The Impact of Billing on Churn and Lifetime Value

Subscribe Our Newsletter

One of the key differences between the transactional (one-time sale) world and the subscription world is the impact billing practices and systems have on your customers, and consequently your revenues.

In the transactional world, billing is pretty simple. A product or service is purchased and the customer is given the bill with the goods or it is sent at a later date, the bill is paid and the relationship ends.

The subscription world works differently because customers pay on a recurring basis usually monthly, quarterly, or annually, under evergreen or fixed terms. Billing becomes a cycle and consequently plays a much larger role than it does with transactions. The impact of this increased role of billing can often affect your business negatively, especially if your billing system is not correctly mitigating the effects.

It, therefore, becomes increasingly important that you establish some best practices for your SaaS business' recurring billing management.

Typical Impact of Billing Cycles on Churn

Churn is the percentage of customers lost during a specific time period. To calculate, take the number of customers you have entering the period, the number lost during the period and divide the loss over the starting point.

Figure 1. Typical Impact of Churn on a Subscription Business with monthly and annual plans that begin with a one month free trial

The Impact of Billing on Churn and Lifetime Value

At the beginning of the subscription billing cycle churn is faster. As shown in Figure 1, when charting churn you will typically see a significant loss of customers in the first month especially when the subscription begins with a free trial. The first big spike on the chart below occurs when the credit card is charged the first time. Smaller spikes in cancellations can be seen every 30 days as credit cards are charged on monthly plans and once a year on annuals. Track these spikes and the impact billing has on customer churn becomes very apparent.

There are two groups of reasons for this correlation between billing and churn:

Mechanical:

- Many credit cards fail on signup. This can be because the gateway didn’t process, the website timed out, etc. If you haven’t captured contact information beforehand, you won’t be able to ask customers to come back and finish the purchase and they’ll be lost at the beginning of the lifecycle. Our data shows 25-30% of cards will fail but will succeed if retried.

- Customers are lost as cards expire. Credit cards expire every three years, this means 3% expire every month. For startups this may not seem like an issue but if you have a customer base in the thousands or hundreds of thousands, 3% can be a considerable amount.

- Customers could be at their credit capacity on the billing date.

- Many billing systems automatically turn off accounts as soon as a card fails, which can lead to a dramatic increase in churn.

Behavioral:

- The most prevalent behavioral reason is passive churn. These are customers who want to cancel your service, but don’t. A failed or expired card allows them to cancel without having to do anything. Statistically, this type of customer does not come back.

- Sometimes, people are surprised at the end of a free trial. This often leads to a chargeback – where customers don’t just cancel, but call their credit card company and report an invalid charge. This can cause serious problems for you as the vendor.

- Other customers (usually those who don’t review their credit card bills) aren’t surprised they’re being charged for a service; they’re surprised when they realize they are still being charged, and will cancel at that point.

Typical Impact of Billing Cycles on Lifetime Value

1. Customer Lifetime Value

The inverse of churn is customer lifetime, if churn is low customers stay a long time, if churn is high, customers stay a short time. This means that as with churn, billing cycles impact customer lifetime value, a fundamental metric measured by the length of time a customer would have to remain a customer at the cost of the subscription before profitability.

The Impact of Billing on Churn and Lifetime Value

It’s imperative to have a model to measure lifetime value. You can create one even if you don’t have data on how long customers will stay by making assumptions based on costs, revenue stream, and how long you expect customers to last. Next, add sensitivities to see your breakeven point, how profitable you are on a per customer basis, and whether your business model holds.

Pricing Segmentation is also vital, for example, the structure is different depending if you are selling online to someone who has come to your site directly versus someone who clicked on a paid ad, versus if you’re paying a salesperson commission. Segmenting based on acquisition channel is important to measure if the channel is profitable and to get different customer behavior viewpoints, these include selling channels, marketing channels, and price points. Price plan segmentation determines the lifetime value of a customer that can vary based on price plan.

Make sure to look at your margin each month as well as your revenues. If there is a cost to delivering your service you should work this, and churn into your chart aswell.

Solutions

While the billing process can have a negative effect on your business due to impact on churn and customer lifetime value, there are things you can do to mitigate these issues and in fact, many of them can be resolved and even automated just by putting the right billing system in place.

Your billing system should include abilities such as:

- Intelligent retries – It should continue to process cards even those that fail on the first try. This alone this can cut your churn rate in half for a broad based service.

- Customer communication – A good billing system will send notifications to both customers and staff about upcoming renewals, expiring credit cards, failures, and even receipts.

- Credit card management - Give your customers the capability to manage their own payment methods, view invoices and other information about their account.

- Account status implementation – Linking account status to billing status allows you to block account access or limit features to customers who aren’t up to date with payments. This will often compel people to fix their card.

Billing and billing systems should help your business reach its goals, not hinder them.

Subscribe Our Newsletter

Tags: SaaS Subscription Billing Recurring Billing Saas Metrics Churn

Fusebill Inc.

Fusebill simplifies subscription and billing management by automating many manual accounting and financial processes and workflows. Our cloud-based platform gives companies the freedom to grow their businesses, the flexibility to capitalize on new product opportunities, and the agility to maintain a competitive edge.

Newsletter Subscription

The Complete Guide To Subscription Billing