Chargebacks vs. Churn: How to Strike the Right Balance
A hallmark of the subscription economy is its promise of regular, recurring revenue. But what happens when billing…doesn’t recur?
Churn refers to the cancellation of service by a customer. Some degree of churn is unavoidable. In other cases, preventable churn offers a costly wake-up call for merchants living the recurring revenue dream.
Businesses tend to focus—for a good reason—on minimizing churn. However, some of this focus may contribute to an increase in chargebacks (payment card disputes), which can negatively impact your bottom line.
In this article, we discuss how best to strike a balance between minimizing chargebacks and reducing churn. We will discuss the difference between the two and how merchants should evaluate each. Then we will identify some higher-risk churn prevention strategies and suggest some compelling alternatives.
Chargebacks are forced payment reversals initiated by the cardholder’s bank. They are meant to protect consumers from falling victim to credit card fraudsters or being exploited by unscrupulous merchants.
Chargebacks are an essential mechanism of consumer protection. They help foster consumer confidence in card-not-present transactions, playing a pivotal role in the booming online economy. Many chargebacks, however, are filed for reasons outside of their intended use. These illegitimate payment disputes are commonly referred to as friendly fraud.
Utilizing an automated or recurring billing process puts merchants at a higher risk of friendly fraud for three reasons:
Consumers often file chargebacks to relieve the burden of an unanticipated expense. Rebills can catch your customers off guard and frustrate their finances, motivating them to file a chargeback.
Consumers seeking to dispute a recurring charge often dispute more than one. This means a single unhappy customer may translate to several chargebacks being filed against you.
Some consumers often abuse automated billing. Banks are naturally suspicious of these types of transactions. Cardholders, therefore, are less likely to face scrutiny when initiating a chargeback.
Churn & Chargebacks: Understanding the Difference
Churn and chargebacks share some similarities. They both result in the loss of revenue and often mark the end of the relationship with your customer. It is therefore understandable for merchants to lump them together as unavoidable costs of doing business. This conflation, however, is a costly mistake. Chargebacks are far more damaging to your reputation and your bottom line.
First, the amount of the disputed transaction is just the tip of the iceberg. You will also be assessed fees and will be out any secondary fulfillment costs associated with the transaction. Receiving too many chargebacks will also increase the processing costs charged by your bank.
Second, chargebacks almost always indicate a very unhappy customer, while churn does not. As much as 40% of churn is involuntary, which is relatively easier to tackle. Customers who cancel are more likely to renew later than those who felt that a chargeback was their only option.
Merchants should understand that chargebacks are more problematic than they seem.
Reduce Churn Without Causing Chargebacks
It might seem like you’re caught between a rock and a hard place here. Taking steps to reduce churn and retain customers will inevitably result in more chargebacks…right?
Well, not necessarily. It’s possible to reduce churn without causing more chargebacks. There’s a delicate balance you need to strike between the two forces, though. Here are some practices you can implement to discourage churn without putting yourself at risk of chargebacks:
Allow Customers to Pause Their Subscription
A customer may enjoy your service but need to stop using it for a few months at a time. Rather than canceling, you can give the customer the ability to pause service simply. This lets them address their immediate need (such as to reduce costs), then merely restart service later.
Offer a Temporary Discount
Discounts have a powerful psychological effect. If a buyer is considering terminating their service, try offering them a temporary discount code as an incentive to reconsider. The messaging should be clear, allow for easy cancelation, and provide the discount as an optional alternative.
Use Rebill Notifications
Customers may understand the value of your service but start to take it for granted over time. You can use rebill notifications to remind customers of your value proposition subtly. The messaging you employ is important, though; you want to come across as earnest and trustworthy rather than as if you’re bragging.
Launch Automatic Re-engagement Campaigns
Even with these in place, some amount of churn will still occur. You may be able to recapture those customers if you automatically launch a re-engagement campaign for them. Consider your customer base carefully, and try to identify offers that can get them back on board.