How Direct Debit can drive key SaaS metrics

How can Direct Debit impact the numbers you care about most? Find out as we explain the relationship between Direct Debit and four key SaaS success metrics.

As a leader of a SaaS business, you care about a handful of metrics (e.g. MRR, churn rate) and every action you take should be tied back to these numbers. So, how can thinking about your payment strategy impact these key metrics?

Specifically, how can Direct Debit impact the numbers you care most about and why should you prioritise offering it as a payment method, over credit/debit cards and other alternative payment options?

In this guide, we explain the relationship between Direct Debit and the following four SaaS success metrics:

  • Churn - The rate at which a company loses subscribers or revenue due to subscription cancellations (we’ll be looking, more specifically, at involuntary churn).
  • Customer Lifetime Value (LTV) - The average revenue generated by a customer before a subscription is cancelled.
  • Monthly Recurring Revenue (MRR) - A measure of your normalised, monthly subscription revenue (excluding one time payments).
  • Cost of Goods Sold (COGS) - How much it costs to provide the service you sell.

These metrics allow businesses to measure success in the core areas of value, growth, retention and cost.

Here, we take a closer look at how Direct Debit can drive these metrics in the right direction.

The rate at which a company loses subscribers or revenue due to cancellations.

Churn is, arguably, one of the most important metrics that a mature SaaS business will monitor. It is also the metric that Direct Debit can have the most significant impact on.

There are two different types of churn:

  • Voluntary - churn caused by customers actively cancelling their subscriptions
  • Involuntary - churn caused due to payment failures, for example expired, cancelled or lost cards

According to Price Intelligently involuntary churn makes up between 20-40% of your overall churn.

churn equations

Due to the bank to bank nature of Direct Debit, failure rates are significantly lower than those seen with recurring card transactions. This is because, unlike cards, bank accounts do not expire, cannot be physically lost and are unlikely to be stolen.

It is estimated that failure rates on card can range anywhere from 10 - 25% a month. Customers who use Direct Direct through GoCardless have an average failure rate of 2%, with some merchants as low as 0.5%.

So, as a result, Direct Debit helps to significantly lower involuntary churn.

Consider this:

  • A SaaS business collects recurring card payments from its customers and has a monthly churn rate of ~6%.

  • 30% of that total churn will be involuntary - that is, the result of administrative failure of card payments. So this business is needlessly losing 1.8% of its customers every month.

  • Using Direct Debit improves payment success rate, reducing failures from around 10% to around 2%.

  • Even with a conservative estimate, this would allow our example SaaS business to reduce involuntary churn from 1.8% to to 0.36% - and overall churn from ~6% to ~4.5%.

The average revenue generated by a customer before they churn.

ltv equations

The lifetime value of your customer base is directly related to your churn, so by reducing churn you can help to maximise LTV.

Using Direct Debit helps to eliminate involuntary churn (see 'churn' section above) and ultimately increase lifetime value.

A measure of normalised, monthly subscription revenue (excluding one time payments).

Payment preferences vary across Europe. Offering alternatives to card payments can help you to capitalise on local preferences.

Direct Debit accounts for 20% of all electronic payments made across Europe and 74% of recurring payments in the UK. A YouGov survey showed the different attitudes to subscription payments across Europe, where Direct Debit proved popular in France, Sweden and Spain.

Adding Direct Debit to your payments mix can help you to maximise reach in these markets and improve conversion. On top of this, more customers using Direct Debit will helps to reduce involuntary churn and maximise MRR.

How much it costs to provide the service you sell.

Cost of Goods Sold relates to the direct costs attributable to the production of the goods sold or the services provided by a company. It is a key input when calculating Gross Margin or Gross Profit, therefore anything that can be done to lower the COGS will help to improve these metrics.

Depending on your business, COGS is typically made up of, but not limited to, the following costs:

  • Hosting costs
  • Transaction fees
  • Employee costs related to keeping the service running
  • Employee costs for customer support/success of the application (excluding any sales costs for up-sells, or cross-sells)
  • Cost of any third-party software or data that is included in your delivered product
  • Any other direct employee costs required to deliver the ongoing service

Of the above, Direct Debit can have the biggest impact on the cost of transactions fees. Depending on Average Transaction Value (ATV) and the volume of transactions being processed, Direct Debit can cost less than 1% per transaction (compared to ~2.5% for credit/debit card transactions). This is because there are less intermediaries in the payment process, for example, there aren’t any card network or interchange fees involved and you avoid having to pay for account updater technology.

Since Direct Debit reduces failed payments and churn, it can also help decrease the amount of time customer success and support teams spend dealing with payment-related queries, as well as time spent chasing customers to renew their details or pay for an overdue invoice.

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