Many customers may not be intentionally cutting ties with your business but are instead experiencing payment-related issues, leading to what we call involuntary churn. This is the loss of customers due to external factors rather than a deliberate decision.
Let’s explore how this could be affecting your business and what steps you can take to address it.
What is Customer Churn and How is it Calculated?
Churn rates refer to the loss of customers over a set timeframe. This “loss” can manifest in a few ways, such as when a customer stops buying from your business or when they cancel a subscription.
While many companies focus on attracting new customers, it’s crucial to pay more attention to existing ones—retaining a customer can cost five to 25 times less than acquiring a new one.
Forbes recently reported that the ideal annual customer churn rate should fall between 5% and 7% for established companies, while monthly churn rates should be less than 1%. As for early-stage startups or SMBs, Forbes states the typical rate can average between 10% and 15% while the company works on improving its products and services.
Calculating your customer churn rate is pretty straightforward — simply choose a time period (i.e. one month), determine your original number of customers at the start, and record your number of customers lost by the end. Once you have these numbers, use the following formula:
(Number of customers lost / by total customers) x 100 = your customer churn rate.
For example, let’s say you are calculating your churn rate over a 30-day period. At the start of the period, you have 200 customers, but by the end of the period, you have lost 50 of those original 200. Applying the formula above would give you the following result : (50/200) x 100 = 25, meaning you have a 25% churn rate over the 30-day timeframe.
Any new customers gained during this timeframe are not included in this calculation, as they are not the original customers you are measuring for loss. You can include new customers in your churn rate calculations for the following time period.
Understanding Involuntary Churn and the Factors Behind It
Involuntary churn occurs when your customer stops using a service or product unintentionally. Unlike voluntary churn, in which a customer purposefully ends their relationship with a company, involuntary churn typically involves operational problems on the business side.
Alarmingly, anywhere from 20% to 40% of your total customer churn can actually be involuntary.
Swiftly addressing these problems is the key to reducing your churn rate when it spikes unexpectedly.
The root cause of involuntary churn often relates to payment issues that cause failed transactions, such as:
- Expired card information
- Failed transactions due to system errors
- Banking issues (such as blocked payments in specific geographic regions)
- Payment gateway failures
Dealing with involuntary churn can be tricky if you lack clear oversight of your payment system and any malfunctions that may occur. The ability to track individual transactions and automate payment alerts can help tackle the problem of involuntary churn by giving you greater overall system transparency.
Methods for Reducing Involuntary Churn
Improving your customer churn rates starts with reducing involuntary churn. Identifying instances of involuntary churn and measuring their impact requires you to examine your payment system closely, especially when it comes to failed transactions.
Before you can begin this process, you must first determine whether your churn is due to payment acceptance or payment recovery:
- Payment acceptance: Payment acceptance issues can stem from failures caused by either soft declines (temporary issues like insufficient funds or network errors) or hard declines (permanent problems such as account closures or inaccurate payment details). If these declines go unresolved, customers may lose access to services despite a willingness to pay.
- Payment recovery: Payment recovery efforts, such as retries for failed payments or managing chargebacks, can cause involuntary churn if they frustrate customers. Excessive attempts, complicated updates, or wrongful account flags due to chargebacks may lead to lost access and dissatisfaction.
Keeping this in mind, you can begin applying the following three tips today to reduce your involuntary churn:
Optimize Your Tech Stack
Streamlining your payment processes is the most essential first step to take.
As we discussed earlier, without payment transparency, you are likely to struggle with identifying common pain points in your system. The matter becomes more complex as your business grows, as you will need to incorporate more technologies and providers to keep up with increasing payment volumes.
To optimize your payment tech stack, follow these steps:
- Implement tools that help you identify churn patterns, such as advanced data analytics that can identify customers at a high risk of leaving and employ special tactics to keep those customer segments satisfied and engaged with your business
- Research different payment gateways and integrate those that are both secure and user-friendly
- Review your checkout flows and implement tools that can remove friction in the process (i.e., use tools that allow embedded checkouts rather than redirecting customers to separate web pages)
- Employ technologies like tokenization and card updater services that can keep your stored payment information updated and minimize subscription or recurring billing disruptions
Offer Flexible Payment Methods
The more payment methods you can offer, the better. Limiting customers to credit and debit cards can bring challenges, especially in online environments. Factors like geographic region and payment amounts can trigger banking fraud systems, leading to failed transactions if a payment is flagged as suspicious.
Flexible payment plan adjustments and billing cycle options are also key to reducing involuntary churn. Custom billing cycles—such as weekly, bi-weekly, or monthly—allow customers to choose a schedule that fits their finances, lowering the chance of failed payments. Additionally, allowing customers to update their payment plans or adjust payment dates as needed helps them adapt to any shifts in their financial situation. One increasingly popular option, Buy Now, Pay Later (BNPL), lets customers pay in installments over a set period, reducing the immediate financial burden while ensuring your business receives timely, full payment.
These adjustments make it easier for customers to manage payments while creating a more customer-centric experience. Ultimately, this approach improves retention and loyalty by reducing the risk of missed or declined payments.
Build an Exceptional Customer Experience
Creating satisfactory customer experiences is important not only for retention but also for reducing churn.
Implementing tools that can send customers automatic reminders to update their payment information can help keep stored payment data evergreen. Meanwhile, services that can automatically reroute payments to different payment gateways can decrease the number of failed transactions in your system.
Improved customer communication is also a major component to consider.
When things go wrong, you want your customers to come to you first — not their banks or payment providers. Encouraging your customers to reach out to you directly can aid in reducing both failed payments and chargebacks, both of which can exacerbate the churn rate issue.
Establishing a highly accessible communication system starts with utilizing multiple connection channels, including SMS, push notifications, and email. On top of increasing your channels, you also need to ensure those channels are highly responsive and timely.
Improve Your Churn Rates with Automated Analytics and Expert Insights
At Optimized Payments, we offer comprehensive solutions for simplifying your payment processes.
Check out how we’ve helped recurring payment businesses revolutionize their approach:
- How Optimized Payments helped America’s top publisher increase customer retention by 7% for its vast subscriber base of more than 200 million
- The changes Optimized Payments implemented for a top magazine publisher to achieve a revenue recovery of up to $20,000/month from previously failed transactions
From streamlining your back-office operations to tackling specific payment problems, our team provides your business with critical support for identifying and reducing involuntary churn.
Schedule an Optimized Payments demo today.