A Payment Strategy for Customer Retention and Increased Customer Lifetime Value

(PaymentsMarket) - The lifeblood of any business is its ability to effectively sell and win new customers, better known in marketing terms as Customer Acquisition. Many companies’ measurement of their success unfortunately falls short after the customer’s initial purchase. More successful organizations take a longer term strategic approach with additional measurements and marketing processes throughout the entire lifecycle of a customer to maximize profitability. The additional attention to a customer lifecycle includes Customer Retention strategies and understanding customer exits.

A tangible metric for the financial health of a business is the rate of both acquiring and retaining good customers. As reported in previous “Ask the Expert” posts, the cost of acquisition must be maximized throughout the entire customer lifecycle to manage profitability and long term ROI. This is even more relevant for merchants offering a recurring revenue model where each billing cycle improves the Average Customer Lifecycle Value (ACLV).

ACLV is calculated by multiplying the Average Recurring Charge by Average Customer Duration (ACLV = ARC x ACD). For example, a merchant billing an average of $10 per month over the average customer duration of 18 months would result in $180 ACLV.  If you have good data available, you will want to go to the individual customer level to determine specific programs that work well or understand support issues and reasons for customers leaving, better known as “exit”. The Exit impacts customer duration and effectively stops future billing. Understanding why customers leave allows you to proactively address those issues with process improvement which extend your Customer Duration, thus improving the ACLV and your marketing investments.

A merchant that proactively manages its ACLV will see considerable improvements in both customer satisfaction and financial results. This is especially relevant for merchants with acquisition costs and margins that are recovered over multiple billing cycles. Such merchants include those selling digital goods and subscription-based services in areas such as MMO gaming, dating and social media.

According to a whitepaper by Vindicia, a leading provider of Software as a Service (SaaS) billing solutions for digital merchants, there are guidelines a merchant can take to effectively measure and manage the Customer Lifecycle Value (CLV) for improved customer retention, customer satisfaction and profitability.

The initial steps to measuring retention are to 1) establish a current baseline; 2) define what success should look like; 3) then track your progress towards those objectives. Establishing a baseline allows you to measure your current customer base, their typical behavior and usage patterns. 

Next is to understand your specific business metrics determining how your organization is currently performing. Understanding Average Recurring Charge (ARC) is probably the simplest to calculate by dividing the total Transaction Revenue (TR) for the Period (P) by the number of (C) customers and the number of Billing Cycles included.  Understanding customer duration can be more challenging. Simply looking at the number of accounts starting at the same period and still remain for various periods provides a basic level of insight, but more sophisticated tools will be of greater value.

Customer exit paths requires you to dig deeper into the why customers leave. Opt-outs and cancellations are similar yet occur for different reasons.

Cancellations occur when your company stops service as a result of an existing customers’ payment method failing or “payment failure” and unable to successfully be re-billed. Opt-outs are a result of a prospect or (trial) customer taking specific action to stop service and no longer be billed. Opt-outs happen for many reasons and you should offer your customers a clear and clean path for opting out to avoid unnecessary chargebacks or excessive complaints.

Cancellations and payment failures warrant more focus as a strategic part of your back-end processes and payments strategy. Since customer acquisition is a result of an up-front marketing expense, each successfully billed period improves your ROI and profitability. Minimizing payment failures drives extended customer duration and is especially important in retaining those customers that want to continue services. In many cases, these transactions fail as a result of an outdated payment profile where the customers’ payment profile has changed and has not been updated.  Other issues can be the credit card may temporarily be over their limit or the transaction was processed during a temporary network outage.

To keep the recurring payment failures to a minimum, companies like Vindicia recommend three best practices for merchants:

  1. Use advanced billing retry logic and customer communications at each step of the process
  2. Track and analyze the reasons codes for failure
  3. Leverage Account Updater services whenever possible

Advanced billing retry logic is the attempt to re-process a transaction after a “soft” failure. A “soft” failure can include card limits exceeded, card expiration or temporary network outage. “Hard” failures cannot be fixed or re-tried and are often the results of more serious issues such as lost or stolen cards being used. Understanding and analyzing the reason codes for failure allows you to identify areas where process can be improved (“soft failures) or not (“hard failures”).

MasterCard and Visa issuing banks from North America and Western Europe offer a data feed of all accounts and their respective updates. Certain processors make this “account updater” available to merchants as a way to maintain the most up-to-date account details for more accurate processing. This is a powerful data component in minimizing failure rates.

When it comes to managing your billing systems you can keep everything in-house or outsource to a third-party service provider. With the rapid changes in technology, highly competitive nature of digital goods and compliance issues associated with data storage, outsourcing to a partner with robust billing engines and sophisticated rules engines can pay dividends for customer retention and extended ACLV. Companies such as Vindicia offer SaaS on-demand billing and fraud management solution called CashBox and a recently announced CashBox StoreFront.

customer retention increases customer lifetime value

The CashBox services include advanced payment logic, support for localized global transactions, business model flexibility and flexible merchandizing. According to Vindicia’s VP of Marketing Sanjay Sarathy, “one of our customers was able to improve customer retention rates from 92 percent to 95 percent within a few months of implementation through our advanced billing logic alone. Merchants with a lower starting retention rate baseline have seen even higher results.”

The “Impact of Customer Retention” graph outlines sample results for three different digital merchants from dating, financial and online content markets. Each has a different recurring billing model and initial transaction success rate.

The data demonstrates the impact of how customer retention strategies can deliver results in each market through Vindicia’s proprietary retry logic, support for Account Updater, communication engine and best practices. Independent of your initial success rate, when a merchant can boost increase retention an additional 2.9 – 7.8 percent, it has immediate financial impact.

If you are an online digital merchant with a recurring billing model we would encourage you to learn more about Vindicia and their CashBox solutions by visiting their website or online virtual booth at PaymentsMarket.com