Strategy #5: Improve subscription payment acceptance (30% less ARR churn)
How and why it works
Since failed payments will cause 20%-40% of your total revenue churn (our data at Paddle shows this will vary significantly for individual sellers month to month), the most effective way to save failed subscription payments is to stop subscription payments from failing in the first place .
The most effective methods we've tested to increase payment acceptance:
- Run payments through alternative payment methods which have a direct source of funds
- Charge payments in local currencies
- Increase your transaction volumes
- Route payments through local acquirers
- Prompt (and where possible, automatically update) expiring cards
Most US-based or US-focused SaaS companies focus on charging by card, which typically sees lower payment acceptance rates than digital wallets (like PayPal). This is because cards aren’t a source of funds themselves (unlike a bank or a digital wallet).
For card payments, we see big differences in payment acceptance across different geographies. This is usually because of the lack of relationships with local banks due to different countries, currencies, and card networks. It becomes harder to draw a path between the acquiring bank (your bank) and the issuing bank (of your customer’s card).
It’s also more likely that these transactions get flagged for fraud as the path of your payment is less familiar and matches fraud patterns (less common as you hit higher transaction volumes and show a track record). In the worst-case scenarios, foreign banks can issue chargebacks that cost you money. Most payment processors will automatically deduct chargeback fees from your account balance.
Finally, anti-fraud laws mandate cards must expire within three years of being issued, which means an average of 1 in 36 cards (or 2.78%) of your customer’s cards could be expiring each month (excluding other factors like cancelling cards).
This is one reason why you can expect recurring payment acceptance to be lower than the initial payment — especially for annual subscriptions paid by card. To counter this you’ll need to have customers proactively update their card details or otherwise lookup new card details through connected bank networks (most payment processors offer this, but you can only expect a fraction of your card vault to be updated).
To improve payment acceptance, you should offer local currencies and payment methods (like digital wallets) and route payments to be processed by local acquiring banks (instead of a one-size-fits-all global account). Most SaaS businesses generally don’t optimize for any of the banking infrastructure behind their chosen payments processor.
Evidence in the market
We have a number of data points on improving payment acceptance at Paddle as we’ve built out and tested our infrastructure.
Across our volumes and purchase types (B2B/B2C, 1st checkout/monthly subscription/annual, AMEX/Visa/MasterCard), we typically see more than 2X the proportion of failed payments for card transactions than PayPal.
When we A/B tested local acquiring in the US at Paddle (i.e., running US transactions through banks and entities that were based in the US vs. generic global accounts), we saw a 3% lift in payment acceptance on subscription renewals and 20% lift in 1st-time checkout subscriptions. That translates directly into 3% less MRR churn across all of our sellers for their US-based customers, and compounds to over 30% less ARR churn within 12 months.
When payments are in international markets, we typically see payments 1%-2% more likely to be successful (although in some regions, up to 9%!) when they're charged in local currency rather than a generic currency (like USD or EUR) for checkout and subscriptions. For instance, Japanese Yen (JPY) for Japanese buyers, Polish Zloty (PLN) for Polish buyers, and so on.
With Paddle’s card updaters, we see card details updated for around 10% of cards which are due to expire (as the issuing bank issues the new cards from the same account), and so the subscription can continue as normal.
Calculating the value to your business
With your own data, first look at the proportion of payments that failed. Analyze your unique transactions. If you have payment retries (recommended), this will drag down your overall payment acceptance rate as each individual unique transaction will have multiple payment attempts. This might be alarmingly low. Failed unique transactions are a much more helpful way to view involuntary churn.
Then, look into the proportion of recurring revenue that’s most likely to fail:
- Card payments (minus 1%-2%)
- International customers (minus 1%-3%)
- International customers paying in a currency different from their own (minus 1%-9%)
Churn can be even higher for companies based outside of the US who don’t have a US bank, or if they’re based in countries with generally lower authorization rates in their home market. We see some SaaS businesses come to Paddle from other providers with more than 30% annual churn from failed subscription payments (approximately 3% monthly — in line with results from our testing).
Estimate annual impact = 30.6% decrease in year-end ARR churn
Compound the monthly impact as 1 - (1-0.03)^12
Note: Improved payment acceptance will decrease your involuntary or delinquent churn. This will decrease the revenue impact of your dunning campaigns as they’ll have a smaller volume of customer accounts to engage in. The types of reasons for payment failure (and the effectiveness of different dunning strategies) will also shift.
Best practice: Cut your involuntary churn
Steps to go live in less than 2 weeks:
Payment acceptance can be optimized in the long term with currencies, payment methods, and local entities. The fastest fix is to start routing subscription payments through local acquiring banks.
For SaaS businesses that are setup with payment processors like Stripe and Braintree, you’ll need to set up multiple accounts for each target region (if you have a local business entity registered there with a public address). You’ll also need to migrate your subscriptions from your subscription billing tool to run through your localized payment processing.
Alternatively, you could migrate your subscriptions to a platform like Paddle, which manages all global acquiring and subscriptions together in one place — no extra tools or business entities to integrate. Paddle holds relationships with banks and card schemes worldwide and routes payments through entities on your behalf without any extra admin on your side.
Key Takeaway: Reduce churn by fixing sources of failed subscription payments