SaaS: A Guide to Avoiding Failed Payments

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Is your SaaS business needlessly losing customers? A ProfitWell study reckons it probably is. Up to 40% of all SaaS customer churn is involuntary. This means that in 40% of cases it isn't customers who are cancelling their subscriptions. Rather, the subscriptions lapse due to payment failures.

The good news is that you don’t have to write this off as part of the cost of doing business. Involuntary churn is both avoidable, and preventable.

SaaS: A Guide to Avoiding Failed Payments - illustration of merchant and pet dog surrounded by goods and services with $ signs

In this article, we’ll look at the main reasons payments fail. We’ll then show you how to optimize your SaaS business’s payment processes so you can reduce involuntary churn and retain more subscribers.

What Causes Payment Failures?

Most payment failures in the SaaS space come down to card issues.

In many countries around the world, credit and debit cards are the most popular online payment methods. But cards weren’t designed for recurring payments. So, SaaS subscription renewals often fail because:

  • There’s a problem during the card payment process
  • The customer’s card details are outdated, so they’re no longer valid

Issues With Card Infrastructure

When a customer pays for their SaaS subscription with their card, they kickstart a lengthy chain of processes.

First, a payment processor passes on the details of the transaction to the card network (Visa, MasterCard, American Express or Discover). The card network then communicates with the issuing bank, which approves the transaction and releases the money to the SaaS company through the settlement network.

With so many stages to go through before the money reaches your merchant account, there’s a lot of room for things to go wrong. Case in point, as many as 6.7% of card transactions are blocked because the card network’s fraud detection software incorrectly flags them up as suspicious.

Transactions may also be rejected for other reasons. For example, the issuing bank might decline the payment because the customer has reached their credit limit or doesn’t have sufficient funds in their account.

Inaccurate Card Details

While things can go wrong while a transaction is being processed, payments also fail for a more straightforward reason.

Cards expire every three to four years. They may also get cancelled, for instance because they’ve been lost or stolen, or because the customer has decided they no longer need a particular card.

At the risk of stating the obvious, expired or cancelled cards won’t work. If the customer doesn’t update their billing information, the payment won’t go through and the subscription won’t renew.

How Can SaaS Businesses Avoid Failed Payments?

Subscription renewals are SaaS businesses’ lifeblood. It costs $1.32, on average, to earn $1 worth of annual recurring revenue from a new customer. In comparison, earning $1 worth of annual recurring revenue from an existing customer costs $0.71.

With this in mind, if you want your SaaS business to succeed, reducing involuntary churn is crucial.

Here are four SaaS payment processing tips to help prevent involuntary churn when payments fail and, more importantly, avoid payments from failing in the first place.

Keep Customers’ Payment Details Up To Date

According to ProfitWell, at any given time one in three customers’ credit cards are about to expire. Potentially, that’s 30% of your business lost to involuntary churn. So, getting customers to update their payment details beforehand is key.

One way to do this is to send customers an email — or a sequence of emails — letting them know their card is about to expire. This is called pre-dunning.

Pre-dunning emails remind your customers to update their payment details before their subscription fee is due. So, for instance, you could send a pre-dunning email 30, 15 and 7 days before the customer’s card is due to expire.

That said, while pre-dunning emails can be effective, not everyone thinks they’re a good idea. PayKickstart, for instance, think they “can make you seem greedy and inconsiderate Your customer may be well aware that it’s almost time to pay and don’t need to be told half a dozen times.”

So how do you make sure your customers’ card details are up to date without putting them off?

A better alternative is to use a card updater. These communicate with card networks and automatically update cards that are about to expire. The upshot is that you’ll always have your customers’ latest credentials on file without having to remind them. And payments won’t fail because of expired cards.

If Payment Fails, Try Processing it Again

While payments may fail on the first try, they won’t necessarily fail again. Sometimes, a transaction is declined because of a glitch in the system. Or because the customer had insufficient funds or went over their daily spending limit.

These types of declines — called soft declines — are usually temporary. So it’s worth attempting to re-process the transaction before letting the subscription lapse.

Retrying gives you a chance to fix payment issues without having to bother the customer. ChurnBuster, for instance, says that up to 21% of failed payments will go through when you retry.

The trick is to be savvy with your timing.

Let’s say a transaction was declined because the customer went over their spending limit. Here, trying again the next day may work. By contrast, if the decline was due to insufficient funds, it may be worth waiting until the end of the month, when most people get paid.

Most good SaaS payment processors now have retry logic. This means they’ll try to take payment again automatically if a transaction is declined.

Send a Dunning Email Sequence

Tried to take payment a few times with no luck? It’s worth sending the customer a dunning email.

Unlike pre-dunning emails, which you’d send before there’s an issue, dunning emails let customers know payment has failed. This gives them an opportunity to try a different card or another payment method before their subscription lapses.

Dunning emails are named after Joe Dun, a bailiff from the seventeenth century whose determination to collect every last penny of debt became the stuff of legend.

It’s not advisable (rather, incredibly counter-productive) to pull a Dun and bombard your customers with emails if payment fails. Instead, the idea is to let the customer know there’s been an issue and encourage them to try again with a different payment method.

Here are a few examples of dunning emails done well.

Tools such as Recurly, which integrates with CardPointe, can send dunning email sequences to customers automatically when a payment fails. And the results can be staggering. For example, when analytics platform Statsbot set up a dunning email sequence, they cut involuntary churn by 27%.

Offer Your Customers Payment Alternatives

Credit and debit cards are still customers’ preferred way to pay online, but that’s changing quickly. According to the Global Digital Payments Forecasts 2019-2022, by 2022 mobile wallets will account for almost half of all online payments, overtaking credit and debit cards as the most popular way to pay online.A Guide to avoiding failed payments - image showing alternative payment options with in store clients purchasing via POS but also via mobile

With this in mind, there are three compelling reasons to start accepting alternative payments:

  • They offer your customers a second option should their card payment fail. This is especially helpful because, with customers becoming increasingly conscious about online security, they may not be willing to share another card’s details
  • It tackles one of the root causes of involuntary churn. Put simply, if your customers don’t pay by card, their payment can’t fail because of issues with card infrastructure or out-of-date credentials
  • More and more people are starting to prefer alternative payments over card payments, because they allow them to pay without having to share sensitive information. So, accepting a mix of payment methods means you can future-proof your business and catch the wave once these payment methods go mainstream

Wrapping Up

According to a BetterCloud study, 73% of organizations think the vast majority of their apps will be SaaS by 2020. And, by 2021, the industry will earn $113 billion in revenue worldwide.

Clearly, the prospects for SaaS businesses have never been brighter. The flipside is that competition can only get stiffer, which means reducing customer churn is going to be key to success.

With this in mind, picking the right payment processing partner is crucial. Almost half of SaaS customer churn is involuntary and, so, completely preventable. And an effective, reliable payments partner that understands how SaaS billing works can help you implement strategies that will cut your churn rate and maximize renewals.

With real time transaction reporting, powerful integrations and specialized tools for subscription-based payments, CardConnect is perfectly placed to help you reduce involuntary churn and grow your SaaS business.

Talk to us to find out more.


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