Customer churn has a major impact on the bottom line for any company using a subscription billing model. The term ‘churn’ is the rate at which a company loses subscribers or revenue due to subscription cancellations. Churn can either be voluntary (active) or involuntary (passive).
Churn is an important measure of how successful a business will be in the long term and directly relates to the business’s lifetime value (LTV). Therefore, reducing churn and increasing the LTV of a business ultimately leads to an increased return on the customer acquisition cost (CAC).
To cut down overall churn, SaaS businesses tend to focus on reducing their levels of voluntary churn; where customers deliberately cancel their subscriptions. Maintaining customer satisfaction is commonly viewed as the main way to reduce active churn. And of course keeping customers happy is critical for business success. But in focusing too heavily on this, SaaS businesses could be missing out on another area where they can maximise profit margins - reducing involuntary churn.
According to recent research from IBM, involuntary churn affects a surprising number of SaaS customers. 16% of survey respondents reported subscriptions having been cancelled when they forgot to update their payment information after receiving a new credit card. It could be damaging for a company’s revenue prospects for so many customers to have their experience disrupted like this.
Involuntary churn can occur for a number of reasons, ranging from customers forgetting to update their card details, to lost or stolen cards, bank rejections, network errors, and customers exceeding their credit limits. Either way, the end result is the same: your SaaS company loses valuable revenue.
What can be done to prevent involuntary churn? There are a variety of recommended actions, but for starters, it’s worth noting most of the reasons for involuntary churn are linked to credit and debit cards.
In fact, 5.95% of card transactions fail on the first attempt, with 74% of these failures leading to involuntary churn. Avoiding the card networks altogether could be the easiest way for SaaS businesses to reduce failures and eliminate involuntary churn. But what’s the best alternative to cards for fast-growing global SaaS businesses?
Direct Debit could be exactly what SaaS businesses need. It solves the involuntary churn problem and boosts profit margins in the process. Designed specifically to handle recurring payments, Direct Debit is ideal for the subscription economy. It’s a bank-to-bank payment method, where the customer pre-authorises the merchant to collect payments directly from their bank account.
Unlike credit and debit cards, Direct Debit never expires, and bank accounts can’t be physically lost or stolen. What’s more, failure rates with Direct Debit payments are as low as 0.5%. Even that figure is almost always due to the simple reason of customers having insufficient funds.
GoCardless enhances Direct Debit, providing a payment solution specifically designed for companies using the subscription business model. Our product uses Direct Debit to support those key metrics driving success in the subscription economy.
On top of that, GoCardless is perfect for US SaaS firms with customers in the UK and Europe. Using API-based technology, we give global subscription businesses single access to multiple Direct Debit schemes across Europe.
Our one-stop payments access point also handles all the complex compliance and regulatory issues for you. We provide an easy way to get started taking European payments, while also enabling your SaaS business to eliminate involuntary churn and increase LTV.
To find out exactly how much involuntary churn costs your SaaS business - and how to eliminate it once and for all - get in touch with our payment experts today.