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February 7, 2017 | Authored by: Vindicia Team

Three reasons to focus on involuntary churn

Businesses that operate on a subscription billing model know that customer churn has a severe impact on their bottom line. As such, these companies primarily focus on minimising voluntary churn, where a customer willingly cancels a subscription. Involuntary churn, when subscriptions are canceled without action on the customer's part, gets less attention but is still an important metric to consider when maximising profit. The most common type of involuntary churn is when a customer forgets to update their billing information, while others include network errors and exceeded credit limits. But regardless of what form involuntary churn takes, it can have a major, negative impact on subscription management-based strategies. With that in mind, here are three reasons why involuntary churn should be a focus:

"Involuntary churn impacts 16 percent of subscribers."

1. Involuntary churn affects more customers than expected

Most businesses worry about active churn rates, working to keep customers satisfied and engaged to discourage deliberate cancellations. However, research from IBM found involuntary churn impacts a surprising number of subscribers. Sixteen percent of respondents said they had their subscriptions canceled after receiving a new credit card and failing to update their payment information. Instances of passive churn were particularly prevalent among 30 to 44 year olds, impacting 28 percent of this particular demographic. Disrupting the customer experience for nearly 20 percent of your subscribers could tank your revenue prospects.

2. Involuntary churn directly affects revenue

Consider a customer who subscribed to an online content service three months before his credit card expired. The publishers spent $200 acquiring that customer, and he pays $10 a month for his subscription. In this scenario, it would take just under two years for the business to recoup the cost of acquisition. If the customer forgets to update his credit card and experiences passive churn, the company loses $170. Plus, the business has to spend more money either re-engaging the customer or finding a new one to maintain its overall bottom line.

On a grand scale, involuntary churn causes a business to fall short of estimated growth and profits. Consider what happened to Netflix last year as the U.S. switched to EMV cards. According to Bloomberg, the company claimed its stunted growth in Q3 2015 was a result of massive involuntary churn. As subscribers received new EMV cards, their old ones were automatically deactivated. When customers didn't update their information on Netflix, their payment couldn't go through and their subscriptions were canceled. In addition, the transition caused issue with Netflix's payment processor. The resulting involuntary churn left Netflix with just 880,000 new U.S. subscribers - far below the 1.3 million Wall Street expected. As a result, Netflix shares fell nearly 7 percent. This scenario can happen to subscription-billing-based businesses in any industry, including publishing, educational services, member-based communities and more.

3. Involuntary churn harms the customer experience

Passive churn disrupts a seamless customer experience, adding a barrier that leads some to actively disengage with a business. At best, these subscribers suffer a minor annoyance that forces them to update their card information. At worse, they stop working with a business entirely. IBM's survey found a quarter of customers who underwent involuntary churn would seriously consider parting with a service because of the inconvenience.

Businesses hoping to see maximum revenue in 2017 must address passive churn before it occurs. Thankfully, working with a subscription billing platform that addresses failed payments immediately keeps involuntary churn rates down. A good subscription billing service automatically retries transactions and integrates with Account Updater services provided by major card companies. The latter feature alone, which automatically updates payment information, decreases passive churn by 2 to 3 percent. By taking a proactive approach, businesses can keep retention rates high.

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Vindicia Team

Vindicia Team

We value our subject matter experts and the insights each of them brings to the table. We want to encourage more thought leaders to come together and share their industry knowledge through our blog. Think you have something interesting to contribute as a guest blogger? Contact us at info@vindicia.com