SaaS providers that can successfully integrate billing and payments into their software have a unique opportunity to add value to their customers while generating recurring revenue for themselves. Yet, most SaaS providers don't - signifying the lack of available knowledge on how leveraging the right payments functionality could prove mission-critical. In this blog, we'll cover why payments functionality is essential and what to do next.
The volume and value of online transactions have grown during the pandemic but one subset in particular has thrived - the subscription model. Businesses taking advantage of this opportunity range from streaming services (Netflix, Spotify) through to home recipe boxes (Hello Fresh, Mindful Chef) and pet supplies (Kong Box, Tails). These models are also gaining traction in industries that have historically focused on fixed price models, such as Costa Coffee and Volkswagen.
To put this growth in context, Zuora, the subscription management platform, estimates that the subscription economy has grown more than 435% over the past nine years and a recent report from the Motion Picture Association estimates the number of global subscriptions for streaming services alone totaled $1.1 billion in 2020.
Subscription figures continue to rise from this high base as consumers seek out products and services they can enjoy in the safety of their own homes during the pandemic.
SaaS platforms have been working with payment service providers for many years but there are unique aspects of a subscription model that can create both challenges and opportunities and these need careful consideration.
Payments processed by bank transfer or company credit card are practical for one-off transactions but they typically fall short in a recurring revenue model, creating serious problems for both sides of the transaction. Payment failures are the largest impediment to the growth of the subscription model and can cause serious customer retention and loyalty issues. Data suggests that credit and debit cards have as high as 10-15% failure rates on the first attempt in a recurring payment model. Payments can fail for many reasons – insufficient funds, a block by the issuing bank, an expired card, a closed bank account, a lost card – and can be both voluntary and involuntary on the part of the subscriber.
On the supplier side, merchants must manually reconcile late or failed payments, leading to problems arising from human error and creating a huge administrative burden. At scale, particularly for a global business, this means haemorrhaging time and resources attempting to recover millions of payments. Clearly, this can also have a detrimental impact on cash flow and profitability.
For the end customer, payment failures can be a source of frustration and can create a negative customer experience. If payments fail, the responsibility is on them to update their details, and worse still, they may suffer an interruption to - or even cancellation of - their service. A degree of customer turnover, or churn, is inevitable.
New solutions that leverage advanced algorithms can reduce failure rates by monitoring customer behavior and putting in place customized measures to improve the success of payment retries. This pre-emptive action can reduce the administrative burden of chasing failed payments and the resultant impact on revenue.
Manual retry strategies typically rely on arbitrary rules, adhering to a strict day for attempted payment collection, for example, every third day. An effective payment facilitator (payfac) will handle all transaction monitoring, incorporating machine learning models to assess the probability of payment success. This allows the solution to automatically schedule the optimal collection day for the individual customer, increasing success rates considerably. Take GoCardless as an example, its Success+ solution uses recurring payment intelligence to predict and manage payment failures recovering, on average, 76% of failed payments for merchants.
This intelligent retry approach takes the onus away from the end user. Rather than it being the payer’s obligation to send, the merchant has complete control of the transaction, deciding the time and place that they will take the money. With the subscription fee taken directly from the bank account, there is no dependence on third parties, again limiting the risks of payment failure.
The regular data gathered by the algorithms allows the merchant to build a much clearer picture of the customer and how they operate. Any changes in behavior can be picked up more quickly and potential challenges can be met with a solution. This opens up more ways to improve customer retention, such as providing targeted content and developing loyalty and reward programs. With PSD2 and Open Banking improving visibility of customer accounts for the payments sector, the opportunities to develop customer intelligence will only increase.
If SaaS providers can deliver these value-add services as a fully integrated solution, with the facilities to ensure customer details are kept up to date, then it can be leveraged as a solution to the wider industry. In the same way that credit cards take a cut of transaction value, the Saas provider can receive a recurring revenue stream from each client processing payment.
SaaS providers that continuously tailor their service to the market they serve will retain the competitive edge. Merchants seeking to transform new subscribers into loyal, long-term customers are seeking solutions that can offer a simple onboarding process, easier payment options and flexible features that allow customers to customize plans.
Although most consumers are expected to continue with subscription services once the pandemic is over (51% according to PYMNTS.com), many plan to cancel their subscriptions because they do not have the flexibility to change their plans. Providing a configurable service that makes it easy for merchants to adjust or pause subscriptions will be a key differentiator.
The system must be flexible enough to incorporate usage changes and integrate discounts at any stage – for example, a ‘refer a friend’ promotion might mean a discounted rate for just one month. Research by Zuora suggests that SaaS companies that allow their users to upgrade and downgrade at will – offering more flexibility around what they can access on a monthly basis - make more revenue overall than those that are rigid in their pricing approach.
Another element of an optimized payment strategy is that transaction value can be more easily adjusted. The lower the average transaction value, the more likely it is to process. Research also suggests that shorter payment timeframes can help reduce churn, although this very much depends on the industry.
Certainly, more regular contact can be an added benefit in other ways. Subscription-based services promote a greater understanding of the customer base, allowing providers to develop stronger relationships.
'If one subscriber is lost through passive churn, it represents much more than just the loss of one transaction - it also shuts down subsequent revenue opportunities from that customer'
By removing manual drains in payment processing, costs are reduced for both parties and huge efficiency gains are realized. The merchant optimizes cash flow management and develops better supplier relations allowing opportunities for discounts.
PaymentGenes Consultancy leverages the value of an effective payment solution per specific use case. We work closely with SaaS providers to ensure that they find the right technology partners, developing integrated solutions and strategies with data at their core. This will be the key to long-lasting customer loyalty and business success.
Interested in learning more about how PaymentGenes Consultancy can help your company integrate payment functionality? Read more here
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