2015 INDUSTRY REPORT Recurly Subscription Snapshot€¦ · Customer retention metrics in recurring revenue businesses are complex, especially when transactions are weighted to credit

Powering Subscription Success

2015 INDUSTRY REPORT

Recurly Subscription Snapshot

2

Table of Contents

What's Inside

Introduction

The Sample Set

The Role of Promotions

Factors Impacting Subscription Revenue

Churn

Credit Card Declines

Recovering Lost Revenue

Summary

Methodology

Glossary

About the Subscription Snapshot

Subscription businesses are focused

on customer retention and loyalty.

This report examines a sample set of

25 million transactions and identifies

key metrics. Through careful analysis

of these metrics, we reveal how they

can be used to provide guidance in

product, promotions, and operations

to support a subscription business'

growth and success.

Number of transactions in the sample setMILLION

From startups to global enterprises, today's fastest-growing businesses are harnessing the power of the subscription model. This business model delivers multiple benefits: predictable revenue, ongoing customer relationships that lead to critical customer insights, and the ability to automate revenue-optimizing decisions.

One of the keys to unlocking these benefits

is developing customer loyalty, forged from

the predictable delivery of great products and

services. As a result, subscription businesses

prioritize customer retention metrics to

understand loyalty trends.

Customer retention metrics in recurring revenue businesses are complex,

especially when transactions are weighted to credit cards. Securely handling

credit cards, managing failed transactions, or credit card declines, and

minimizing churn, or customer attrition, are vital areas of focus, and each

requires careful measurement.

This report investigates a sample set of 25 million transactions generated in 2015,

examining the role of promotions and emphasizing customer retention metrics.

Understanding metrics such as credit card declines and reasons for customer

churn are key factors to unlock ‘economic loyalty,’ providing guidance in product,

operational, and promotional arenas and keeping subscription businesses on the

path to healthy growth.

3

Introduction

Benefits of a Subscription

Business Model

To the business:

⊲ Predictable revenue

⊲ Customer relationships

that lead to insights

⊲ Automation of revenue-

optimizing decisions

To the consumer:

⊲ Convenience

⊲ Flexibility to choose the

plan/product that best

meets their needs

⊲ Pay-as-you-go model

amortizes costs

The Sample Set

5

The Sample Set

We categorized the 25 million transactions in our sample set by market—either business-to-business (B2B) or business-to-consumer (B2C)—and by whether the product or service was digital or physical.

Ninety percent of transactions involving physical goods fell in the B2C category,

a reflection of the popularity—and wide variety—of box-of-the month offerings, as

well as consumers embracing monthly deliveries of staples like shaving supplies

or pet food.

The digital goods category displayed more

variety, with 25 percent of transactions for digital

goods in our sample set originating with B2B

companies—underlining the rise of software-as-

a-service (SaaS) and cloud-based platforms.

B2C companies generated 72.9 percent of

the transactions for digital goods in our sample set. Considering the growth of the

Internet of Things (IoT) and digital delivery of entertainment as consumers ‘cut the

cord’ for over the top (OTT) content, this trend should continue.

Transaction Overview by Business Orientation

* Only recurring transactions included in sample set; initial transactions excluded.

72.9%

24.1%

Percentage of physical goods transactions in the B2C category

B2B B2C Both


7


Sales promotions such as discounts, coupons and ‘specials’ play a big part in demand generation and are always a major factor in holiday shopping. Coupons are especially attractive to consumers, as Nielsen research discovered when consumers in their September 2015 survey cited coupons as the top influence in pre-purchase decisions.

Coupons are an attractive tool for encouraging sampling, trial and adoption for

subscription businesses, too. In our sample set, more than 15 percent of customers

redeemed coupons in the fourth quarter of 2015, with the highest number of

customer redemptions in November.

In fact, earlier Recurly research found that Cyber Monday, which fell on November

30th in 2015, experienced three times the rate of coupon redemptions than other

days in a two-week period that included Cyber Monday and Black Friday. Powering Promotions

With Coupons

Recurly’s coupon feature lets you

create percentage or fixed-amount

coupons and create bulk unique

coupons. Read our blog series to

learn more about how you can use

coupons to power the promotions for

your subscription business.

Coupon redemptions on Cyber Monday versus other days in our research periodTHE RATE

Average Monthly Coupon Redemptions

October November December0

6

12

1815.1%

16.1% 15.4%

http://www.nielsen.com/us/en/insights/news/2015/digitally-disrupting-the-habitual-shopping-routine.html

http://www.nielsen.com/us/en/insights/news/2015/digitally-disrupting-the-habitual-shopping-routine.html

https://info.recurly.com/hubfs/infographics/Recurly-Holiday-Infographic.pdf

https://blog.recurly.com/test-your-way-to-success-developing-a-discount-campaign-in-recurly

Factors Impacting Subscription Revenue: Churn

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Churn, or customer attrition, is one of the most sensitive variables impacting the value of a subscription business. Customer retention rates ultimately determine whether a recurring revenue business is growing profitably or not, and small shifts in churn rates can have major impacts on future periods. In effect, churn reflects how well products and services satisfy customers over a period of time. Dissatisfied customers cancel their subscriptions, or ‘churn,’ negatively impacting revenue and overall growth.

However, churn isn’t always voluntary. If a subscription business is unable to

collect payment, even if the customer is satisfied with the product or service,

that customer is lost to involuntary churn. Credit card issues, such as outdated

information which leads to failed payments, are major reasons for involuntary

churn. Measuring both voluntary and involuntary churn rates is very important for

subscription businesses, as each rate requires different mitigation strategies.

Amount of overall churn in our sample set categorized as involuntary churn PERCENT

10


In our sample, the overall churn rate peaked in Q1 of

2015 and declined by 8 percent throughout the year.

Voluntary churn, reflecting customer dissatisfaction as

customers cancel subscriptions or switch to different

providers, represented 80 percent of churn throughout

the year and mirrored the overall churn pattern. Mitigating

voluntary churn requires strategies that focus on customer

satisfaction, including product or service improvements.

Involuntary churn, which is often caused by credit card

declines or other non-payment reasons, remained steady in

each quarter and made up almost 20 percent of the overall

churn rate.

Q1 Q2 Q3 Q40

2

4

8

6

108.8% 8.5% 8.2% 8.2%

2015 Quarterly Churn Rates

* Only recurring transactions included in sample set; initial transactions excluded. * Includes churned and total customers for each month; Recurly averaged rates over

four quarters. See glossary for further details.

Involuntary and Voluntary Churn as Percentage of Total Churn

82.4%

Q1

81.7%

Q2

80.6%

Q3

79.9%

Q4

Measuring voluntary and involuntary churn rates

is important for subscription businesses, as each

rate requires different mitigation strategies.

Voluntary Involuntary

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Examining churn patterns for B2B and B2C categories

revealed that the churn rate declined for both categories

throughout the year. The B2C category, however, had a

higher churn rate than B2B and decreased by 5 percent

over the course of the year. As we saw in the overall churn

analysis, voluntary churn formed the largest component for

the B2C category.


Given these findings, we believe that New Year’s resolutions

to rein in expenses and save money drove voluntary

churn in the first quarter of 2015. As with many New Year’s

resolutions, the effects tapered off throughout the year.

82.5%

82.0%

78.3%

77.9%

B2C

Q2

Q1 80.2%

80.3%

B2B

Q4

Q383.0%

81.5%

Q1 Q2 Q3 Q40

4

2

6

10

8

12

7.9%

10.2%

7.6%

10.2%

7.4%

9.8%

7.2%

9.8%

B2B vs. B2C Quarterly Churn Rates

Churn Type as Percentage of Total Churn by Business Orientation

B2B B2C


12


Comparing churn rates for digital and physical goods

showed that the physical goods category, with a 10.6 percent

churn rate, experienced a 23 percent higher churn rate than

that for digital goods, at 8.2 percent; voluntary churn drove

the majority for both categories.


Higher churn rate of physical goods than that of digital goods

0

4

2

6

10

8

12

Q1

8.7%

10.5%

Q2 Q3 Q4

8.3%

10.2%

7.9%

11.1%

7.8%

10.4%

Digital vs. Physical Quarterly Churn Rates Churn Type as Percentage of Total Churn by Business Type

Digital Physical

Physical

Q2

Q1

Digital

Q4

Q380.8%

78.9%

84.5%

78.7%

82.3%

86.0%

81.4%

78.5%

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Measuring and Managing Churn

The first step to minimizing churn is to

understand the difference between voluntary

and involuntary churn. Voluntary churn is

when a customer does some action such as

canceling their subscription. Involuntary

churn happens from a passive customer

action, such as when a credit card problem

is never resolved.

In either case, churn is a critical issue for

any recurring revenue business. There are

different ways to measure and manage it to

ensure your business’ success. To learn more,

read our white paper on calculating churn.

Involuntary churn remained fairly constant throughout the year. As noted

earlier, involuntary churn is usually caused by credit card issues. It’s

important to remember that many commonly experienced credit card errors

can be successfully remediated with careful management, resulting in

consistent and low rates of involuntary churn.

Minimizing involuntary churn

leads to two important

results: capturing the value

of otherwise-lost transactions

which translates into increased

revenue for the business and,

more importantly, retaining satisfied customers who would otherwise have

been lost to recoverable credit card failures.

In our next section, we’ll examine another key metric for managing

customer retention, credit card declines, and how to analyze decline rates.

Managing involuntary churn results in higher customer retention and lifetime value.

https://info.recurly.com/hs-fs/hub/308856/file-1593548289-pdf/Guides/A-Better-Way-to-Calculate-Your-Churn-Rate.pdf

Factors Impacting Subscription Revenue: Credit Card Declines

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Credit Card Declines

Each billing cycle is an opportunity to minimize a subscription business’ involuntary churn. Predictable revenue streams are one of the great advantages of the subscription model, and to keep the stream flowing smoothly, subscriptions are often paid by credit cards, whether corporate cards for business services or personal credit cards for consumer products.

While most transactions are successful for Card Not Present (CNP) transactions

in e-commerce and subscription commerce, if there is a problem, the customer,

too, is not present to provide another payment method. Whenever a credit card

is used, the risk of failed transactions, or ‘declines,’ is present and needs careful

management in order to ensure the transaction is successful and the customer

is not lost.

Designing a proper checkout flow reduces the level of declines on initial

transactions, and most companies follow best practices for this critical function.

However, if credit card information changes after the customer’s initial sign-up,

subsequent transactions are at risk, as is the customer. ‘Repairing’ the situation

seamlessly is critical so the customer is not lost to involuntary churn. As such,

we focused our decline rates analysis solely on recurring transactions and

excluded initial transactions from the data set.

Success rate of the 25 million transactions in our samplePERCENT

16


With an average quarterly decline rate of 12.2 percent for recurring transactions, our

sample of 25 million transactions experienced a success rate of almost 88 percent.

Transactions may decline for a variety of reasons, from a temporary processing

glitch at a payment gateway to an overburdened credit card. Noting the small

increase in declines as the year progressed, we decided to investigate the role

of seasonality.

Q1 Q2 Q3 Q40

6

3

9

12

15

12.0% 12.1% 12.2% 12.5%


Average Transaction Decline Rates by Volume

17


Does Seasonality Affect Decline Rates?

From a seasonality perspective, decline rates as measured by volumes of transaction were relatively stable, indicating valid credit cards on file. However, transaction decline rates based on the value of the transaction increased by 10 percent over the course of the year, from 14.4 percent in the first quarter of 2015 to 15.9 percent in the fourth quarter of the year.

The fourth quarter of any year is one of

increased retail activity as consumers

shop for holiday gifts and increase the

balances on their credit cards. However,

an additional factor was at play in the

latter part of 2015 as the credit card

industry continued to roll out EMV,

or chip-and-pin, cards. Card-holders

received new credit cards designed

with additional security measures to defeat point-of-sale fraud—cards which

included new expiration dates and, in many cases, new security codes. Unless

this information is updated, transactions can be declined. This information can be

updated smoothly and programmatically when merchants use ‘Account Updater’

services, such as those provided by credit card companies or Recurly.

Average Transaction Decline Rates by Value

Q1 Q2 Q3 Q40

6

12

16

14.4%15.1% 15.2%

15.9%

The fourth quarter of any year is one of increased retail activity as consumers shop for holiday gifts and increase the balances on their credit cards.

18


$0-18 $19-28 $29-48 $49-98 $99+0

7

14

21

8.1%

9.4%

7.6%

11.5%

8.5%

13.1%

9.5%

15.7%

11.9%

20.9%

How Do Price Points Affect Decline Rates?

Do price points play a role in transaction declines? To answer that question, we segmented our sample transactions into five clusters of price points and identified whether the transactions originated with a B2B or a B2C company.

Decline rates increased in step with

price points in both the B2B and B2C

categories. However, decline rates

for transactions in the B2C category

outstripped the average decline rate

for each price point, based on the

volume of transactions.

In the B2C category, decline rates

for transactions valued at $99+ and

$49-98 reached almost 21 percent

and 15 percent respectively. The B2B

category experienced much lower

decline rates at those same price

points—almost 12 percent for $99+

and 9 percent for $49-98.

* Price points were chosen to reflect the most common subscription fees throughout the sample set.

B2B vs. B2C Transaction Decline Rate by Price Point

Decline rates in the B2C category outstripped the average decline rate for each price point, based on the volume of transactions.

B2B B2C

19


As noted earlier, transactions can decline for a variety of reasons, including

fraud or temporarily overburdened credit cards. This factor appears to be at

work as we saw higher rates of declines with the B2C category, especially

when working with higher price points.

Credit cards can be declined for a variety of reasons, but higher ticket

transaction sizes are certainly weighted with increasing sensitivity by

payment gateway and card processing participants. We have observed a

distinct correlation between the transaction amount and the probability that

the card will result in a declined transaction.

Being able to identify these scenarios is crucial, as there are a variety of

tactics that subscription businesses can use to recoup revenue which would

otherwise have been lost. In our next section, we’ll analyze how to measure

revenue recovery and how it contributes to healthy growth.

Analyzing Decline Rates

To establish a baseline, compare your

average decline rate to industry rates. For

most businesses, a decline rate of 5-14

percent of monthly transactions for B2B and

6-18 percent for B2C is standard.

Then look for trends. Sometimes, viewing

month-over-month data can reveal interesting

trends. Your customer service team can also

be a great source of information on decline

reasons and trends.

Regular analysis will make clear what issues

are causing transaction declines and how you

can correct them.


21


Unlike physical commerce, where a transaction can be ‘saved’ when the customer provides another credit card if the first card has a problem, card-not-present (CNP) transactions such as those in subscription businesses require specialized strategies if the transaction fails.

While most transactions are successful, the nature of subscription businesses

provides opportunities to ‘recover’ revenue that might otherwise have been lost

to credit card declines or churn. This is especially important at renewal time for

subscriptions. Recovering this revenue requires specialized logic which can vary

based upon why a transaction fails. This may include re-submitting the transaction

programmatically, or ‘re-trying’ the transaction, at defined intervals, to avoid

inconveniencing customers.

How Well Do Various Business Categories Recover Lost Revenue?

Using these programmatic techniques, the businesses in our sample were

able to recover almost 11 percent of revenue that would otherwise have been

lost during 2015.

The revenue recovery rate for B2C transactions was higher, at 12 percent. This is

noteworthy since the B2C category experienced a slightly higher rate of declines

and churn, too. Efficient revenue recovery can lead to significant upticks in

revenue for subscription businesses.

0

6

3

9

12

10.4%

12.0%

11.0%

Quarterly Average Recovered Revenue Rates

B2B B2C Overall Average

22


How to Calculate the Recovered Revenue Rate

The Recovered Revenue Rate is calculated by taking the sum of revenue Recurly is able to recover that would have been lost otherwise and dividing that by the original revenue amount.

In general, there are three types of successful transactions, and the last two

cases contribute to the Total Recovered Revenue amount:

First attempt with existing and

up-to-date credit card information.

This is the bulk of most recurring

transactions, where the transaction

will just go through on the first

attempt with the existing credit

card information.

First attempt with updated credit

card information. This is a group

of transactions where Recurly’s

proprietary solution, including Account

Updater, will update the credit card

information before processing the

first transaction. Without the updated

information (e.g. new credit card

number), these transactions would

have failed and the revenue would

have been lost.

Subsequent attempts on initially

failed transactions. This group

of transactions are ones where

the initial attempt was declined,

due to credit card issues such as

insufficient available balance, but

were successfully re-submitted

programmatically at defined

intervals using our service.The effective recovered revenue rate is

calculated by dividing the total recovered

revenue by the total revenue amount.

Amount of revenue businesses in our sample were able to recover

23


Let’s use a fictional company called Kale Krate to illustrate how this works.

In the month of April, Kale Krate generated $950,000 in revenue. Of the

$950,000, Recurly was able to successfully process $800,000 on the first

attempt without any updates (case #1). Recurly was also able to update the

credit information and successfully process $100,000 on first attempt (case

#2). Finally, $50,000 was declined initially but subsequent programmatic

attempts helped recover $10,000 of that amount (case #3) for Kale Krate.

As a result, Kale Krate collected $910,000 in the month of April, including

$110,000 that might have been lost.

Step-by-Step: Calculating Effective

Recovered Revenue Rate

Follow these three simple steps to calculate

your effective recovered revenue rate and

see how much you could save.

Calculate the total recovered

revenue (case #2 + case #3)

Calculate the total

possible revenue

Divide recovered revenue

by possible revenue

$100,000 + $10,000 = $110,000

$900,000 + $50,000 = $950,000

$110,000 ÷ $950,000 = 11.57%

There are over 2,000 ways a credit card transaction can fail. See how much revenue you can recover by preventing declines.

1

2

3

https://info.recurly.com/recovered-revenue-calculator

https://info.recurly.com/recovered-revenue-calculator

24


The key to revenue recovery lies in identifying the reason for a transaction

decline so the appropriate action can be taken. There are scores of reasons why

transactions can be declined, or fail. Each reason has a different rate of revenue

recovery with some reasons generating high rates of revenue recovery and other

reasons very low rates.

Overall, our sample saw a revenue recovery rate of 11 percent, across all decline

reasons. This rate is attributable to proactive management and use of Recurly’s

proprietary retry logic and built-in Account Updater tools.

Quarterly Recovered Revenue Rates by Top Failure Types

Insufficient Funds Temporary Hold Exceeds Daily Limit

We further examined three of the more

common decline reasons—Insufficient

Funds, Temporary Hold, and Exceeds

Daily Limit—that we remediate using

proprietary logic. The revenue recovery

rates were fairly consistent throughout

2015, demonstrating how managing

declines can lead to significant revenue

contributions on a repeatable basis.

Revenue recovery rate of our sample, attributed to proactive management

Q1 Q2 Q3 Q40

22

11

33 31.5% 32.9%

14.7%

28.9%

14.3%

29.8%

13.7%

31.4%

25.0%

12.1%

31.4%

27.4%

25


Keys to Recovering Revenue

⊲ Identify the reason for a transaction

decline so the appropriate action can

be taken. Common decline reasons are:

Insufficient Funds, Temporary Hold, and

Exceeds Daily Limit.

⊲ Use an Account Updater function to

automatically repair failed transactions.

Recurly’s Account Updater recovers

up to 9 percent of a customer’s annual

revenue, on average.

⊲ Read more about Recurly’s free Account

Updater service.

The recovered revenue rate represents only one facet of value, as it

represents only the money recovered from individual transactions. If a

customer is lost or churns due to a credit card issue, then the subscription

business not only loses the revenue from that failed transaction, the

business could also lose all future revenue from that customer. Since

subscription businesses are based upon the premise of customer loyalty

and retention, it is critical to build revenue recovery processes into

business workflows.

If a customer is lost or churns due to a credit card issue, the business could lose all future revenue from that customer.

https://blog.recurly.com/enable-recurlys-account-updater-service-now

Summary and Methodology

27

Summary

The recurring nature of subscriptions provides an opportunity to reinforce value for customers every time a product or service is delivered and with every billing cycle. Customer retention is key as customers who derive value reward companies with economic loyalty.

Two of the factors that subscription businesses need to manage closely

are credit card declines and customer attrition, or churn. Mitigating churn

can provide subscription businesses with significant revenue uptick

and can be achieved with modest process improvements. One of the

first steps is to identify business patterns, especially as they compare

to industry averages. For example, companies that target consumer

audiences may see increased customer churn after the holiday period

and should create proactive strategies for mitigating

this ‘hangover effect.’

Churn falls into two categories, voluntary and involuntary. The former

category indicates customer dissatisfaction with products or services,

providing a clear indication that improvements are needed in product

or operational areas. Involuntary churn is usually caused by credit card

issues which, when remediated, lead to two important results: increased

revenue gained from capturing the value of failed transactions, and

increased rates of customer retention as satisfied customers were not

lost due to credit card declines.

The nature of card-not-present transactions, unlike physical commerce

where both the card and the customer are present, require specialized

strategies if the transaction fails. While most transactions are successful,

the nature of subscription businesses provides opportunities to ‘recover’

revenue that might otherwise have been lost. This is especially important

at renewal time for subscriptions as credit cards may have been updated

or replaced. In our sample set of 25 million transactions that occurred

over 2015, Recurly was able to recover almost 11 percent of revenue for

these subscription businesses, providing a noticeable, positive impact.

As more businesses embrace the subscription model to deliver

predictable revenue and form closer relationships with their customers,

customer loyalty and retention metrics such as those we analyzed in this

report provide the key to automating revenue-optimizing decisions.

28

Methodology

Our study examined a sample pool of 25 million aggregated and anonymized subscription transactions generated throughout 2015.

We categorized these transactions by market—either business-to-business (B2B) or

business-to-consumer (B2C)—and by whether the product or service was digital or

physical, in order to identify trends, including seasonality.

We also segmented our sample transactions into five clusters of price points and

identified whether the transactions originated with a B2B or a B2C company in

order to examine the impact of price.

The sample set included paid recurring transactions only and did not include the

initial subscribing transaction.

29

Glossary

Transaction Decline Rate

The number of declined transactions as a percentage of

the total number of recurring transactions in the sample.

Voluntary Churn

Customer attrition based upon a direct customer action

intended to terminate a subscription, for example when a

customer cancels their subscription or purposefully lets it

lapse without renewing.

Coupon Customer Impact Rate

The total number of customers who redeemed a

coupon divided by the number of customers in that

month for each business offering coupons. The reported

rate is an average across these businesses. The time

period included was the 2015 holiday season (October

to December).

Recovered Revenue

The sum of revenue recovered by Recurly (through

processes such as Account Updater, automatic retries,

and dunning) that would have otherwise been lost,

divided by the original revenue amount.

Monetary Decline Rate

The total value of declined transactions as a percentage

of the total value of recurring transactions in the sample.

Involuntary Churn

Customer attrition based upon a passive customer

action, such as a declined credit card. If the credit card

information is not updated or repaired, it causes the

customer’s subscription to be terminated.

Churn Rate

The total number of customers who left due to either

voluntary or involuntary churn during a given time period

divided by the total number of customers at the start

of that time period. Only recurring transactions were

included in sample set; initial were transactions excluded.

Recurly measured churned and total customers for

each month of 2015 and averaged these rates into

four quarters.

Recurly provides enterprise-class recurring billing management for thousands of subscription-based businesses worldwide.

+1.844.732.8759 [email protected] © 2016 Recurly, Inc. All rights reserved.

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2015 INDUSTRY REPORT Recurly Subscription Snapshot€¦ · Customer retention metrics in recurring revenue businesses are complex, especially when transactions are weighted to credit