In the transactional world, the billing process is simple. A product and/or service is purchased, and the customer is presented with a bill. The goods are either sent with the bill or at a later date and then the customer pays the bill.
The transactional world is basic in the fact that it involves a one-time sale. This is very different from the increasingly popular subscription-based business world with repeat billing cycles. One key difference is the role that billing practices and systems have on the customer experience, and consequently, your revenues.
In the subscription world, customers are billed on a recurring basis; this tends to be monthly, quarterly, or annually, under evergreen or fixed terms. Billing becomes a cycle and consequently plays a much larger, more dynamic role than it does with one-time transactions.
As businesses increasingly offer their customers the convenience and flexibility to pay smaller amounts on a recurring basis, they can attract more customers. However, the recurring billing system in use has a major impact on the customer experience and there may be challenges if that system cannot adequately support customer expectations.
In fact, the increased complexity and the role of recurring billing can often affect your subscription business adversely, especially if your billing system does not mitigate the emergent billing challenges.
Typical Impact of Billing Cycles on Customer Churn
Churn is the percentage of customers lost over a specific period. To calculate churn, take the number of customers you have entering the period, then the number of customers lost during the period and divide the loss over the starting point.
Yikes! That number can be pretty eye-opening, can’t it?
But why does this happen?
Often, churn occurs faster at the beginning of the subscription billing cycle when there is typically a significant loss of customers in the first month of their subscription. This is especially true when the subscription begins with a free trial. Churn usually spikes after a customer’s credit card is charged for the first time.
However, churn isn’t limited to that first billing cycle. You will also see cancellations as credit cards are charged on a monthly or annual based subscription plan. There are fewer customers who cancel during this time than at the beginning of a subscription cycle, but they do occur.
If you were to keep track of the rise and fall of cancellations throughout a billing cycle, you will notice just how important billing cycles are in relation to the impact of customer churn.
The most successful organizations are those nimble enough to adapt in real time to the changing needs of their individual customers. Regardless of why customers are looking to make a change, you can bet that if they cannot easily get what they are looking for from you, they’re talking to your competition.
But what if your processes don’t allow you to make changes to customer plans in real time to meet your client’s expectations? What if you can’t keep up?
There are two reasons for the correlation between billing and churn: mechanical and behavioral.
1. Mechanical Effects on Billing and Customer Churn:
- Quite often, a new customer’s credit card will fail upon start up. This could happen due to technical issues with the gateway processing the new transaction, such as the website freezing.
It is crucial your platform has the capability to save customer information along the way so that the customer can try again without having to restart the process. After all, these issues are very common—35-30% of cards will fail but succeed if retried.
- Most credit cards expire every three years, which means you can expect at least 3% of your customers’ cards to expire per month. Customers are lost as cards expire because they don’t take that extra step to update their card information.
- A lot of billing systems will automatically terminate a subscription if a credit card is not processed, regardless of why that payment method was unsuccessful. Before getting to this point of no return, it is important that you monitor card expirations and prompt your customer to update their credit card. By reaching out and fixing the problem proactively, you can retain the customer’s business.
2. Behavioral Effects on Billing and Customer Churn:
- Passive churn occurs when customers have already decided they want to cancel the service, but do not want to take the effort to do it themselves. Typically, they will wait for a failed or expired credit card charge to “cancel” for them, most likely (and statistically) never to return.
- Sometimes, customers forgot they signed up for a free trial and once the free trial ends and their card is charged, they’re taken by surprise. Often, this leads to a spike in chargebacks for your company.
Customers won’t just cancel the service, they will call their credit card company and report the charge as false. Regardless of the validity of the claim, it provides extra challenges for you as a vendor.
- There are also customers who don’t consistently review their credit card statements, bills, or mail. When they discover they’re still being charged for a service, they will call and immediately cancel.
Typical Impact of Inflexible Subscription Plans and Billing Cycles on Customer Churn
Inflexible subscription plans are one of the biggest reasons your customers will turn away from your business platform. It is therefore imperative to allow customers to make subscription changes quickly and easily if you want to keep them happy, versus feeling trapped.
Incorporating flexible billing will encourage them to upgrade their plans ultimately maximizing revenue and improving customer satisfaction. Eight out of ten consumers say they would pay more to ensure a superior customer experience. To scale your business, you need to eliminate any friction in the customer experience.
It is vital to convey a sense of urgency while communicating and processing customer initiated changes. Assure your customers that their time is as valuable to you as it is to them and prove to your customers that your company respects their time.
Typically, customers will expect to have a large range of options and flexibility within their subscription plans before they sign up for your product or service. They will also expect this flexibility after they make the purchase. This is important to keep in mind knowing that the average subscription customer makes at least three changes to their subscription plans during their time with the product.
It is crucial that you accommodate those needs from the very start to ensure customer loyalty by the reduction of customer effort. When you empower your customers to make easy subscription changes, you are improving the customer experience. This prevents churn and gives your customers what they want when they want it.
Subscription Billing and Churn Solutions
As we now know, the billing process can negatively affect your business and/or customer lifetime value due to impact on churn. However, these risks can be overcome just by putting a proven billing system in place.
It is important, however, that your platform is adaptable to your customers’ needs throughout their subscription lifecycle, not just in the beginning. Ask yourself this: How easy is it for my customers to alter their subscription plan mid-term?
Your billing system should include features such as:
- Intelligent retries – Mechanical issues such as first-time signup credit card failures should have a system in place with the ability to retry the payment. This alone can cut your churn rate in half.
- Customer communication – An excellent billing system will consistently send customers notification of any changes. Changes include upcoming renewals, expiring credit cards or failures, and all transaction receipts.
- Credit card management – Allow your customers the capability to manage their own payment preferences and methods such as options to viewing their subscription’s invoices and/or any other information that is related to their payment methods on their account.
- Account status implementation – When customers are behind on their payments, this allows for their account status to synch up with their billing status. Often this will nudge your customers to update their card or get in touch with you to get everything straightened out.
- Metrics and reports –Your recurring billing management platform should empower you with insights on key metrics like customer churn, MRR, and LTV (subscriber lifetime value).
- Revenue recognition – In a subscription business, revenue needs to be recognized daily. This is hard to accomplish manually and in a timely fashion without errors, as subscriptions are received every day. New revenues result in a unique revenue recognition calculation and this is the key focus of the important new ASC606 standards taking effect in 2018 for public companies, and in 2019 for private companies.
As you take advantage of the long-term value of flexible recurring customer and billing management solutions, your billing system is a core business system for your subscription-based business. Not only does all the money flow through it, the billing platform is also the dashboard of the business—managing the customer lifecycle, communicating with clients for renewals, upsells, and cross-sells.
Remember, as you scale your business, your billing management platform should help your business along. It should not stand in the way.