Subscription businesses live and die by customer loyalty — yet many don’t see the full price tag of customer churn until it’s too late.
“Recurring revenue is a huge part of almost every business,” Ken Houseman, vice president of product strategy at Zuora, told PYMNTS during a conversation for the B2B Payments 2024 event.
When people think of the subscription economy, they often default to consumer-centric models like streaming services. However, as Houseman pointed out, the reality is much broader. Subscription models are embedded in many business verticals, from cloud computing to digital media, telecommunications and even older industries like footwear and apparel.
These retention-based models allow businesses to build and maintain recurring relationships with their customers, beyond just a one-time transaction.
But the chief financial officer (CFO) is building out forecasts and cash flow strategies atop that subscription model. And, as Houseman said, when customer churn hits — when subscribers discontinue their relationship with a business — the ripple effects on cash flow can be disastrous.
At least for those businesses caught flat-footed and unprepared.
Impact of Churn
Customer churn has become a focal point for CFOs and financial planners within subscription-based businesses.
Houseman said the challenge is twofold: Businesses must manage both voluntary and involuntary churn. Voluntary churn occurs when customers consciously decide to cancel their subscription, often because they no longer see value in the service. Involuntary churn, on the other hand, is caused by payment failures, such as expired credit cards or failed transactions due to fraud detection.
“If you don’t manage that churn and you don’t take a strong approach to that churn, you’ll end up negatively impacting any financial planning model the business has in place,” he said, noting that finance functions in subscription businesses depend on the predictability of recurring payments to plan their cash flow, manage working capital and optimize long-term costs.
Any fluctuation in churn rates can disrupt these financial models. For instance, if a company experiences a sudden spike in churn, it must scramble to acquire new customers to fill the revenue gap, impacting both short-term cash flow and long-term growth prospects.
But with real-time data, Houseman said, CFOs can arm their finance teams with insights that go beyond the basics. It’s not just about tallying up losses; it’s about getting granular — understanding what’s driving those exits and making swift, strategic moves to lock in cash flow and secure the bottom line.
Real-Time Insights and Churn Management
For digital platforms, Houseman said, customer engagement levels with specific features directly correlate with retention rates. Companies that closely track these metrics can predict and prevent churn by targeting customers with personalized messages and offers.
A practical example is The New York Times’ strategy of continually engaging subscribers through emails that prompt them to explore additional features. These communications are designed to remind subscribers of the value they receive. For CFOs, this approach offers an opportunity to align financial models with customer engagement data, enabling more accurate forecasts and efficient cash flow management.
At the same time, Houseman said that Zuora’s own platform integrates billing and payment data to offer CFOs a broader view of cash flow. This integration allows CFOs to anticipate cash collections, manage liquidity, and even predict which payments may fail based on historical data. By synchronizing billing data with financial operations, companies can optimize their revenue streams and reduce the risk of unexpected churn.
And one of the critical aspects of managing involuntary churn is ensuring that a business’s payments architecture is robust and efficient. Payment failures are not only disruptive but can also damage customer relationships.
“Every recurring transaction you have, there’s a cost associated with your processors and orchestration gateways, and if you have a failed attempt, many failed attempts, you start to incur aggregate costs … the real balance CFOs have to strike is with growth officers, because a lost involuntary churn just means you have to go find one more acquisition to make up for it. But if you overindex and you say, look, if I get a failed payment just retry every day until that payment comes in, your costs could go up,” Houseman said.
Looking ahead, Houseman sees the next evolution of the subscription economy as one of total monetization. This model extends beyond the traditional subscription framework to include a blend of subscription services, one-time purchases, and usage fees — all consolidated into a single billing experience for the customer.
This model simplifies the customer experience and drives revenue growth by offering flexibility and clarity, which are critical in retaining and upselling customers. By consolidating billing processes and expanding their monetization strategies, businesses can diversify their revenue streams and create additional value for their customers.
