Subscription-based businesses are rising, and with them, the challenges of managing payments. Companies must be on top of their game, from recurring billing to fraud prevention, ensuring seamless payments and satisfied customers.
This is especially true for vehicle subscription businesses, which offer a flexible and convenient alternative to traditional car ownership. These businesses need a reliable payment processing system to handle recurring payments and a robust fraud prevention system to protect against fraudulent charges.
By understanding the challenges of payments for subscription businesses and taking steps to address them, businesses can ensure that payments are processed smoothly and efficiently, leading to increased customer satisfaction and retention.
Here are some of the most common challenges when it comes to payments:
Recurring billing
Recurring billing is a dynamic payment solution that empowers businesses to charge customers monthly or annually. It stands as the predominant billing model for most subscription-based enterprises.
Subscription businesses require a well-structured mechanism for seamlessly billing customers on a recurring schedule. The intricacy increases, mainly when the business provides varied subscription plans featuring diverse billing intervals.
Problems with recurring billing:
Insufficient funds
The most common reason for failed payments is that customers provide invalid payment information, accounting for 40% of all failed payments. Customers may need more money in their account to cover the payment or their credit card may be declined.
Expired card
This is the second most common reason for failed payments, accounting for 25%. Customers may need to remember to update their payment information when their credit card expires.
Wrong billing address
This is the third most common reason for failed payments, accounting for 15%. Customers may have entered their billing address incorrectly, which can cause the payment to fail.
Fraud
Fraudsters can use stolen credit cards or other methods to sign up for subscriptions and never pay for them.
Technical issues
Technical issues, such as a website crash or a payment gateway outage, can also cause failed payments. This is the fifth most common reason for failed payments, accounting for 10% of all failed payments.
The most common reason for failed payments is that customers provide invalid payment information, accounting for 40% of all failed payments. Customers may need more money in their account to cover the payment or their credit card may be declined.
Expired card
This is the second most common reason for failed payments, accounting for 25%. Customers may need to remember to update their payment information when their credit card expires.
Wrong billing address
This is the third most common reason for failed payments, accounting for 15%. Customers may have entered their billing address incorrectly, which can cause the payment to fail.
Fraud
Fraudsters can use stolen credit cards or other methods to sign up for subscriptions and never pay for them.
Technical issues
Technical issues, such as a website crash or a payment gateway outage, can also cause failed payments. This is the fifth most common reason for failed payments, accounting for 10% of all failed payments.
Friction
Subscription businesses must make it as easy as possible for customers to sign up and pay for their subscriptions. Any unnecessary friction in the payment process can lead to cart abandonment and lost revenue.
Cart abandonment rate: The average cart abandonment rate for subscription businesses is 75%. For every 100 customers who add items to their cart, only 25 will checkout and complete the purchase.
Friction points:
- Complex forms: Too long or complicated forms can discourage customers from completing the payment process.
- Security concerns: Customers may hesitate to enter their payment information if they don't trust the website or payment processor.
- Technical errors: Technical errors, such as a website crashing or a payment gateway not working, can also lead to cart abandonment.
Churn
Subscription churn is the rate at which customers cancel their subscriptions. There are many reasons why customers might churn, but one of the most common is billing problems. If a customer's payment is declined or they experience a billing error, they are more likely to cancel their subscription.
Churn rate: The average churn rate for subscription businesses is 6.12%. This means that for every 100 customers who sign up for a subscription, 6.12 of them will cancel their subscription within a year.
Reasons for churn:
- Billing problems: As mentioned earlier, billing problems are among the most common reasons for churn. This could include a payment being declined, a billing error, or a customer forgetting to pay.
- Lack of use: If customers do not use the subscription service, they are more likely to cancel it. This could be because they are not finding the service useful or because they have found a better alternative.
- Competition: The competition in the subscription market is fierce, and customers are always looking for the best deal. Customers who find a better subscription service at a lower price are more likely to switch.
- Customer service: If customers have a terrible experience with customer service, they are more likely to cancel their subscription. This could be due to long wait times, unhelpful representatives, or a lack of resolution to their issue.
Operational costs
Managing payments can be a complex and time-consuming process. Businesses must consider the operational costs of managing payments when choosing a payment solution. The average subscription business spends 10% of its revenue on payment processing fees.
Fraud
Subscription businesses are also at risk of fraud. Fraudsters can use stolen credit cards or other methods to sign up for subscriptions and never pay for them. This can lead to financial losses for the business.
Fraud rate: The global fraud rate for subscription businesses is estimated to be between 2% and 5%. For every $100 in revenue, subscription businesses can expect to lose $2 to $5 to fraud.
Types of fraud:
- Credit card fraud: This is the most common type of fraud. Fraudsters use stolen credit cards to sign up for subscriptions and never pay for them.
- Account takeover fraud: This is when fraudsters gain access to a customer's account and then use it to sign up for subscriptions or make unauthorized charges.
- Subscription abuse fraud: This is when customers sign up for subscriptions and then cancel them before the free trial period is over. This can be done to get free products or services.
Managing multiple payment methods
Subscription businesses often need to support a variety of payment methods, such as credit cards, debit cards, and PayPal. This can be a challenge to manage, especially as the number of payment methods available continues to grow.
Number of payment methods: Over 500 different payment methods are available worldwide. This number is constantly growing as new payment methods are developed.
Challenges of managing multiple payment methods:
- Integration with multiple payment processors: Each payment method requires integration with a different payment processor. This can be a complex and time-consuming process.
- Compliance with different regulations: Each payment method has its regulations that businesses must comply with. This can be a complex and time-consuming process.
- Support for different currencies: Businesses must support different currencies to accept customer payments worldwide. This can be a complex and time-consuming process.
Scalability
As a subscription business grows, the volume of payments can also grow. Businesses need a payment system that can scale to handle the increased volume of payments.
Payment volume: The volume of payments for subscription businesses can grow rapidly. For example, a study by McKinsey found that the average subscription business experiences a 100% year-over-year growth in payment volume.
Challenges of scalability:
- Increasing the capacity of the payment system: As the volume of payments increases, the system needs to handle the increased load. This can require upgrading hardware and software.
- Managing peak traffic: Subscription businesses often experience peak traffic, such as when new subscriptions are launched or sales or promotions. The payment system needs to handle peak traffic without experiencing errors or downtime.
- Providing a good user experience: Even if the payment system is scalable, it is important to provide a good user experience for customers. This means that the payment system should be easy to use understand and secure.
Managing payments for subscription businesses can be challenging, but ensuring that payments are processed smoothly and efficiently is essential. By understanding the challenges and taking steps to address them, businesses can ensure that payments are processed correctly and on time, leading to increased customer satisfaction and retention.
