I’ve decided that the biggest threat to a software as a service startup isn’t anything sexy or mysterious. No, it’s the annoying fact that so many credit cards get cancelled by no fault of the user. SaaS companies, like Pixily, rely on retaining customers to achieve our target lifetime value and to recoup our marketing costs/costs of customer acquisition. When MasterCard or whoever cancels a user’s credit card it is a real pain to gently remind them to enter a new card number.
As Bessemer Venture Partners says, “It’s very difficult and expensive to grow subscription businesses if you have moderate customer churn– and prohibitive if your churn is high.” Pixily’s users are really important to us. We work really hard to get them and it is painful when one cancels. When some one’s credit card fails, we email and eventually phone to follow up and get them back into our system. We’ve had customers who have been “gone” for more than a couple of months re-engage and pay for past months/bring their accounts up to date. It’s worth the effort to try to keep them in our system, even if it is a pain. But since the majority of our churn comes from credit card cancellations, everything we can do to reduce it really helps our metrics and helps the company grow. And when technically do they count as churned, if so many of them eventually come back?
I know that large SaaS companies have these problems too. I’ve spoken with the heads of very large SaaS businesses, and they have a person or even a small group in charge of trying to get customers to re-enter their billing information. This is a real issue.
I’m afraid that this problem will get even worse. It seems like credit card companies are becoming pretty nonchalant about canceling cards. I only really use two cards; one was re-issued to me this year and last year the other was. Both were canceled by my card company because one of the vendors I bought something from had a security breach. I actually think it is nice that they were able to cancel my card before any fraud could possibly have happened, but I did get some emails from the subscriptions I used asking me to re-enter my credit card information. And it was a pain, and I’m sure there were a few that I didn’t end up updating.
I hope that credit card companies don’t end up being the achilies heel of the SaaS business model. Anyone else seeing this problem with their SaaS businesses?
January 4th, 2010 at 7:58 pm
While this issue is a pain I would have to sat the biggest enemy of SaaS is user apathy. When you sell a traditional license you dont care ultimately if your product is used. With SaaS, no usage = churn.
January 5th, 2010 at 12:19 am
Maybe a good reason to do a pre-pay plan (12 months, 24 months up front, lifetime, etc)? The guys at Peek (getpeek.com) are doing this for their email device and service (I think its like $300 for a lifetime membership). Not sure what kind of uptake they've had but its an interesting spin and maybe gives you another packaging option with different (better?) cash flow characteristics.
January 5th, 2010 at 1:44 am
I completely agree with your statement especially as an individual who tends to misplace cards far too often and cancel them to avoid fraud. I know you can set payments to go directly to a company, though i'm not sure what fees are associated on the recipients part. I wonder what the impact (customer adoption and decreased churn) of a Company asking for a routing number or payment via a pay/pal account would be vs. the cost of maintaining staff to look after canceled credit cards. In thinking out loud maybe there's a way companies such as paypal can become the intermediary between the SaaS companies and its consumers i.e. after three months of usage the service prompts you to upload your paypal address which contains your routing number and gives a 1 time discount for making the switch.
January 5th, 2010 at 1:49 am
I agree with Mark. I use an online backup service for my home PC. I get a monthly statement in my email. Twice now my cards had to be canceled and reissued. In both cases seeing that "NOT CHARGED" in my email caught my eye and I immediately went in an updated my number. Why? Because keeping that service backing up weekly and, as important, allowing me to get at all my data is critical to me.
January 5th, 2010 at 2:11 am
Totally thinking about this! Pretty sure we will launch something like this in the not too distant future. But still, we'd have to eventually contact them to get a new credit card number if the card was cancels during that year. However, I do know from other SaaS companies I've spoken with that the yearly billing works well for people ready to commit. I also believe that our free trial helps customers get committed, so I will let you know how it goes…
January 5th, 2010 at 2:14 am
Solid point. I've got a very good idea of which free users will convet to paid users from their usage.
But the strange thing is we have users who are totally inactive for a number of months, and who had dead credit cards, and eventually we connect with them on the phone and they pay and re-engage. It's hard to really know who is going to actually churn and who will come back.
January 5th, 2010 at 2:16 am
You are my dream user Mark!
January 5th, 2010 at 2:21 am
I remember seeing a stat a few years ago on the number of Paypal users who actually had their checking #'s in the PayPal system. My memory is that it was something like 1/3 of users, but I don't remember for sure. I know they really, really want users to switch from credit cards to ACH (I think it's ACH – not a payments expert, sorry) because the interchange fees were much, much lower (again, not a payments expert, not sure if the right term is interchange.)
Maybe PayPal could try to offer this sort of a service. They already offer all sorts of enterprise type payments.
January 5th, 2010 at 9:52 am
Great post and definitely timely. Credit card companies do seem to be canceling credit cards much more rapidly and for less reason than they have before- i'm guessing this is due to new legislation passed making them liable for fraudulent transactions. This is a serious pain for both SAAS companies as well as customers too.
The best way to handle this is to be flexible in the way you bill your customers. As Mark mentioned, by proactively notifying your users of a declined card and offering them a simple, easy way to update their account with their replacement card, you help them avoid their service being canceled while preserving your revenue stream. It's crucial to provide the customer with a "grace period" that will enable them to update their account (instead of just canceling/revoking their service when a card doesn't go through). Like Mark's comment said, users who appreciate the service will scramble to update their info to preserve uncorrupted service. Even if the account lapses, you can still reach out later and provide them with an incentive to re-subscribe (Gamefly does a great job of this for video game rental subscriptions). The key to ensuring the best rentention of paying users is to keep these concepts in mind when implementing your subscription billing system.
I'm a co-founder of Recurly- we simplify subscription billing and help automate the handling of declined cards. With Recurly, you can quickly set up customized emails that are automatically sent to customers that have their cards canceled or declined. We also provide a simple and easy for your customers to update their account info easily. This helps you ensure your customers have the best experience possible while simultaneously preserving your revenue stream. We have no set up cost and can be quickly integrated into a service in less than a day. You can find out more on Recurly at http://recurly.com/
January 5th, 2010 at 10:01 am
Great post and definitely timely. Credit card companies do seem to be canceling credit cards much more rapidly and for less reason than they have before- i'm guessing this is due to new legislation passed making them liable for fraudulent transactions. This is a serious pain for both SAAS companies as well as customers too.
The best way to handle this is to be flexible in the way you bill your customers. As Mark mentioned, by proactively notifying your users of a declined card and offering them a simple, easy way to update their account with their replacement card, you help them avoid their service being canceled while preserving your revenue stream. It's crucial to provide the customer with a "grace period" that will enable them to update their account (instead of just canceling/revoking their service when a card doesn't go through). Like Mark's comment said, users who appreciate the service will scramble to update their info to preserve uncorrupted service. Even if the account lapses, you can still reach out later and provide them with an incentive to re-subscribe (Gamefly does a great job of this for video game rental subscriptions). The key to ensuring the best rentention of paying users is to keep these concepts in mind when implementing your subscription billing system.
I'm a co-founder of Recurly- we simplify subscription billing and help automate the handling of declined cards. With Recurly, you can quickly set up customized emails that are automatically sent to customers that have their cards canceled or declined. We also provide a simple and easy for your customers to update their account info easily. This helps you ensure your customers have the best experience possible while simultaneously preserving your revenue stream. We have no set up cost and can be quickly integrated into a service in less than a day. You can find out more on Recurly at http://recurly.com/
January 6th, 2010 at 6:58 am
Interesting point. I wonder if Skype got the message. Recently, my credit card that I was using to pay for skype expired. This is the second email I got from Skype ( the first email saying there was a problem preceded the second by 30 secs )
"Your subscription has been cancelled
The credit card linked to your Skype account for Auto-recharge recurring payments has expired. As a consequence the next payment for your Unlimited World subscription cannot be completed.
Once you update your credit card details you will be able to purchase a new subscription. Please be aware that the price of the new subscription may be different from the previous one."
I was impossible to update the credit card info. But I realized that I really didn't need the paid version of Skype anyhow.
This highlights the key point: The expiration of the credit card re-opens the purchasing process. SaaS companies need to be aware that they have to constantly be "making the sale" because when the credit card is refused – it may be too late.
For me it is actually easier to cancel unwanted subscriptions by changing the credit card. One call to the credit card company instead of 3 or 4 calls.
January 6th, 2010 at 2:39 pm
You make a number of interesting points. Yes, even we at Pixily have been guilty of canceling credit cards to cancel SaaS subscriptions – some providers make it really hard to terminate your "monthly" contract.
And regarding the need to constantly be selling: yes!
December 3rd, 2012 at 3:55 pm
extremely impressive graphic!