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Growing a subscription-based business is notoriously difficult. Churn – both involuntary and voluntary – is a significant barrier to building a sustainable, profitable business. Payment optimisation plays an important role in reducing churn and stabilising growth.
Subscription businesses need to recover a customer acquisition cost over multiple months (known as the payback period) and when customers leave, it's a net loss for the business considering not only the upfront cost invested but also all lost future potential revenue.
In this article, we explore the most common payment challenges faced by subscription businesses and how they can be addressed.
Unpacking the Subscription economy in South Africa
According to the IFWG, subscriptions are one of the fast-growing segments in cross-border e-commerce. “In South Africa, it is estimated there are more than 7 million active subscriptions, and the local subscription economy is estimated to be worth $530 million (~R8.6 billion) – and is anticipated to reach over $800 million by 2025.”
Globally, subscriptions follow a similar pattern as the international subscription economy is expected to reach $1.5 trillion (R24 trillion) by 2025 from $650 billion in 2020.
Both global and local subscription businesses must consider their payments experience and identify areas for improvement to capitalise on this growth opportunity, prevent churn and stem revenue leakage.
By optimising payments for recurring growth, businesses can achieve higher customer lifetime value and profitability.
Five common challenges in subscription payments
- Customer churn due to failed payments
Up to 50% of subscription payment failures are caused by expired or lost cards while a further 30% are caused by insufficient funds.. When a payment fails, subscriptions are often cancelled for otherwise loyal customers (known as involuntary churn). Customers must manually update their payment details, creating friction and resulting in customer drop-off. With more than 60% of subscription revenue attributable to renewals, addressing involuntary churn is critical.
- “Friendly” or chargeback fraud
“Friendly” fraud occurs when a customer disputes a legitimate charge they made on their card.
Many customers treat subscription payments with a ‘set it and forget it’ approach. This has a dual consequence: first, customers may dispute a transaction because they do not recognise it having forgotten that they subscribed or forgotten to cancel. Second, customers may overestimate their usage of the subscription and dispute the charge due to buyer’s remorse – the classic example being gym memberships. According to Sift, two-thirds of consumers have filed disputes, and of that subset, nearly 1 in 4 (23%) admitted to participating in friendly fraud.
- Security and privacy vulnerabilities
Subscription businesses face specific threats from a security perspective due to storing the payment information of their customers. The common risks faced include data theft, unauthorised access, and system breaches.
This means that any merchant who processes payments and stores the payment information of their customers needs to be compliant with Payment Card Industry (PCI) Data Security Standards (DSS). To do this, merchants need to either build internal capabilities or work with a payments partner that can ensure security and compliance.
- Localisation challenges
The advantage of a digital subscription business is its ability to serve a global audience. Payment localisation is critical to successful global expansion and customer conversion. This includes making available locally relevant payment methods and card schemes, multi-currency checkout pages, and dynamic translation based on the customer’s location.
- Manual or inefficient reconciliation
Reconciliation in a subscription business can become complex as finance teams grapple with different values for different offers, pro-rata rates, and ongoing up– or downgrades. Doing this manually is not only time consuming, but prone to error and inefficient. Automated financial operations are central to detecting and resolving problems, effectively managing cash flow, and making strategic decisions for improvement.
What is network tokenization?
Tokenization is an encryption process by which sensitive card data is replaced with a unique string, called a token, that acts as a reference to the underlying data.
While tokenization has become the mainstream standard for secure online payment processing, most tokens today are gateway tokens issued by a single processor and are only valid for that processor. When the underlying card is lost or stolen, gateway tokens become invalid. Moreover, the tokens cannot be used on other payment gateways in the event of downtime, and keep merchants locked in even when they experience unreliable service.
Fast becoming the global standard, network tokens represent the next frontier in tokenization.
Network tokens are generated by the card schemes (such as Visa, Mastercard) when a consumer uses their card. The card schemes are responsible for maintaining the tokens so that they remain valid, even if the underlying card data changes or expires. Network tokens are interoperable across payment processors and are encrypted throughout the payment process, offering more security to consumers and merchants.
Optimise recurring payments with Precium’s network token solution
Network tokenization is an excellent choice for subscription-based businesses to increase customer retention and lifetime value.
Challenge: Customer churn due to outdated payment details
- Solution: Minimise involuntary churn with automatic updating of card-on-file information when a consumer’s card is replaced or expires
Challenge: Customer churn due to failed payments
- Solution: Higher success rates due to reduced false declines and ability to cascade failed transactions to another processor in real-time
Challenge: “Friendly” or chargeback fraud
- Solution: Reduce friendly fraud or chargebacks as cardholders authenticate recurring transactions
Challenge: Security and privacy vulnerabilities
- Solution: Reduce risk of data breaches or fraud with end-to-end encryption with tokens stored in our PCI DSS Level 1 vault
Challenge: Localisation challenges
- Solution: Own your customer tokens that can be used on multiple gateways and acquirers enabling you to switch processors as needed
Connect with us to understand how network tokenization can optimise your subscription payments and enable sustainable growth.
Explore other Precium solutions for optimising payments
- Solve localisation challenges with smart routing with wide range of payment methods
- Automate reconciliation to improve efficiency and accuracy
- Collaborate with an expert partner in fraud and risk management
