The subscription business model has grown to take over media and entertainment over the last two years, with new streaming services like Disney+, Peacock and discovery+ rising to take on behemoths like Netflix and Hulu. This great subscription boom has led to a fundamental change in the way consumers interact with entertainment: according to recent research from Deloitte, the average consumer pays for a whopping nine digital media subscriptions.
Shifting to a subscription model requires businesses to reconsider their customer relationships, as well as the metrics they use to define success. With media companies working tirelessly to increase Customer Lifetime Value (CLV), churn has emerged as possibly the most crucial metric for whether a business succeeds or fails. A company's churn rate – the percent of customers who no longer subscribe to the service – has a direct impact on business growth, affecting everything from soliciting investments to building accurate financial projections.
Two types of churn
The end result of churn is always the same – your company ends the period with less customers than it had at the beginning. However, the type of churn a company experiences, and the tools it can use to fight back, can vary significantly. Voluntary churn happens when customers actively choose to unsubscribe to a service. Involuntary churn happens when customers fall off their subscription either due to a failed payment method or an expiring subscription that isn’t renewed.
While voluntary churn is painful, involuntary churn may well be even more difficult to swallow: the customer hasn't rejected your service; instead, you've lost revenue due to a potential administrative error or miscommunication. Involuntary churn can represent anywhere from 20% to 40% of overall churn rate; however, it is much more easily addressed when compared with voluntary churn. With the right tools and strategies, companies can reduce their involuntary churn significantly and see a director increase in CLV.
Reducing involuntary churn
Involuntary churn is frequently the result of a nuanced technical error or simply the inattention of the customer. These four techniques are some of the most effective ways to proactively address involuntary churn and limit its effect on your bottom line:
- Pre-empt declined payments with customer reminder emails: When a customer switches banks or replaces a lost or expired payment card, they often fail to consider the many services that relied upon that card. By setting up proactive emails to customers whose subscriptions are expired, you can jolt their memory – prompting them to update their payment method to ensure seamless renewal and delivery of service.
- Adjust retry cycles to match bank practices: To reduce fraud, issuing banks can decline transactions using either a soft or hard decline. A hard decline is used in the event of a lost or stolen card; however, a soft decline may be used when a credit limit is exceeded or the customer uses their card in a new location. Instead of treating all failed transactions as hard declines and immediately removing card details from the system, companies should view failed payments as soft declines – setting up retry cycles that allow for the possibility that the decline will get resolved.
- Flag payments as recurring: Payments can be declined for any number of reasons, but they essentially boil down to a lack of trust on the part of the issuing bank. Companies can reduce failed payments and involuntary churn by making themselves more trustworthy. Flagging a payment as recurring demonstrates a long-term relationship between the service provider and the customer, and the lengthy history of successful payments makes it less likely for a bank to decline a transaction based on a separate factor.
- Adopt a Payment Method Updater (PMU): Credit cards and debit cards are frequently reissued when a bank experiences a hack or data breach. PMU services automatically update customer payment information when a new card is issued, eliminating a potential headache for both the service provider and the end user.
Involuntary churn is most often the result of small technology bugs or inattentive end users; the tools to address these may seem tedious, but they can pay outsize dividends in terms of improving CLV and building a more sustainable business. Many of the tasks mentioned above can be addressed using software tools or platforms, and media companies seeking to drive value using a subscription model should consider whether buying an off-the-shelf solution could offer greater ROI than building their own churn reducing tools.
— Vijay Sajja, CEO, Evergent