For the purposes here, we’ll avoid the finance theory and focus on the general concepts of subscription economics that matter most to every company offering products, applications or services on a subscription basis.  In order to grow any business, it is of first-order importance to first know what your customers are worth – at all times.

Early customer retention rates decay as lower quality users are acquired

Concept 1 – Understand Customer Lifetime Value

A company offering a service for $19.95 per month with healthy customer retention rates, and an expected Lifetime Value (LTV) of 24 months can expect their customers to deliver $479 in revenue on average. (The green line indicates the slope of retention curves and gives an approximation of a 24 month expected timeline).

At this stage, many companies commit this expected customer LTV to memory, and want to ‘stomp on the gas’ to acquire as many customers as possible.

[For riveting guidance on appropriate ratios of customer acquisition costs to LTV for SaaS companies, see David Skok's post on SaaS metrics here]

Concept II – Understand Customer Retention At ALL Times

Customer retention becomes a very sensitive variable, comprising the “T” in Lifetime Value (LTV). In the chart above, we present anonymized, actual data from a Recurly customer that started with very healthy customer economics. Strong retention rates indicated an expected customer lifetime of 24 months and average customer revenue of $479 over their lifetime. As marketing programs ramped up, channel partnerships were launched, and customers were acquired aggressively to fuel growth. Over this same period, the product did not change substantially, but the average ‘quality’ of customers declined, and so did customer retention.

Frequent Assessment of Customer Economics is Vital For Success

The example company here demonstrates a very common cycle which is experienced when customer economics are not assessed on a frequent basis. Better yet, they should be assessed on a per channel, per partner, per campaign basis in order to prune the ‘losers’ and add more profitable marketing programs in a repeatable fashion.  It is rare for companies to have resources and infrastructure dedicated to understanding customer economics over ongoing periods of time until they have hundreds of employees.

Much of the recent speculation over the likelihood of Groupon’s (NASDAQ: GRPN) success centers singularly around this concept.  Their S-1 Filing indicates that they spent $179MM in Q1 of 2011, acquiring 33 MM customers at approximately $5.42 per customer. They surely have teams of people monitoring the value of their customers over time, and while customer acquisition costs are important, customer retention rates ultimately determine whether your business is growing profitably or not.

If your business offers a product, application or service on a subscription-basis and you’d like to have better visibility into your customer economics, have a conversation with us. Contact sales@recurly.com

Recurly can help.

Multi-Currency Goes Hand-In-Hand with International Language Support

Recurly also supports 12 languages, (Chinese, Danish, Dutch, German, English, English (U.K.), French, Hindi, Japanese, Portuguese, Russian, Turkish) so that your customers’ experience will be defined by their browser settings and location. Recurly will present the appropriate language to your end customer so that they can not only pay in their preferred currency, but you will also speak to them in their native language.

Multi-Gateway Support and Intelligent Payment Routing

In order for companies to support multiple currencies, it is a common to require multiple payment gateways as well. Recurly supports multiple payment gateways per account, and our customers can easily configure routing rules so that transactions can be routed to the appropriate payment gateway according to the currency specified in the transaction.

See, it’s all coming together nicely!

If you have any questions about this enterprise feature, please contact sales@recurly.com.

Cheers,
-The Recurly Team

Error Code Fidelity

The error handling for most subscription billing services is pretty basic: the transaction either succeeded or failed. Yet, the actual type of failure is incredibly important. That’s why we categorized over 2,000 error codes from the dozen gateways we support down to over 60 unique errors.

For starters, we know if a card failed with a hard decline. There’s no need to retry hard declines because the card details will never work again. Soft declines, on the other hand, should be re-attempted at different intervals depending on the failure type. For example, a debit card with a temporary hold will likely work again sooner than a credit card at its limit. Additionally, any decline by a fraud filter during a renewal should set off an alert; fraud filters should only be applied to the first transaction, otherwise they are only increasing your subscriber churn.

Subscription billing systems that rely on card details being stored in Authorize.Net’s CIM are at a big disadvantage when it comes to errors during the renewal process. Authorize.Net CIM does not explain why a renewal failed. Because Recurly stores your card numbers in our PCI compliant card vault, we are able to get the full error fidelity from our Authorize.Net integration.

Optimizing Renewals

Every gateway has a unique set of parameters that must be set differently for the first transaction, or updated billing information, versus the recurring transaction. These parameters allow us to optimize all your initial and recurring transactions on your behalf.

On recurring transactions, we disable most fraud filters. Fraud filters validate that a card belongs to the cardholder and we do exactly that during the initial transaction. So, there is little incremental benefit in applying most fraud filters on recurring transactions. Have you ever moved, only to find your credit card no longer auto-renews for some services? These merchants are accidentally increasing their subscriber churn.

Recurly also leverages continuous authority, whenever possible. Continuous authority allows Recurly to continue charging a credit card on your behalf, even after its original expiration date has passed. For gateways that do not support continuous authority, Recurly is able to submit an updated expiration date for expired cards. Most issuing banks will accept the updated expiration date on recurring transactions.

Most payment gateways that token card numbers will not allow the card to be authorized after its original expiration date passes. Once again, Recurly has a big advantage over subscription billing systems that rely on the payment gateway’s tokenization.

Failure Alerts

Through our extensive effort to categorize payment gateway errors, we know exactly why your transaction failed. Temporary failures automatically recover, soft declines are retried according to a dunning schedule, and failures requiring attention trigger an alert to Recurly support for follow up.

Recurly Adds Value Where It Matters

Many companies offer subscription billing solutions, but the ‘mechanics’ of subscription billing are not the most difficult piece to get right. Companies that choose to build their own ‘homegrown’ solution always miss the optimization opportunities, presuming that a ‘decline is a decline’. Even the most expensive vendors frequently miss opportunities to optimize your renewal rates. We encourage you to take a close look at your existing decline rates by error type and contact Recurly.

If you had to pause and ponder the answer, or if you felt that it was everybody’s responsibility…then you’re not alone.

When I was with eBay, it was far easier for marketing teams to focus on acquiring new customers than to identify an effective means to address customer churn. Customer churn is a ‘wet bar of soap’ problem, and therefore always seems to be ‘somebody else’s responsibility’, because it is a difficult problem to attack.

Consider these factoids:

Most Executives Have No Idea What Drives Their Churn

Identifying the drivers of customer churn can be extremely difficult. Additionally, customer acquisition is infinitely more fun for marketers than retention marketing. [It is much more interesting and profitable for Ad Agencies to focus on driving brand awareness, positioning and expanding appeal than driving retention metrics.]

In our business of providing subscription billing, we frequently discuss the topic of customer retention and churn with our customers. Through this, we’ve learned that executives generally have a clear sense for their own customer retention and churn metrics, but they have very little idea what is driving it. Most will cite Net Promoter Scores (NPS), or customer satisfaction rates as the broad and diffuse driver of customer churn, but they have difficulty pinning down any single reason why their customers leave them.

Subscription Businesses – Plug That Leaky Bucket!

For subscription businesses, customer retention is driven by renewal rates. Improving renewal rates extends the ‘T’ in Lifetime Value (LTV), and this is an extremely sensitive variable in the overall calculation. The enemy of the renewal rate is your churn rate.

Q: What drives customer churn in subscription-based businesses?

A: [Assuming your product/service delivers good value] If you are a subscription-based business, the most immediately addressable, passive culprit is: Credit card errors and declines.

What Can You Do?

Examine Your Credit Card Decline Logs!

Many commonly experienced credit card errors can be successfully remediated. Results will vary depending on your payment gateway/payment processor combination, but by beginning with your credit card error logs, and working backwards towards the solve, you will find that you can dramatically reduce your customer churn with proper error and decline remediation. However, if your customer credit cards are stored within a payment gateway, you will be limited in your ability to remediate many common errors.

If you have questions about Recurly’s standard error handling practices, and how we might help your business reduce customer churn, please contact us.

Email sales ‘at’ recurly.com or call 415-800-2042.

Step One: Define your own billing requirements – what are your needs?

Here is a punch-list of items for you to consider:

Be clear on the structure of your subscription offering:

• How many subscription plans will you be offering? One plan or multiple plans?
• What is the billing cycle interval? (Monthly, Quarterly, Bi-Annual, Annual?)
• Will you offer free trials?
• Will your subscriptions auto-renew, or terminate on some date?
• Will your business require one-time payments?
• Do you need optional items to be added? (Add-ons)

Define how you will you price your subscriptions:

• Are you charging a flat fee per month?
• Do you have a variable pricing component? (Requiring ‘metered billing’)
• Will your pricing change based on usage? (Tiered pricing?)

Communication Requirements:

• How and when would you like to communicate with your customers?
• What are your data integration needs? CRM? Finance/Accounting? Mailing lists?
• How important is it for your billing + subscriber status to be synced up with your application?

EXPERT TIP:

Step Two: Items to look for in a subscription billing provider

Think about your businesses end-goals and total cost of ownership (TCO).

Most subscription-based businesses ultimately care about the following:

• Minimizing Customer Churn
• Maximizing Lifetime Customer Value (LTV)
• Maximizing Return on Investment (ROI) – which means minimizing TCO

You cannot achieve these goals if your billing platform doesn’t support key daily functions efficiently. Your billing system should be a valuable tool, not an impediment.

PCI Compliance:

If your vendor is not PCI Level 1 compliant, ‘do not pass go’. You cannot afford to store your customer credit cards with a company that is not invested enough to achieve PCI Level 1 certification.

Functional capabilities:

Daily administration (This is frequently overlooked):

• Is there a Customer Support console? If so, is it functional? Intuitive to use?
• Search / Sort / Filter – How easy is it to find accounts?
• Account changes – How easy is it to make a manual override?
  • Upgrades/Downgrades
  • Pro-ration of accounting? Is this automated or manual?

Really push on this. Some very expensive vendors require 30+ clicks to make simple manual changes to subscriptions.

Customer Invoicing

Automated – Are customer invoices delivered automatically?

Manual – Can you create invoices manually?

Credits and Refunds (Both whole and partial credits)

This is key functionality to keep your customers happy. It needs to be incredibly easy to issue a credit or a refund.

Transaction History

It is always critical to be able to call up the transaction history for an account in order to provide customer support.

Marketing Support: Coupon and Discount code management

Your business might require coupons or discounts for promotional purposes, or channel discounts. Coupon and discount support needs to be seamless and easy to manage. Not all systems are created equal.

• How easy is it to set up a new coupon or discount code? (60 sec. max).
• Can you manually apply coupons or discounts to an account?
• How flexible is the coupon/discount functionality?
  • One-time, Limited Time, Evergreen applications
  • Percentage discounts vs. absolute dollar off?
  • Expiration date management?
  • Applies to specific billing plans?
  • Limited count offers? “First 500 subscribers receive…”

Error Handling: Credit Card Error and Decline Management

Like it or not, your recurring payments will encounter errors. This is a given when you are charging credit cards on a recurring basis. Cards will be declined for a variety of reasons, and from a variety of sources.

Q: At the highest level, you need to know whether your provider stores credit cards and tokenizes cards in their own environment.

A: If the answer is no, then that vendor cannot remediate credit card errors and declines on your behalf. It’s that simple.

Reporting: Data or Business Insights?

What kind or reporting capabilities do they provide?

Revenue by period, Revenue by plan, Monthly Recurring Revenue (MRR), Cohort analysis, Credit card decline rates, Lifetime value analysis?

What is the support model? Look at support forums and evaluate quality and timeliness of responses.

Step Three: Evaluate Total Cost of Ownership

Total cost of ownership is often underestimated.

It breaks down simply to the following four buckets:

1. Cost of Integration (often a hidden cost – Recurly takes days rather than months)
2. Cost of Administration
3. Cost of Customer Churn and Non-renewing subscribers (another hidden cost)
4. Marginal Cost of Billing Service

Is your billing system working for you? Or are you working for your billing system?

Expert Tip:

Most evaluations of subscription billing providers erroneously focus only on #4. Total Cost of Ownership surprises most companies. Ease of integration, ease of use and ease of administration can be very costly. (Employee resignations have occurred over frustration with complex billing systems)

Pricing Gotchas

Be clear on Setup Fees, Cancellation Fees, Extra charges.

(Recurly does not charge for any of these)

Network Availability

Don’t be shy. You’re the customer.

Ask for third party auditing of network uptime and availability reports. [Recurly has proudly maintained 99.994% uptime in 2011]

Final Thoughts:

Expensive ≠ Better

Your subscription billing system should work for you, not the other way around. Paying more for an expensive enterprise ‘solution’ does NOT mean that you get more value.

If you consider the elements from this guide, you will not only be much happier with your ultimate decision, but your business will have a greater chance of success.

If you would like to learn more about Recurly’s capabilities, please contact sales@recurly.com

Setting up more than one payment gateway account enables our merchants to accept more currencies (coming very soon), more card types, and optimize their pricing. At any time, you can pause a gateway for new transactions to ensure continuity in your business. If your transactions are below $10, you can also optimize your transaction fees with a PayPal gateway with Micropayment pricing (5% + 5 cents per transaction) for qualifying transactions.

Read more in our Multiple Gateway documentation.

After speaking with our customers, we also included other features into our Coupon and Discount implementation:

• Specify coupon codes and expiration dates – Recurly manages validations and expiration on your behalf.
• Define the duration of your offer.  (i.e. First three months, Once, or Forever)
• Specify the maximum number of redemptions or date of expiration.  (i.e. “First 100 sign-ups”, “June 10th, 2012″)
• Line item coupon discount on invoices
• Coupon code field on hosted payments pages
• Selectively apply coupons to individual subscription plans

The Recurly coupon creation interface makes things easy to manage.

The new Recurly coupons code feature makes it easy to test price points and reward your customers with special deals and promotions. For more detailed documentation, visit docs.recurly.com/advanced/coupons and docs.recurly.com/api/coupons. We look forward to your feedback about this release!

Recurly’s new MailChimp integration automatically updates your marketing lists in MailChimp. We also pass key customer attributes to MailChimp such as subscription status, account tenure, plan type and a number of other useful account attributes, enabling easy segmentation and filtering of your customer communication lists.

Watch this video tutorial to see how easy it is to connect your Recurly account with MailChimp.

In addition, we have posted documentation to help guide you through the specifics of your Recurly MailChimp integration.

Now you’re all set to automatically integrate your marketing communications with your subscription business.

If you like this feature, please let us know by tweeting to @recurly.

- The Recurly Team

Once you have installed the Recurly Add-On in your Heroku application, you will will have single sign-on access to your Recurly account, and will receive your Recurly fees bundled as an added line item to your Heroku invoice. This makes it easy to provision subscription billing without cluttering your desk with multiple invoices and account credentials. You will still log-in to Recurly to set up your subscription plans, manage your accounts and make any necessary changes.

The Recurly Add-On is currently in the Heroku beta process, which means it is first made available to private beta users, then open for public beta, and after having been reviewed by a number of beta testers, it will become a permanent Heroku Add-On available for everyone.

FOR ACCESS: You can join the Heroku beta program at http://beta.heroku.com/signup.

We’ve already received very positive feedback from early testers, and look forward to receiving more feedback from the rest of you.

Get those subscription-based applications rocking!

Cheers!

The Recurly Team

We took great care to deliver a simple and intuitive solution that offers our customers the greatest amount of versatility in designing and delivering Add-Ons.

If you open your existing subscription plans, and go to EDIT any plan, you’ll see the new Add-On capability.

Once you’ve created your Add-Ons, they will appear automatically in your Hosted Payment Pages. As users select an Add-On or change their quantity, the math immediately updates.

You have control over you want your Add-On quantities to be editable by your customers or not.

INVOICES:
Your customer invoices will also itemize the each customer’s Add-On details. Each Add-On is broken out as a separate line item for absolute clarity.

We look forward to hearing your feedback and hope that this new feature adds to your business’ success.
Please send feedback to support@recurly.com

Cheers!

The Recurly Team