2015 INDUSTRY REPORT

Recurly Subscription
Snapshot

Powering Subscription Success

Table of Contents

About the Subscription

Snapshot
Subscription businesses are focused
on customer retention and loyalty.
This report examines a sample set of
25 million transactions and identifies
key metrics. Through careful analysis
of these metrics, we reveal how they
can be used to provide guidance in
product, promotions, and operations
to support a subscription business'
growth and success.

What's Inside
Introduction
The Sample Set
The Role of Promotions
Factors Impacting Subscription Revenue

Churn

Credit Card Declines

Recovering Lost Revenue

Summary
Methodology
Glossary

Introduction

From startups to global enterprises, today's fastest-growing

businesses are harnessing the power of the subscription model.
This business model delivers multiple benefits: predictable revenue,
ongoing customer relationships that lead to critical customer insights,
and the ability to automate revenue-optimizing decisions.

Benefits of a Subscription
Business Model

One of the keys to unlocking these benefits

is developing customer loyalty, forged from
the predictable delivery of great products and
services. As a result, subscription businesses
prioritize customer retention metrics to
understand loyalty trends.

To the business:

MILLION

Number of
transactions in
the sample set

Predictable revenue

Customer relationships
that lead to insights

Automation of revenueoptimizing decisions

Customer retention metrics in recurring revenue businesses are complex,

especially when transactions are weighted to credit cards. Securely handling
credit cards, managing failed transactions, or credit card declines, and
minimizing churn, or customer attrition, are vital areas of focus, and each
requires careful measurement.
This report investigates a sample set of 25 million transactions generated in 2015,
examining the role of promotions and emphasizing customer retention metrics.
Understanding metrics such as credit card declines and reasons for customer
churn are key factors to unlock economic loyalty, providing guidance in product,
operational, and promotional arenas and keeping subscription businesses on the
path to healthy growth.

To the consumer:

Convenience

Flexibility to choose the

plan/product that best
meets their needs

Pay-as-you-go model
amortizes costs

The Sample Set

The Sample Set

We categorized the 25 million transactions in our sample set by

marketeither business-to-business (B2B) or business-to-consumer
(B2C)and by whether the product or service was digital or physical.

Transaction Overview by Business Orientation

24.1%

Ninety percent of transactions involving physical goods fell in the B2C category,
a reflection of the popularityand wide varietyof box-of-the month offerings, as
well as consumers embracing monthly deliveries of staples like shaving supplies
or pet food.
The digital goods category displayed more
variety, with 25 percent of transactions for digital
goods in our sample set originating with B2B
companiesunderlining the rise of software-asa-service (SaaS) and cloud-based platforms.

72.9%
Percentage of physical goods
transactions in the B2C category

B2C companies generated 72.9 percent of

the transactions for digital goods in our sample set. Considering the growth of the
Internet of Things (IoT) and digital delivery of entertainment as consumers cut the
cord for over the top (OTT) content, this trend should continue.

B2B

B2C

Both

* Only recurring transactions included in sample set;

initial transactions excluded.

The Role of Promotions

The Role of Promotions

Sales promotions such as discounts, coupons and specials play a big

part in demand generation and are always a major factor in holiday
shopping. Coupons are especially attractive to consumers, as Nielsen
research discovered when consumers in their September 2015 survey
cited coupons as the top influence in pre-purchase decisions.

THE RATE

Coupon redemptions
on Cyber Monday
versus other days in
our research period

Coupons are an attractive tool for encouraging sampling, trial and adoption for
subscription businesses, too. In our sample set, more than 15 percent of customers
redeemed coupons in the fourth quarter of 2015, with the highest number of
customer redemptions in November.
In fact, earlier Recurly research found that Cyber Monday, which fell on November
30th in 2015, experienced three times the rate of coupon redemptions than other
days in a two-week period that included Cyber Monday and Black Friday.
Average Monthly Coupon Redemptions
18

15.1%

Powering Promotions
With Coupons
Recurlys coupon feature lets you

16.1%

15.4%

create percentage or fixed-amount

coupons and create bulk unique
coupons. Read our blog series to

12

learn more about how you can use

coupons to power the promotions for

your subscription business.

October

November

December

Factors Impacting Subscription

Revenue: Churn

Factors Impacting Subscription Revenue: Churn

Churn, or customer attrition, is one of the most sensitive variables

impacting the value of a subscription business. Customer retention
rates ultimately determine whether a recurring revenue business
is growing profitably or not, and small shifts in churn rates can
have major impacts on future periods. In effect, churn reflects
how well products and services satisfy customers over a period of
time. Dissatisfied customers cancel their subscriptions, or churn,
negatively impacting revenue and overall growth.

PERCENT

Amount of overall
churn in our sample
set categorized as
involuntary churn

However, churn isnt always voluntary. If a subscription business is unable to

collect payment, even if the customer is satisfied with the product or service,
that customer is lost to involuntary churn. Credit card issues, such as outdated
information which leads to failed payments, are major reasons for involuntary
churn. Measuring both voluntary and involuntary churn rates is very important for
subscription businesses, as each rate requires different mitigation strategies.

Factors Impacting Subscription Revenue: Churn

2015 Quarterly Churn Rates

10

8.8%

8.5%

Involuntary and Voluntary Churn as Percentage of Total Churn

8.2%

8.2%

8
6
82.4%

81.7%

80.6%

79.9%

Q1

Q2

Q3

Q4

4
2
0

Q1

Q2

Q3

Q4

* Only recurring transactions included in sample set; initial transactions excluded.

Voluntary

Involuntary

* Includes churned and total customers for each month; Recurly averaged rates over
four quarters. See glossary for further details.

In our sample, the overall churn rate peaked in Q1 of

2015 and declined by 8 percent throughout the year.
Voluntary churn, reflecting customer dissatisfaction as
customers cancel subscriptions or switch to different
providers, represented 80 percent of churn throughout
the year and mirrored the overall churn pattern. Mitigating
voluntary churn requires strategies that focus on customer
satisfaction, including product or service improvements.

Involuntary churn, which is often caused by credit card

declines or other non-payment reasons, remained steady in
each quarter and made up almost 20 percent of the overall
churn rate.
Measuring voluntary and involuntary churn rates
is important for subscription businesses, as each
rate requires different mitigation strategies.

10

Factors Impacting Subscription Revenue: Churn

Examining churn patterns for B2B and B2C categories

revealed that the churn rate declined for both categories
throughout the year. The B2C category, however, had a
higher churn rate than B2B and decreased by 5 percent
over the course of the year. As we saw in the overall churn
analysis, voluntary churn formed the largest component for
the B2C category.

Given these findings, we believe that New Years resolutions

to rein in expenses and save money drove voluntary
churn in the first quarter of 2015. As with many New Years
resolutions, the effects tapered off throughout the year.
Churn Type as Percentage of Total Churn by Business Orientation
B2B

B2C

B2B vs. B2C Quarterly Churn Rates

12

82.5%

Q1

80.2%

82.0%

Q2

80.3%

83.0%

Q3

78.3%

81.5%

Q4

77.9%

10
10.2%

8
6

7.9%

10.2%
7.6%

9.8%

9.8%
7.4%

7.2%

4
2
0

Q1

Q2
B2B

Q3

Q4

B2C

* Only recurring transactions included in sample set; initial transactions excluded.

Voluntary

Involuntary

11

Factors Impacting Subscription Revenue: Churn

Digital vs. Physical Quarterly Churn Rates

Churn Type as Percentage of Total Churn by Business Type

12
10
8

10.5%
8.7%

10.2%
8.3%

7.9%

Digital

11.1%

Physical

10.4%
7.8%

84.5%

Q1

82.3%

78.7%

Q2

86.0%

80.8%

Q3

81.4%

78.9%

Q4

78.5%

4
2
0

Q1

Q2

Q3

Digital

Physical

Q4

Comparing churn rates for digital and physical goods

showed that the physical goods category, with a 10.6 percent
churn rate, experienced a 23 percent higher churn rate than
that for digital goods, at 8.2 percent; voluntary churn drove
the majority for both categories.

Higher churn rate of

physical goods than
that of digital goods

Voluntary

Involuntary

12

Factors Impacting Subscription Revenue: Churn

Involuntary churn remained fairly constant throughout the year. As noted

earlier, involuntary churn is usually caused by credit card issues. Its
important to remember that many commonly experienced credit card errors
can be successfully remediated with careful management, resulting in
consistent and low rates of involuntary churn.
Minimizing involuntary churn
leads to two important
Managing involuntary churn
results: capturing the value
results in higher customer
of otherwise-lost transactions
retention and lifetime value.
which translates into increased
revenue for the business and,
more importantly, retaining satisfied customers who would otherwise have
been lost to recoverable credit card failures.
In our next section, well examine another key metric for managing
customer retention, credit card declines, and how to analyze decline rates.

Measuring and Managing Churn

The first step to minimizing churn is to
understand the difference between voluntary
and involuntary churn. Voluntary churn is
when a customer does some action such as
canceling their subscription. Involuntary
churn happens from a passive customer
action, such as when a credit card problem
is never resolved.
In either case, churn is a critical issue for
any recurring revenue business. There are
different ways to measure and manage it to
ensure your business success. To learn more,
read our white paper on calculating churn.

13

Factors Impacting
Subscription Revenue:
Credit Card Declines

Factors Impacting Subscription Revenue: Credit Card Declines

Credit Card Declines

Each billing cycle is an opportunity to minimize a subscription
business involuntary churn. Predictable revenue streams are one
of the great advantages of the subscription model, and to keep
the stream flowing smoothly, subscriptions are often paid by credit
cards, whether corporate cards for business services or personal
credit cards for consumer products.

PERCENT

Success rate of the 25

million transactions in
our sample

While most transactions are successful for Card Not Present (CNP) transactions
in e-commerce and subscription commerce, if there is a problem, the customer,
too, is not present to provide another payment method. Whenever a credit card
is used, the risk of failed transactions, or declines, is present and needs careful
management in order to ensure the transaction is successful and the customer
is not lost.
Designing a proper checkout flow reduces the level of declines on initial
transactions, and most companies follow best practices for this critical function.
However, if credit card information changes after the customers initial sign-up,
subsequent transactions are at risk, as is the customer. Repairing the situation
seamlessly is critical so the customer is not lost to involuntary churn. As such,
we focused our decline rates analysis solely on recurring transactions and
excluded initial transactions from the data set.

15

Factors Impacting Subscription Revenue: Credit Card Declines

Average Transaction Decline Rates by Volume

15
12.0%

12.1%

12.2%

12.5%

Q1

Q2

Q3

Q4

12
9
6
3
0

* Only recurring transactions included in sample set; initial transactions excluded.

With an average quarterly decline rate of 12.2 percent for recurring transactions, our
sample of 25 million transactions experienced a success rate of almost 88 percent.
Transactions may decline for a variety of reasons, from a temporary processing
glitch at a payment gateway to an overburdened credit card. Noting the small
increase in declines as the year progressed, we decided to investigate the role
of seasonality.

16

Factors Impacting Subscription Revenue: Credit Card Declines

Does Seasonality Affect Decline Rates?

From a seasonality perspective, decline rates as measured by volumes
of transaction were relatively stable, indicating valid credit cards on
file. However, transaction decline rates based on the value of the
transaction increased by 10 percent over the course of the year, from
14.4 percent in the first quarter of 2015 to 15.9 percent in the fourth
quarter of the year.
The fourth quarter of any year is one of
increased retail activity as consumers
The fourth quarter of any
shop for holiday gifts and increase the
year is one of increased
balances on their credit cards. However,
retail activity as consumers
an additional factor was at play in the
shop for holiday gifts and
latter part of 2015 as the credit card
increase the balances on
industry continued to roll out EMV,
their credit cards.
or chip-and-pin, cards. Card-holders
received new credit cards designed
with additional security measures to defeat point-of-sale fraudcards which
included new expiration dates and, in many cases, new security codes. Unless
this information is updated, transactions can be declined. This information can be
updated smoothly and programmatically when merchants use Account Updater
services, such as those provided by credit card companies or Recurly.

Average Transaction Decline Rates by Value

16
14.4%

15.1%

15.2%

Q2

Q3

15.9%

12

Q1

Q4

17

Factors Impacting Subscription Revenue: Credit Card Declines

How Do Price Points Affect Decline Rates?

Do price points play a role in transaction declines? To answer that
question, we segmented our sample transactions into five clusters of
price points and identified whether the transactions originated with a
B2B or a B2C company.

Decline rates in the B2C

category outstripped the
average decline rate for
each price point, based on
the volume of transactions.

B2B vs. B2C Transaction Decline Rate by Price Point

21
20.9%

15.7%

14
13.1%

9.4%
7

8.1%

11.9%

11.5%
7.6%

9.5%

8.5%

$0-18

$19-28

$29-48
B2B

$49-98

B2C

* Price points were chosen to reflect the most common subscription fees throughout the sample set.

$99+

Decline rates increased in step with

price points in both the B2B and B2C
categories. However, decline rates
for transactions in the B2C category
outstripped the average decline rate
for each price point, based on the
volume of transactions.
In the B2C category, decline rates
for transactions valued at $99+ and
$49-98 reached almost 21 percent
and 15 percent respectively. The B2B
category experienced much lower
decline rates at those same price
pointsalmost 12 percent for $99+
and 9 percent for $49-98.

18

Factors Impacting Subscription Revenue: Credit Card Declines

As noted earlier, transactions can decline for a variety of reasons, including

fraud or temporarily overburdened credit cards. This factor appears to be at
work as we saw higher rates of declines with the B2C category, especially
when working with higher price points.
Credit cards can be declined for a variety of reasons, but higher ticket
transaction sizes are certainly weighted with increasing sensitivity by
payment gateway and card processing participants. We have observed a
distinct correlation between the transaction amount and the probability that
the card will result in a declined transaction.
Being able to identify these scenarios is crucial, as there are a variety of
tactics that subscription businesses can use to recoup revenue which would
otherwise have been lost. In our next section, well analyze how to measure
revenue recovery and how it contributes to healthy growth.

Analyzing Decline Rates

To establish a baseline, compare your
average decline rate to industry rates. For
most businesses, a decline rate of 5-14
percent of monthly transactions for B2B and
6-18 percent for B2C is standard.
Then look for trends. Sometimes, viewing
month-over-month data can reveal interesting
trends. Your customer service team can also
be a great source of information on decline
reasons and trends.
Regular analysis will make clear what issues
are causing transaction declines and how you
can correct them.

19

Recovering Lost Revenue

Recovering Lost Revenue

Unlike physical commerce, where a transaction can be saved

when the customer provides another credit card if the first card
has a problem, card-not-present (CNP) transactions such as those
in subscription businesses require specialized strategies if the
transaction fails.
While most transactions are successful, the nature of subscription businesses
provides opportunities to recover revenue that might otherwise have been lost
to credit card declines or churn. This is especially important at renewal time for
subscriptions. Recovering this revenue requires specialized logic which can vary
based upon why a transaction fails. This may include re-submitting the transaction
programmatically, or re-trying the transaction, at defined intervals, to avoid
inconveniencing customers.

Quarterly Average Recovered

Revenue Rates
12
12.0%
11.0%
10.4%
9

How Well Do Various Business Categories Recover Lost Revenue?

Using these programmatic techniques, the businesses in our sample were
able to recover almost 11 percent of revenue that would otherwise have been
lost during 2015.

B2B

B2C

Overall Average

The revenue recovery rate for B2C transactions was higher, at 12 percent. This is
noteworthy since the B2C category experienced a slightly higher rate of declines
and churn, too. Efficient revenue recovery can lead to significant upticks in
revenue for subscription businesses.

21

Recovering Lost Revenue

How to Calculate the Recovered Revenue Rate

The Recovered Revenue Rate is calculated by taking the sum
of revenue Recurly is able to recover that would have been lost
otherwise and dividing that by the original revenue amount.
In general, there are three types of successful transactions, and the last two
cases contribute to the Total Recovered Revenue amount:

First attempt with existing and

up-to-date credit card information.
This is the bulk of most recurring
transactions, where the transaction
will just go through on the first
attempt with the existing credit
card information.
The effective recovered revenue rate is
calculated by dividing the total recovered
revenue by the total revenue amount.

First attempt with updated credit

card information. This is a group
of transactions where Recurlys
proprietary solution, including Account
Updater, will update the credit card
information before processing the
first transaction. Without the updated
information (e.g. new credit card
number), these transactions would

Amount of revenue businesses in our

sample were able to recover

Subsequent attempts on initially

failed transactions. This group
of transactions are ones where
the initial attempt was declined,
due to credit card issues such as
insufficient available balance, but
were successfully re-submitted
programmatically at defined
intervals using our service.

have failed and the revenue would

have been lost.

22

Recovering Lost Revenue

Lets use a fictional company called Kale Krate to illustrate how

this works.
In the month of April, Kale Krate generated $950,000 in revenue. Of the
$950,000, Recurly was able to successfully process $800,000 on the first
attempt without any updates (case #1). Recurly was also able to update the
credit information and successfully process $100,000 on first attempt (case
#2). Finally, $50,000 was declined initially but subsequent programmatic
attempts helped recover $10,000 of that amount (case #3) for Kale Krate.
As a result, Kale Krate collected $910,000 in the month of April, including
$110,000 that might have been lost.

There are over 2,000 ways a credit card

transaction can fail. See how much revenue
you can recover by preventing declines.

Step-by-Step: Calculating Effective

Recovered Revenue Rate
Follow these three simple steps to calculate
your effective recovered revenue rate and
see how much you could save.

Calculate the total recovered

revenue (case #2 + case #3)

$100,000 + $10,000 =
$110,000

Calculate the total

possible revenue

$900,000 + $50,000 =
$950,000

Divide recovered revenue

by possible revenue

$110,000 $950,000 =
11.57%

23

Recovering Lost Revenue

The key to revenue recovery lies in identifying the reason for a transaction
decline so the appropriate action can be taken. There are scores of reasons why
transactions can be declined, or fail. Each reason has a different rate of revenue
recovery with some reasons generating high rates of revenue recovery and other
reasons very low rates.

Revenue recovery rate of our sample,

attributed to proactive management

Overall, our sample saw a revenue recovery rate of 11 percent, across all decline
reasons. This rate is attributable to proactive management and use of Recurlys
proprietary retry logic and built-in Account Updater tools.
We further examined three of the more
common decline reasonsInsufficient
Funds, Temporary Hold, and Exceeds
Daily Limitthat we remediate using
proprietary logic. The revenue recovery
rates were fairly consistent throughout
2015, demonstrating how managing
declines can lead to significant revenue
contributions on a repeatable basis.

Quarterly Recovered Revenue Rates by Top Failure Types

32.9%

31.5%

33

31.4%

29.8%

28.9%

27.4%

25.0%

22

11

31.4%

14.7%

14.3%

13.7%

12.1%

Q1
Insufficient Funds

Q2
Temporary Hold

Q3

Q4
Exceeds Daily Limit

24

Recovering Lost Revenue

The recovered revenue rate represents only one facet of value, as it

represents only the money recovered from individual transactions. If a
customer is lost or churns due to a credit card issue, then the subscription
business not only loses the revenue from that failed transaction, the
business could also lose all future revenue from that customer. Since
subscription businesses are based upon the premise of customer loyalty
and retention, it is critical to build revenue recovery processes into
business workflows.
Keys to Recovering Revenue

If a customer is lost or churns due to a

credit card issue, the business could lose
all future revenue from that customer.

Identify the reason for a transaction

decline so the appropriate action can
be taken. Common decline reasons are:
Insufficient Funds, Temporary Hold, and
Exceeds Daily Limit.

Use an Account Updater function to

automatically repair failed transactions.
Recurlys Account Updater recovers
up to 9 percent of a customers annual
revenue, on average.

Read more about Recurlys free Account

Updater service.

25

Summary and Methodology

Summary

The recurring nature of subscriptions provides an opportunity to

reinforce value for customers every time a product or service is
delivered and with every billing cycle. Customer retention is key as
customers who derive value reward companies with economic loyalty.

Two of the factors that subscription businesses need to manage closely

The nature of card-not-present transactions, unlike physical commerce

are credit card declines and customer attrition, or churn. Mitigating churn

where both the card and the customer are present, require specialized

can provide subscription businesses with significant revenue uptick

strategies if the transaction fails. While most transactions are successful,

and can be achieved with modest process improvements. One of the

the nature of subscription businesses provides opportunities to recover

first steps is to identify business patterns, especially as they compare

revenue that might otherwise have been lost. This is especially important

to industry averages. For example, companies that target consumer

at renewal time for subscriptions as credit cards may have been updated

audiences may see increased customer churn after the holiday period

or replaced. In our sample set of 25 million transactions that occurred

and should create proactive strategies for mitigating

over 2015, Recurly was able to recover almost 11 percent of revenue for

this hangover effect.

these subscription businesses, providing a noticeable, positive impact.

Churn falls into two categories, voluntary and involuntary. The former

As more businesses embrace the subscription model to deliver

category indicates customer dissatisfaction with products or services,

predictable revenue and form closer relationships with their customers,

providing a clear indication that improvements are needed in product

customer loyalty and retention metrics such as those we analyzed in this

or operational areas. Involuntary churn is usually caused by credit card

report provide the key to automating revenue-optimizing decisions.

issues which, when remediated, lead to two important results: increased

revenue gained from capturing the value of failed transactions, and
increased rates of customer retention as satisfied customers were not
lost due to credit card declines.

27

Methodology

Our study examined a sample pool of 25 million aggregated and

anonymized subscription transactions generated throughout 2015.
We categorized these transactions by marketeither business-to-business (B2B) or
business-to-consumer (B2C)and by whether the product or service was digital or
physical, in order to identify trends, including seasonality.
We also segmented our sample transactions into five clusters of price points and
identified whether the transactions originated with a B2B or a B2C company in
order to examine the impact of price.
The sample set included paid recurring transactions only and did not include the
initial subscribing transaction.

28

Glossary

Transaction Decline Rate

The number of declined transactions as a percentage of
the total number of recurring transactions in the sample.

Monetary Decline Rate

The total value of declined transactions as a percentage
of the total value of recurring transactions in the sample.

Voluntary Churn
Customer attrition based upon a direct customer action
intended to terminate a subscription, for example when a
customer cancels their subscription or purposefully lets it
lapse without renewing.

Involuntary Churn
Customer attrition based upon a passive customer
action, such as a declined credit card. If the credit card
information is not updated or repaired, it causes the
customers subscription to be terminated.

Coupon Customer Impact Rate

The total number of customers who redeemed a
coupon divided by the number of customers in that
month for each business offering coupons. The reported
rate is an average across these businesses. The time
period included was the 2015 holiday season (October
to December).

Churn Rate
The total number of customers who left due to either
voluntary or involuntary churn during a given time period
divided by the total number of customers at the start
of that time period. Only recurring transactions were
included in sample set; initial were transactions excluded.

Recovered Revenue
The sum of revenue recovered by Recurly (through
processes such as Account Updater, automatic retries,
and dunning) that would have otherwise been lost,
divided by the original revenue amount.

Recurly measured churned and total customers for

each month of 2015 and averaged these rates into
four quarters.

29

Recurly provides enterprise-class recurring billing management

for thousands of subscription-based businesses worldwide.

+1.844.732.8759

sales@recurly.com

2016 Recurly, Inc. All rights reserved.