive user action to update payment information. The email is a great example of getting the customer to understand and act on the problem.
- Explains how the payment failed – they remind the user that this could be due to a new card from the bank or an expired card.
- Several options for resolving the payment issue – the user can update their information via the website link or phone, whichever is preferable and easier.
- Opportunity cost of what – this email is probably towards the end of the dunning campaign to get user credit card info and unpaid bills. In an effort to reinforce the value of the product and what would be lost if the account were to be canceled: “the world’s finest journalism, in-depth articles, innovative videos, and multimedia”.
Canceling An Account
At some point, if your customer still has not paid or updated payment information after repeated attempts and emails, then you may have to pull the plug and cancel the subscription. No free lunch for them.
Canceling a customer’s account is a challenge, as it makes it much harder to reacquire and onboard the customer again. When deciding which accounts to cancel, ideally you are able to have greater leniency with customers who have higher lifetime value, and instead start by canceling the customers that generate less revenue for you.
The notification that the account is scheduled to be deleted is a final call to action.
The HelpScout example below is direct and to the point:
Why Is Dunning So Important?
As you may expect, it gets increasingly harder to recover failed payments and get updated customer payment information as more time lapses from the first failed payment. Thus, it is critical to be proactive in reducing the likelihood of a failed payment in the first place.
It is much easier to remind an existing customer of the value that you deliver, instead of convincing and reselling a former customer to input payment information again. In short, it is an easier ask, and quicker task, to get updated information before the credit card expires.
Here are a few reasons that setting up a dunning management system is so important and can grow revenue and profits:
These days there a variety of automated dunning management systems, from ProfitWell to Baremetrics to Churn Buster and others. These are often automated, set-it-and-forget-it systems.
They flag payments that have upcoming expiring credit cards, send pre and post-dunning messages to customers, and help you recover any potential delinquent churn.
The beauty of these apps is that it removes the tedious manual work of reviewing, tracking, and recovering these failed payments. The dunning management tool handles all of this so that you and your team have more time to grow the business instead of focusing on chasing down failed payments.
Make More Money
Technically, you aren’t making more money as you recover payments, you are just getting paid money that you earned. However, this is effectively incremental revenue coming in, as delinquent churn means lost customers and lost revenue.
The dunning management tool can help you get in front of customers who have expiring credit cards, often something that they are unaware of until they receive a notification from you.
Retain More Customers
You have already gone through the harder (and more expensive) challenge of acquiring a new customer. We all know it’s not just harder to acquire new customers, it can also be significantly more expensive too–from 5-25 times more expensive, according to the Harvard Business Review.
Reducing delinquent churn therefore makes a significant impact to customer retention that has lasting implications on revenue, retention, and profitability.
Communication Strategies To Keep In Mind
Getting the dunning process and notifications perfect is an iterative game that can take some time. What is the best email to drive action? What is the subject line that has the highest open rate?
You will want to be thoughtful about your dunning strategy, as the process ultimately drives the customer to reconsider how valuable your product is, and whether it is worth signing up for again.
Moreover, you are asking, or perhaps telling, your customer to pay you your money. So you do want to be sensitive in messaging and not create an aggressive or off-putting experience that leads to a poor customer experience.
Send Great Emails: Capture The Opportunity To Sell
Your emails here should be short, and to the point. They are essentially transactional emails: “update your payment info…..please!” However, these are also opportunities to re-engage your leads and remind them of the value of your product.
This Mailflow example pulls the direct usage statistics into the email, which makes underscores the value that the product is currently delivering. Assuming that the customer was actively using Mailflow in their business, the 6 campaigns and 13 active emails could be a negative impact to the business that is offset by simply updating payment information.
Simplicity is the name of the game here. You want specific Calls To Action, and an easy form to update their information.
The customer should have no chance to get distracted or confused when updating their payment information.
Some things that can help:
- A mobile responsive page – These days, everything should be created to be mobile-friendly.
- No log in required – if you are using an automated dunning service like Churn Buster, then you can send users to a branded, secure page that does not require any log in when updating payment information. This makes updating far easier, particularly when the user is on a mobile device and may not have log in credentials handy.
- Secure Page – It goes without saying that security, particularly when handling credit card payment, is of utmost importance.
Optinmonster has a straightforward option:
In App Notifications
Sometimes emails are just not an effective way to get in touch with someone. So how can you communicate with customers?
In app notifications are a good option here (assuming that they are using your product, of course!). With many product analytics tools today (like Mixpanel or Intercom) you can send event-based or segmented messages to your customers, with a link to their Billing Settings so that they can update payment information immediately.
This is an unobtrusive way to communicate with customers, effective both before a card has expired and afterwards as well.
If you have not solidified a process to reduce delinquent churn, you have a simple opportunity in front of you to improve customer retention, grow recurring revenue, and improve profits (remember it’s far cheaper to retain a customer than acquire a new customer).
Failed credit card payments can be a painful thorn in the side of any subscription business, but the remedy can be very straight forward.
The ideal strategy for reducing delinquent churn is to take a holistic approach: communicate with customers before and after a card transaction fails, and across different channels (like email, in app, phone, in person if it makes sense).
And ideally, your product has proven its value and it have proven yourself and your dunning emails simply become transactional emails that remind the customer why they love your product, and why though should continue paying for it.