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Reduce Failed Payments for Your Subscription Business

How to Reduce Failed Payments for Your Subscription Business

Customer Service 12 min read

A large number of SaaS startups depend on subscription renewals to keep their business running and make a profit over a period of time. When running a subscription business, your goal is to generate profit in the long term with a steady amount of money that comes in every month.

Customer churn is a sad reality for a big number of subscription businesses, and a lot of times it happens due to failed payments. To prevent this, you need to analyze your company’s failed payment cycle and reduce failed payments as much as possible.

What are the failed payments? What are the types of failed payments?

An orange question mark drawn on a blackboard

Payment failures range from 5% to 18% across different industries, averaging at 13%. 

Failed payments occur when a customer is willing to complete a transaction but isn’t able to so due to a number of reasons. Even though none of these reasons guarantees that the customer will never settle their payment, it is still a huge inconvenience and results in involuntary churn.

But what are the reasons for failed payments?

You need to be aware of all the different reasons for failed payments, why they occur so you can know how to solve this issue.

Insufficient funds

If a customer doesn’t have enough money in their bank account, the automatic payment won’t be able to go through. The solution for this is to contact your customer and ask them to deposit more funds to their bank account so you can re-bill them and fix the issue.

Incorrect account details

It’s a common occurrence for a customer or a member of your staff to submit incorrect account details that will lead to a failed payment. This issue can be solved by updating the account details with correct information.

Closed account

Sometimes customers close their bank accounts without giving you their new and updated account information. This will result in the bank rejecting the transaction because the account you requested payment form is non-existent.  

When this happens, contact your customer and ask for details from their new account.

Expired credit card

Did you know that the failure to renew a credit card accounts for approximately one-third of failed payments?

All credit cards have an expiration date, which is usually three years. After they expire, you can’t withdraw money from them. If a customer’s credit card expires, the solution to the problem once again is to contact them and ask them to resolve the issue.

Not holding authority

For every recurring payment cycle, the customer needs to give authority to the bank to authorize these payments. For you to be able to perform a transaction with the payment information your customer has provided, your company needs to be authorized with the company’s bank or the credit card issuer.

Before any customer signs up for your service and agrees to recurring payments, ask them for authorization.

Bank reversal

Banks have the authority to reverse a payment if they suspect a transaction isn’t authorized. If this happens, contact the customer’s bank and ask them what their reasoning is for the reversal. You also need to prepare proof that you have authorization so you can solve the issue as soon as possible.

How involuntary churn can silently kill your subscription businesses

A chalkboard with the words who, what, when, where, why, and how

Failed payments often lead to involuntary churn, which is a churn that the customer hasn’t caused intentionally and probably doesn’t even know about. Involuntary churn is the silent killer of subscription businesses because of the three reasons listed below.

It will probably ruin your unit economics

Your unit economics ratio enables the growth of your company, but only if it’s stable enough. The ratio is measured between the lifetime value (LTV) of each customer and their customer acquisition cost (CAC). For a company to be successful, this ratio needs to be 3:1.

If you don’t find a way to reduce failed payments, this ratio will quickly be distorted. One failed payment or involuntary churn won’t destroy the unit economics, but when they start piling up, you will face a serious problem.

Your customers will lose trust in your company

There is nothing more important for a business than building trust with their customers, and that trust can be destroyed due to involuntary churn. If customers get locked out of their accounts because of a failed payment and involuntary churn, they will probably be frustrated with your company.

Customers expect you to resolve issues that can lead to involuntary churn and reduce failed payments before they actually occur.

It’s omnipresent

Involuntary churn is omnipresent among subscription businesses and you can never be sure where it will come from. Even though some companies believe that their least engaged customers are to blame for involuntary churn, this is just a misconception.

All the reasons for failed payments we’ve mentioned result in involuntary churn, and they can happen to anyone, even to your loyal customers. Since you don’t know where it will come from, the best you can do is keep an eye on it and reduce failed payments whenever you can.

Tactic 1 – Preempt the churn

A stop sign that says "Stop waisting time"

One of the best tactics you can use to reduce payments is to preempt the churn and stop it from happening. If you keep a close eye on your user’s credit cards before payment is due, you can anticipate when credit card related churn will happen.

While some payment platforms communicate with card issuers to update the users’ card details automatically before they expire, some don’t. That is why you need to keep track of these expiration dates yourself and preempt the churn by staying in touch with your customers.

There are two ways you can do this:

  • use in-app notifications
  • send pre-dunning emails

Use in-app messages

If you have an app for your SaaS business, it can have a lot of benefits and also a number of different uses. One of those uses can be to engage your users related to their billing and card details. It’s best to do this while they’re engaging with your product.

When users receive an in-app message or notification that tells them their card details need to be updated or changed, they will probably act on the request right away. Just make sure to also give them the option to update their details in-app as well instead of redirecting them to external pages.

If you don’t have an app but still have a service that your users regularly use, send notifications straight to the dashboard when they need to update their payment information.

Send pre-dunning emails

If you can’t implement the first solution because you don’t have your own app, you can still preempt the churn and reduce failed payments if you send pre-dunning emails. These emails are the ones sent to your customers as reminders to set up and update their payment details before a failed payment occurs.

This is a simple but still efficient strategy because most people check their emails at least once a day, so they probably won’t miss your update. However, don’t spam your customers with these emails, as it will seem like you are only interested in their money.

In the past, it was normal for customers to send up to three pre-dunning emails before failed payments, but that was before card updates existed. Now, make sure to wait until a few days before the failed payment so you can be sure your customer isn’t planning on updating their payment information.

Tactic 2 – Use dunning software

a girl typing on a laptop

While the first tactic is great for reducing failed payments, it’s not the ideal choice for everyone. Some companies don’t want to or simply don’t have the means to keep up with all the activities that are necessary for preempting churn.

If your company is one of those that don’t have the time or the will to keep track of the payment methods of potentially hundreds or thousands of customers, there is a different tactic that you can implement. That tactic is to use dunning software.

This type of software will inform your customer in case of a failed payment and you won’t have to monitor them yourself. This solution is an easier option that anyone can benefit from, but especially those companies with a large customer base that physically can’t keep up with their customers’ payment information.

If you want an easy and efficient way to reduce failed payments with your dunning software, you can do this by following these three easy steps:

  • Set up automatic retries. Just because a payment failed after the first try, it doesn’t mean it won’t succeed after a retry that will occur a couple of days after the first try. Set up your software to have automatic charge retries for a failed payment based on different settings that you can choose yourself.
  • Set up reminder emails. Set up professional emails your software will automatically send to customers to try to recover failed payments. Just be careful not to ‘scare’ people into paying. Remember that dunning emails only recover about 10 to 15% of failed payments and scaring your customers won’t increase that number.
  • Choose the right software. There is a high number of dunning software tools on the market, so it can be hard to choose the right one. We recommend trying ChurnBuster, as it comes with great features. This tool has helped many companies reduce failed payments and bring their churn levels to a minimum.

Tactic 3 – Build a failed payment recovery process for your business

Even though you can reduce failed payments to a certain degree, you can’t completely eradicate them as they are an unavoidable part of every subscription business. The last tactic you need to implement is to create a payment recovery process and try to reverse the involuntary churn.

There are a few different steps to building this process.

Choose a member of your team for this task

It’s easy to dismiss a failed payment, especially if the loss results in something small like a 2% monthly failure rate, for example. However, you need to stop and think about what that degree of monthly failure rate will do to your business when you look at the amount of money lost on an annual level.

The compound loss of revenue is what you really need to focus on, not just what you lose on a monthly basis. If the first two tactics don’t work out, you need to make sure you have a strategy that you will use to recover that failed payment. But you also need a team member you can trust with this task.

If you don’t run a big company or see too many failed payments, it’s enough to choose one dedicated team member whose sole purpose will be to focus on recovering failed payments. As long as this individual is dedicated to the task, you can be sure that the number of failed payments will decrease.

Build a cadence of touchpoints across different channels

Even though emailing is a good payment recovery strategy, it’s sometimes not enough. In a perfect world, when you reach out to a customer via email and ask them to update their payment information, they will do it. Unfortunately, the reality is slightly more complicated than that.

Yes, emails have good engagement rates most of the time, but some customers won’t take any action when they receive this email. This could cause your business to lose a customer, and that’s where the team member you’ve chosen for payment recovery steps in.

Having a committed person to reach out to your customers through email, but also through other communication channels such as phone and SMS might bring back these unresponsive customers. It will do this by showing them that your company cares enough to reach out in a more personal manner.

The best way to do this is via telephone because you can put a person’s voice behind the organization and build more trust between you and your customer. Most of the time, customers are more open and relaxed with agents over the phone and therefore more willing to cooperate.

This type of open communication will allow your employee to learn about what kind of problems the customers are facing which lead to the failed payment in the first place. Then, they can work to solve the problem together over the phone.

Just keep in mind that the person you hire needs to be great at customer service as well because they will be on the phone with customers most of the time. A friendly employee who is eager to solve everyone’s problems will bring in a lot of failed payments back to the company.

Send highly personalized messages that come from a human

Automation is a great thing that allows you to run your business smoothly, and it also helps you collect the payments from your customers. However, there are also some instances where automation isn’t good for your business and where a personal touch is preferred.

Personalization is important for business, as it can greatly improve your relationship with your customers. Approximately 63% of consumers stop doing business with companies that provide poorly executed personalization. 

If we’re being honest, asking your customers for money can be delicate and even unpleasant sometimes. You don’t want your customers to come to the impression that they are nothing more than a dollar sign to your company, so calling them about failed payments requires personalization as well.

A generic email or an impersonal phone call won’t do anything to reduce the number of failed payments for your company. All it will do is cause you to lose time and money. If you really want to get your clients back, you need to know all the important details about them before you actually contact them.

That doesn’t only include their first and last name. Make a list of all of your clients and segment them into categories such as age, geographical location, as well as their interests and hobbies, so you can get a clearer picture of who your clients actually are.

Always be patient

There’s nothing more frustrating to a business owner than losing revenue, especially because of failed payments. Even though you probably want a quick and easy solution, you need to remember to always stay patient and don’t rush your clients into fixing the issue, because this will probably just backfire.

Always remember that there are dozens of reasons why a payment has failed, and you need to give customers a chance to update their details. You probably also need to try different methods for them to agree to this, as different people will react to different tactics.

Just to remind you, here are some of the reasons why the payment might have failed:

  • Misconfigured payment gateway
  • Your account may not be set up to accept the payment
  • A credit card has been canceled
  • The card has been stolen
  • Customer’s account has been flagged for fraud
  • The account has been closed

Final thoughts

Failed payments are an issue all subscription companies face. And while it is a real inconvenience, it’s not an unsolvable problem. As long as you apply the correct tactics and are patient with your customers, you will be able to reduce failed payments and prevent them to a certain degree.

However, if you really want to tackle the issue of failed payments and irradiate it from your subscription business, you need to ask a professional for help. Schedule a call with our retention specialists to recover the revenue your company is losing due to failed payments.

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Digital Marketing Manager @LTVplus Actively participating in the digital marketing world for more than 5 years. Currently making sure that our website content is up-to-date and our blog is filled with actionable tips and advice for online retail businesses. Very passionate about dogs, topics on spirituality and Unicorns.

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