What’s Up With Your Passive Churn?

9 Factors that impact customer retention when payments fail

Eliminating passive churn, or involuntary churn, is our sole focus at Churn Buster.

We help companies of all sizes implement better retention strategies. And it’s clear that passive churn is a commonly neglected aspect of business operations. 

Passive churn is generally defined as customers or revenue churned due to a billing problem.

Sometimes this is a mechanical issue, like failing to clear a charge on a credit card for an unknown reason. But human decisions are involved much of the time, and their reasons for leaving are many.

Understanding these reasons will give you a better read on your own passive churn, and help your brand grow faster with deeper profit margins over time.

So let's dig in.

1. Dunning

Once upon a time, "dunning" involved a horse, a sealed letter, and a reminder of a debt owed.

These days, it usually means emails sent to a customer after a subscription payment is declined.

More advanced systems use dunning best practices and send fewer emails, only using them as needed. Less intrusive methods can resolve 20% of billing issues behind-the-scenes. Past-due balances can also be escalated the longer they go unpaid.

This means looping in support teams, initiating lockouts, finding new points of contact, reaching customers by phone/SMS, and other tactics.

Failed payments account for 20-40% of overall churn on average. What seem like small improvements will have a big impact on revenue.

It looks like this:

Imagine you have $10,000 in failed payments this month, and recover an additional 1% by improving your dunning process.

That's $100, but the math doesn’t stop there.

Recovering an extra $100 of recurring revenue each month adds up to $7,800 over the next year. Not bad!

And with a solid dunning process, 5-10% improvements are pretty much a given.

Churn Buster offers frictionless churn recovery with custom dunning emails, support escalations, SMS messaging, and more. Try it for free.

Of course, measuring a 1% improvement is tough without understanding other factors contributing to your passive churn each month. 

2. Brand Experience

Passively churning out can be an easy exit for customers that are already feeling some level of dissatisfaction with your brand.

It’s the “meh” factor- a subscription is nice, but if you aren’t regularly wowing your customers, they can find other routines to fill the same basic needs.

In a market as competitive as eCommerce, it’s tough to dominate based on price, novelty, or logistics for long. Things get replicated quickly, and groundbreaking approaches quickly become the industry standard.

Brand, on the other hand, is something that’s uniquely yours. A great brand experience is the key to building long-term loyalty, even when competition heats up.

For more on creating a standout customer experience, check out Kristen LaFrance's epic post on extending LTVs and reducing churn.

3. Customer Portal & Dashboard UX Issues

First things first: your team should be auditing the backend experience of your brand from the perspective of your customers—routinely, forever.

Most brands focus on signup flows, ad copy, and other touchpoints they can audit and change pretty quickly. 

But what’s the experience like when a customer wants to change their password? What if they need to pause a subscription, or update credit card information? There’s so much that can go wrong in the portal if your team isn’t consistently checking in and exploring this part of the customer journey.

Even simple errors can have a big impact. 404’s on certain pages, customers struggling to log into their accounts, or having difficulty connecting with customer service can make it easy for them to passively churn.

How do you test your customer portal? Try these steps:

• Create an account
• Make deliberate mistakes to check error messaging
• Submit a support request as a secret shopper
• Try to rush your next shipment, delay it, or add/remove products
• Update your billing information

4. Discounting

Discounts are often used to bring new customers into subscriptions (think "Subscribe, and Save 15%").

Thing is, customers who are incentivized with a discount tend to behave differently as subscribers.

Some customers will subscribe just to save a few % on their order, then cancel before the next order renews. Or, after claiming a first order discount, they can get sticker shock when they first experience the “true” price of the products. 

A failed payment can create the perfect opportunity to leave without hassle. 

Take a look at subscriptions lengths, segmented by discount. You may find that groups that come in via a discount have significantly shorter lifespans, with a particular drop off once they get to the end of the discount period.

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5. Seasonality

We tend to imagine our subscriptions as exciting long-term commitments that really pay off over time. But that’s often not the mindset customers have at the beginning of the relationship. And their level of commitment to the subscription varies depending on the time of year.

Signups around the holidays tend to have particularly unique cohorts. 

Why? Well, the person signing up for the subscription may be doing so as a gift, in which case the purchaser isn’t necessarily the customer (or the end user of the product). That disconnect means that the subscription has a higher risk of passive churn.

Let’s say my parents give me the first three months of a coffee subscription as a gift, and they expect me to take over the subscription costs after that point. Unless I’ve already budgeted for that shift, this can be an easy drop off point.

Likewise, because my parents (whose card is on file for the subscription) aren’t receiving the product, they’re less likely to notice when the subscription lapses. 

Coming back to discounts- Black Friday and Cyber Monday can also create cohorts with lower lifespans, leading to a higher passive churn rate a few months later.

6. Billing Cycle

A lot of businesses love annual subscriptions, and it makes a ton of sense- after all, it’s predictable, locked-in revenue over a significant chunk of time. This can be a really solid retention tool as well. 

Annual customers also churn at a higher rate when it’s time for renewal, especially if a payment fails. Those 12 months of locked in revenue are also a much bigger commitment for the customer.

For example, let’s say your annual customers are renewing 70% of the time and your monthly customers are renewing 90% of the time. If you aren’t segmenting these groups out, a spike of annual renewals in a given month will make it look like your churn rate is also spiking.

7. Subscriber Plan

So much of what we’re talking about here comes down to segmenting your customers and understanding where they’re impacted by different factors. 

Take a look at the data and ask yourself: do customers on specific plans have meaningfully different churn rates? 

This can come down to the amount of product they’re receiving (too much, too little?) or a general value judgement on the cost-to-benefit ratio they perceive.

If you’re seeing higher drop-off rates on premium plans, it can be helpful to look at the value provided at each tier to see where customers might feel they’re losing. For a lot of them, it’s probably little issues adding up to an overall uncertainty about the real value of their subscription.

8. Customer Support Interactions

Great customer support teams can be an absolute game changer when it comes to passive churn. 

Going above and beyond here makes customers feel valued and can really pull them back into the fold if they’ve been on the fence. Quickly answering a question or solving an issue can be all it takes to make the save.

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Here’s how Taylor Holiday from Common Thread Collective looks at customer success and retention: 

“Let's say you have this theory that when people talk to our customer service department, they have an incredible experience. Well awesome, let's prove that. 

Let's take everybody who's ever spoken to your customer service department on the phone, and let's look at their LTV relative to the general customer set. 

Because if that's true, let's say it's a 20% higher LTV when you get them on the phone, then guess what your new marketing tactic is? Getting people on the phone with your customer service department because that will arbitrage growth and you can create more value there.”

9. Product Quality

This is a hard one to talk about. We all believe that our product is the best option out there, right?

The real question might be product quality vs cost, relative to similar items.

So if you’re selling the best coffee out there, but it’s coming in with a higher price tag than similar artisan products, customers may decide that the convenience of a subscription doesn’t justify the expense.

It can also come down to your market focus. So if Company A markets their coffee as a convenient option for college students but offers the product at a premium cost, they will likely see higher churn rates as their customers try out a subscription, then let it lapse to shift to more affordable options. 

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Passive churn is more complicated than we often expect it to be. There are a ton of factors, and it can be tough to feel like you really have a handle on it.

The best approach will consistently come back to your customer experience. Audit regularly, with a focus on the entire journey a customer has with your brand. 

From a data perspective, segment your cohorts based on the range of factors we’ve talked about here- seasonality, discounts, plan tier, and any other data unique to your business.

Your passive churn will fluctuate over time, but understanding it and building a clearer picture of the how and the why will make it a lot more manageable.

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Churn Buster offers frictionless churn recovery with custom dunning emails, support escalations, SMS messaging, and more. Try it for free.