How to Optimize Subscription Payment Processing to Reduce Churn

Subscription business models have transformed the way businesses operate. Initially, this model was used for newspapers and businesses, but now streaming services, SaaS platforms, e-commerce memberships, meal kit services, and even automakers have adopted it. 

But this model has its fair share of flaws. One is churn, which causes businesses to lose a large chunk of monthly revenue. Involuntary churn, which is caused by failed transactions from expired credit cards, insufficient funds, or technical errors, can lead businesses to lose 40% of their customers. 

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Involuntary churn makes up 20-40% of subscription losses

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When subscription-based businesses fail to optimize their billing and payment processes, they lose revenue and face additional challenges, such as increased support requests, failed transactions, and manual recovery efforts. Each failed payment creates extra work and unnecessary costs for operational and financial teams to address billing issues, resolve support tickets, and manage disputes. Minimizing revenue drains is possible with data-driven subscription payment optimization.

So, let's dive into the key technical strategies that prevent payment processing errors, optimize failed payment recovery processes, and improve customer retention.

Table of Contents

• Voluntary vs. Involuntary Churn
• The Financial Impact of Churn
• Common Causes of Voluntary Churn
• Common Causes of Failed Payments
• Strategies to Reduce Involuntary Churn
• Leveraging AI & Machine Learning to Combat Churn
• Communication Strategies to Prevent Voluntary Churn
• Key Payment Metrics to Track & Optimize
• Real-World Case Studies: AI and Subscription Payments

Understanding Churn: Voluntary vs. Involuntary

Subscription businesses often face churn when customers leave or stop paying. Churn falls into two categories: Voluntary and involuntary.

Voluntary churn happens when customers cancel their subscription(s) because of high fees, a more suitable or favorable alternative, or simply losing interest. Subscription businesses address this by improving customer engagement, offering incentives, or adjusting prices. 

Conversely, involuntary churn occurs when a customer churns for reasons beyond their control, resulting in a failed transaction. Subscription payment failures can be caused by banks declining payment, a payment card expiring before the due date, insufficient funds, or overly sensitive fraud prevention tools. The good news? Unlike customers who voluntarily churn, customers impacted by involuntary or passive churn can be more easily won back, and lost revenue can be recovered thanks to an optimized payment system.

The Financial Impact of Churn

Every failed payment is lost revenue. Involuntary churn makes up 20-40% of subscription losses, yet many businesses don’t realize how much it costs them.

Take Absolute Software, for example, which utilized revenue recovery tools on the 2Checkout platform to combat involuntary churn. They achieved a 35% recovery rate on auto-recurring transactions, leading to a 23% overall revenue uplift. That’s the impact of fixing payment failures instead of accepting them as losses.

Even marginal increases in payment success can make a big difference when processing thousands or millions of transactions annually. Instead of constantly chasing new subscribers, companies can focus on retaining their loyal customers. With the right approach, failed payments don’t have to mean lost customers.

Common Causes of Voluntary Churn

Most common causes of voluntary churn are not directly related to paytech. Hence, this article will focus mainly on the causes and solutions for involuntary churn. However, one aspect of payments can heavily influence a customer’s decision—checkout friction.

Checkout Friction

Overly complicated checkout processes cause checkout friction. Any element or function that interrupts the checkout flow can significantly affect the rate of completed transactions. In fact, more than 50% of shoppers will abandon their cart and look for alternative products or services if they feel the process is too complicated. 

Contrary to what you may think, checkout friction doesn’t only apply to a one-time or initial subscription purchase. Subscription payment systems not designed to be seamless and limit customer intervention to unavoidable requests can become cumbersome, leading to increased voluntary churn.

Common Causes of Failed Payments 

Understanding why payment failures occur is key to mitigating the risk of them. By analyzing historical transaction data, businesses can better understand customer behavior and its impact on the organization's health. Let’s look at some of the common reasons payments fail.

Expired or Replaced Cards 

One of the most common causes of involuntary churn is expired or replaced cards. When customers are issued new cards because of fraud, expiration, or bank upgrades, their payment details are not automatically updated with PSPs or internal systems. Without the correct payment data, the transaction will fail. 

Insufficient Funds

One of the leading causes of involuntary churn is insufficient funds. Customers may not have enough funds in their accounts to cover the charge or may have exceeded their credit limit. This can only be corrected by the customer or issuing bank, though effective dunning processes can help by alerting customers of the issue as soon as it occurs.

False Declines & Fraud Filters

False declines happen when fraud detection tools incorrectly flag a legitimate transaction as fraudulent. Overly sensitive security systems may flag valid transactions as suspicious. False declines are frustrating, and any payment friction can cause a customer to seek an alternative solution. Ensuring systems that handle PII and sensitive payment card data are secure is a top concern of all companies. However, weighing security against customer experience is important to find the right balance.

Network & Gateway Errors

Network and payment gateway errors can add another layer to an already complex subscription billing and payment process. Even if a customer has the required funds and a valid card, outages or processing errors can still cause a decline. Businesses that rely on a single gateway face a higher risk of involuntary churn than those that leverage multiple gateways. 

Strategies to Reduce Involuntary Churn 

To reduce churn, businesses must adapt structured strategies to recover lost revenue and improve customer retention. Try out one or all of the following to reduce involuntary churn.

Smarter Retry Logic

Failed payments don’t necessarily mean lost customers. Smart retry logic optimizes the timing and frequency of retries based on factors like time zones, customer behavior, and bank processing windows. Depending on the level of customization allowed by the retry engine, it’s possible to add rules that go beyond timing controls to attempt to use a backup payment method or request updated card details from card issuers.

A company struggling with payment failures could increase the number of successful transactions by analyzing payment data and implementing a retry system based on trends. Even better if that retry system is powered by machine learning and can handle the analysis for you.

Card Lifecycle Management

Customers who get new cards due to expiration or fraud forget to update the information, causing failed payments. This leads businesses to lose revenue. In addition to sending payment reminders, businesses can reduce the amount of outdated data using a card account updater (CAU). CAUs help update payment card data and are offered by some payment gateways and major card networks, including Visa and Mastercard. However, not all payment service providers offer this service. 

Companies can also implement network tokenization to reduce the amount of outdated card data. With network tokenization, card networks will manage and update tokens whenever billing information changes.

To learn more about network tokenization, read our other articles, Payments 101: Understanding Tokenization Basics and Network Tokenization vs. Payment Tokenization: What’s the Best Fit for Your Business? This ensures payments continue without customer intervention.

Dunning Management

Failed payment can also happen because customers forget to pay. Dunning management can help businesses recover failed payments by notifying customers about issues and prompting them to update their information. They send automated email and SMS workflows to remind customers. Well-timed messages remind customers about upcoming payments, failed transactions, and any necessary changes to billing information.

Best practices for effective dunning management include personalized messages, multi-channel communication, and grace periods before account suspension. 

Leveraging AI & Machine Learning to Combat Churn

AI has drastically transformed how businesses handle subscription payments while preventing unnecessary churn. AI analyzes customer behavior and predicts which accounts are at risk of churning, whether involuntarily or not. This way, companies send reminders, adjust billing strategies, or offer incentives before customers churn.

Machine learning also makes retry attempts smarter. Instead of approaching retries as a ‘one-size-fits-all’ process, AI can use a customer’s personal payment history to calculate the best time to retry a payment. This increases the chances of a successful payment without annoying the customer with repeated failed attempts. Plus, it practically eliminates the need for manual analysis of customer records and effectively reduces labor costs.

AI has also made great strides in fraud detection and prevention. Sometimes, legitimate transactions are declined due to overly stringent fraud filters. AI fine-tunes this process, reducing the amount of false declines by 85% in some cases.

Hydrant, a wellness brand, used Pecan AI to predict and reduce churn. The results? A 260% jump in conversion rates and a 310% increase in revenue per customer. More than 83% of customers flagged as likely to leave did, but that wasn’t a bad thing. It meant Hydrant didn’t waste time trying to retain customers who were already set on leaving. Instead, they focused their efforts where it mattered most due to AI-driven insights.

Communication Strategies to Prevent Voluntary Churn

One of the most common reasons customers leave is their frustration due to a poor billing system, lack of connection with the service, or forgetting to pay altogether. Clear communication can prevent voluntary churns before they become an issue. 

Send reminders before the payment is due. This gives customers some time to gather funds or update their billing details. By alerting customers at the right time, you greatly increase the chances of timely payment.

Being transparent with billing systems also reduces the churn ratio. Customers who understand exactly what they’re paying for are less likely to feel surprised and overcharged. Many subscription services now provide detailed invoices or usage summaries, which makes users feel more in control.

Additionally, offering incentives can re-engage customers who are on the fence about canceling. Some techniques include targeted discounts, bonus features, or flexible payment plans. Companies that provide personalized retention offers based on user behavior often recover a significant portion of customers at risk of voluntarily churning.

Key Payment Metrics to Track & Optimize 

Businesses can optimize their billing system by identifying churn patterns and taking proactive steps to retain customers. Some of them include the following.

Churn Rate

It measures the rate of customers who cancel within a given period. It’s calculated as (Lost Customers ÷ Total Customers) × 100. A high churn rate indicates retention issues that need immediate attention.

Payment Success Rate

This metric shows the percentage of successful transactions. By tracking these metrics, businesses can identify failed payments and optimize retry strategies. Even a small improvement can dramatically boost revenue.

Recovery Rate

The recovery rate reflects the proportion of failed payment attempts that are successfully retrieved through dunning strategies. A low recovery rate suggests a need for better follow-ups, smarter retry logic, or improved payment gateway performance.

Customer Lifetime Value (CLV)

CLV represents the total income a business can expect from a customer over time. Reducing subscription churn increases CLV, making every customer more valuable and improving long-term profitability.

Real-World Case Studies: AI and Subscription Payments

Reducing involuntary churn requires a mix of technology, data-driven strategies, and proactive measures. Many companies have successfully tackled payment failures and customer retention challenges using AI and machine learning. Here are some real-life examples of businesses that have effectively minimized churn and improved payment success rates.

Visa

Visa has implemented real-time AI through its Smarter Stand-in Processing (STIP) system to manage transaction authorizations during service disruptions. By analyzing individual cardholder transaction histories, this AI-driven approach can approve or decline transactions on behalf of issuers when their systems are offline. This method can potentially reduce transaction declines by up to 50% in certain situations, ensuring a smoother customer experience even during outages. 

Razorpay

Razorpay introduced 'Optimizer,' an AI-powered payment routing system designed to reduce transaction failures. Optimizer utilizes over 2 million data points across 300 parameters from past transactions to determine the optimal real-time payment gateway for each transaction. The intelligent routing system has not only reduced the amount of failed transactions; it has increased revenue by 10%.

Recurly 

Recurly, a subscription management platform, developed a random forest model to predict the best day to retry processing a previously declined subscription payment. By using several decision trees to consider various factors, this machine learning approach has enabled Recurly to recover an average of 70% of failed subscription renewals, significantly improving revenue retention for their merchant clients. 

Conclusion

Keeping customers from churning doesn’t just happen; it takes the right mix of intelligent retry strategies, proactive card updates, and AI-driven insights. Fine-tuning your payment processes can help recover lost revenue and keep more subscribers engaged.