How to Reduce Churn by 30% and Grow Your Revenue with Paddle

Hey everyone, I'm Harrison, co-founder and Chief Customer Officer at Paddle. Thank you so much for joining this webinar today, and today we're going to be talking about churn. And a little on Paddle just before we kick off. So Paddle is a SaaS commerce platform. We handle checkout, payments, invoicing, tax billing, and more, all for software companies. And we do this so they can focus on growing their business without getting held back by tooling and infrastructure. And today, the big topic is us talking about churn reduction, and we're in a unique position to talk about churn and SaaS metrics at Paddle, given we power the financials for thousands of SaaS companies on our platform. But of course, we've also analyzed and worked with many others. And before I kick off, do ask questions via the Q&A throughout. I'll do my level best to fly through this in time to be able to answer some of you So do just keep sticking those in there as we run through the content. So why are we talking about churn today? I mean, I'm sure you may have noticed we're currently living in a global crisis of enormous scale. And this is having a huge impact on each and every one of our businesses. And it's more important than ever during this time to ensure— we ensure that we retain the customers we worked so hard to acquire in the first place. To share with you kind of the scale of that problem, I got permission to share this data with you from my friends at Profitwell. This is the Profitwell Subscription Index. Some of you may have even seen this earlier in Patrick's talk, and if you didn't get the chance to catch that, I recommend you check it out. But the too long, didn't read here is that March 2020 was one of the biggest months of churn in SaaS history. And of course, there are winners and losers in this mix, but the outlook is a little bleak. And it's yet to be seen how long things will take to rebound. And we may be seeing high levels of churn per that index, but also our ability to acquire customers has been hit harder than ever. I'm delighted and proud to be a part of the Revenue Collective. This is an invite-only platform for revenue leaders, and I recommend it to absolutely everyone and you guys listening today. But a survey of those at the Revenue Collective told us that 96% of revenue leaders say they've been impacted by COVID-19. 72% of respondents have adjusted revenue targets and forecasts, or at least expect to soon. And the vast majority of those have done so by reducing it between 25% and 50%. Only a handful have seen a benefit and are increasing their forecast during this time. There's always a slack or a zoom in one of these crises. This is a difficult time to be acquiring new logos or even expanding MRR within existing accounts. So what do we do? I mean, we've just heard that retention is almost worse than ever, and it's really, really difficult for us to be acquiring net new customers or net new logos. So what are our options? We could increase acquisition or expansion by, you know, 14% each month in this climate, but that's going to be damn tough given most folks are reducing their targets, not increasing them. Or we could reach the same outcomes by decreasing our monthly churn by 1%. And that's something that I think we can do and can achieve, and pretty quickly, with some of the actionable advice that we're going to run through today. If anything, when you go back to your teams after this message today, I want your message to them to be to make sure that during this tough climate for all of us, we're not making our lives even harder by losing the customers we've worked so hard to gain out of that kind of backdoor, completely unnecessarily. In this period of survival, it's more important than ever to cling on to the customers we've already worked so hard to win. But how are we gonna do this? What are our strategies for churn in Q2 2020? Now, there's a ton of content on churn out there that I'm sure many of you have read. A huge amount of this is on the fantastic marginal gains we can all adopt during peacetime, to continue to improve our dollar retention and grow our businesses. However, a lot of the most impactful things we can do to reduce churn, I feel, don't get half as much airtime. And I want to focus on some of those really impactful topics today. But before we dive deep into that stuff, just some quick reminders and definitions. Some of you may be familiar with this. So firstly, I want to draw your attention to what we call voluntary churn. This is sometimes known as active churn. These are customers actively looking to cancel their subscriptions. They're hitting your account area and hitting that cancel button. Perhaps they're calling you up and requesting to cancel their subscription. They're actively doing so. We call this active churn occasionally. The second type of churn is involuntary churn. This is sometimes known as delinquent churn. These are customers whose subscriptions are cancelling due to failed payments, our inability to charge them. I think these, these may be definitions that some of you are familiar with. When thinking about our strategies, we also need to acknowledge when the churn is happening, and that's really important. I want you to think about that as we move through this content. Is this a pre-churn event, before the subscription renewal is due, or is it a post-churn event, so after the subscription renewal is cancelled or has failed already? This is really important. I think it's most helpful for you all to start thinking about this as a matrix, and this is something you can take away with you today. With the 4 quadrants of this matrix, you can broadly start to group your churn strategies together and always even more importantly spot where you're missing out, where you've got room for improvement. And today we're going to deep dive into some of these before quantifying the dollar impact each of these can have on your business immediately. But before we run through them and dive a little deeper, let's just run through each of them first and foremost. So firstly, to kind of reduce churn, you should be trying to keep your existing users happy and engaged, running your nurture programs, engaging them all the time, trying to improve feature adoption, maybe upgrading them from a monthly to an annual plan. This is the basic bread and butter of the customer success and account teams that you have today. Next, to kind of reduce churn, we might be thinking about cancellation offers. When a customer hits that cancel button, are we trying to find out why? And more importantly, are we trying to make them offers or give them suggestions to deflect the cancellation request? I've seen case studies and figures of up to 15% of cancellations deflected, and there's a bunch of tools out there to actually assist you with that, and some of them even written a great amount of content about their products in light of COVID-19. Third, we've got payment acceptance. This is stopping subscription payments from failing and the churn thus happening in the first place. A clear kind of pre-churn prevention strategy. And lastly, there's work on payment recovery. This is recovering failed payments after the fact. Now, your goal should, of course, to build a complete churn reduction strategy across all four of these quadrants, and in doing so, you'll maximize your chances to reduce churn and improve revenue retention, which should be a real focus of yours right now. And each of these quadrants also has different metrics, and you're gonna need to determine these to work out how you're actually performing today, where is there room for improvement, and in doing so, you can start to also measure the uplift that we can bring about through some of the suggestions that we're gonna cover. I'd recommend you start with your lagging indicators. It's your past failures which are a strong indicator of your future failures, and it's also the areas in which I think we can make the biggest impact most quickly. So I'm talking about looking at things like your number of cancellations, your number of failed payments, and the number of failed payments you've actually recovered. Today, we're going to be looking at involuntary churn very specifically. Typically, you can expect 20% to 40% of your overall churn to be involuntary, particularly if you take payments through cards, which I'm sure a huge amount of you out there listening today do so. Here in front of us on the screen, we have an example of a seller without any churn optimization before benefiting from the tooling, the experiments at Paddle. We've run around churn across the hundreds of millions of dollars in ARR that runs through our platform. Now, what makes things feel worse for this example seller is that these customers are churning without any decision-making or any active effort to cancel on their side. This is involuntary. And that 20 to 40% involuntary churn figure is an industry standard. And it's absolutely heartbreaking to see SaaS folks scrambling for revenue during this really tough time and seeing this involuntary figure this high. But this is also an opportunity for us to improve. And I think when going away and trying to check your own involuntary churn figure, something to bear in mind is that that percentage will vary from month to month. And I think that the real topic of conversation today is, most importantly, what can we do about it? And wouldn't it be great if we could stop those payments failing in the first place and avoiding that involuntary churn? Most SaaS companies and content in the market are aware of and focused on dunning, on payment recovery. This is solving the mess after it's happened, after the payment has failed, trying our level best to recover it. It's almost too late. But the problem of payment acceptance preempts that. It's a pre-churn strategy. It's looking at our ability to actually charge the customer in the first place. This is much more impactful with many more dollars at stake, and we're going to start to quantify this stuff in just a moment. For those of you unfamiliar with payment acceptance, I thought some brief info on it could be helpful here. Payment acceptance is ultimately the measure of the number of successful charges you make over the number of attempts. This is something that you should measure on your initial transactions, those initial purchases, those initial subscribers, as well as your recurring payments, because your performance there is going to look very different. I'm happy to help each of you, or as many as I possibly can, understand your own kind of payment acceptance just after this webinar, and I'd love you to reach out and we can work through that together. And there's 4 main drivers to improve payment acceptance, and I'm going to briefly run through each, starting with payment methods. So the first way you can improve payment acceptance is by looking at how your customers are paying today. And remember, for improving that payment acceptance figure, we're reducing that voluntary churn and retaining more of our dollars. By looking at payment methods, It's those with a direct source of funds which will have much better payment acceptance. I.e., they're less likely to fail. And examples of payment methods with a direct source of funds are a digital wallet, or a direct debit, say, from a bank account, or a wire transfer from a bank account. Now, what evidence do I have that these types of payment methods can improve payment acceptance? Well, at Paddle, we see more than 2x the proportion of failed payments on card transactions compared with something like PayPal, which is an example of a digital wallet. And we've measured this across the hundreds of millions in SaaS revenue that runs through the Paddle platform. And it's worth noting that some of those digital wallets are super popular as well. And from an acquisition perspective, we see stats like 70% of transactions in Germany which are under $50 take place via PayPal. So not only is taking a payment via PayPal going to help you with retention later down the line, actually offering options like that are probably going to help you with acquisition in the first place. It's on some of the higher ACVs that you'll expect to think more about some of those other options like direct debits and wire transfers. Our next strategy for improving payment acceptance and thus reducing that involuntary churn figure is updating expired cards. It's ensuring the cards you're trying to charge on file are actually up to date and usable. Anti-fraud laws mandate that cards must expire within 3 years of being issued. And I'm not sure what some of your own experiences are, but increasingly, we're seeing the periods in which cards are active actually decrease in length due to some of these anti-fraud measures. What does this mean? This means that an average of 1 in 36 of your customer cards on file could be expiring each month. And that's before we exclude some of the other factors and those cancelling them early. We need to make sure we're able to charge these— to charge customers despite these expiries. And there's two really clear and obvious ways to do that. And the first one, which I'm sure many of you have thought of, is encouraging customers to update their card details in advance of charging them if those card details have expired. Typically, your payment provider will share info on when a card is due to expire. Use this information to programmatically or even manually send out a note to the customer in advance of them being charged. If you know it's going to fail because the card's expired, encourage them to simply update that payment method. Perhaps you could even encourage them to update to a payment method with a direct source of funds, like we just discussed, because your acceptance rates there are also going to be better. Now, that's an option that many folks have thought of. But better yet, and what you're seeing a visual representation of on the screen, is that many cards these days can be automatically updated through connected bank networks, which happen when new cards are issued and old ones are expired. Most payment processors offer this, so customers can continue to be charged without even needing to re-enter their new card details. But you can only expect a fraction of your card vault at any one time to be updated, and this technology is relatively new and getting better all the time. The third strategy we have around improving payment acceptance and thus reducing that involuntary churn figure is payment routing. And this is my personal favorite and the one that has the biggest dollar impact on you and your business. For card payments, we see big differences in payment acceptance across different geographies. This is usually due to the lack of relationship you as a seller have with local banks in different countries, currencies, and over different card networks. To help make this a little clearer or help folks understand it, it basically becomes harder to draw a path between the acquiring bank, your bank and payment infrastructure, and the issuing bank of the customer's card. This means that the payments are more likely to fail, i.e., your payment acceptance figure is going to be worse. It's also more likely that these transactions where it's hard to draw this path get flagged for fraud. And again, this is another thing that's going to reduce your payment acceptance and knock that involuntary churn figure up. How do we resolve this? You resolve this by working with local acquirers. And to really quantify this or put this into context, at Paddle, when we A/B tested local acquiring in the US at Paddle, which means running US transactions, so US buyers who are purchasing products in the US through US banks tied to US entities, as opposed to generic global accounts which could have been based in Europe, UK, or anywhere, we saw a 3% lift in payment acceptance on subscription renewals and a 20% lift in first-time purchases of subscriptions, that initial checkout, that initial enrollment in that subscription. These numbers, numbers are astronomical. This translates directly into 3% less MRR churn across all our sellers for their US-based customers and compounds to over 30% less ARR churn within 12 months. This is a hugely significant amount of revenue for you guys, which we're missing out on if we neglect payment acceptance and don't look to address this problem. Sorry, I skipped a slide there. This is drawing the path between the local charging. And this is a similar one, we're going to talk about currencies now. And this is the final strategy for improving payment acceptance. You guys need to make sure you're charging in local currencies. When payments are in the international market, so you've got customers all over the world, And when payments are in these international markets, we typically see payments made in local currencies as 1% to 2% more likely to be successful, although in some regions that lifts up to 9%. So please, please stop charging everyone in USD, people. Like, I see it all the time, and it's not helping you. And the Japanese want yen, and the Germans want euros. And offering and charging customers in these local currencies Number one, you're going to acquire customers more effectively because they want to see prices and they want to pay in their local currency, but you're also going to be helped later down the line as well because on renewal, every time you try to charge that customer, your likelihood of success is going to increase if you're charging them in their local currency. Now, this data is pretty hard to generalize, and that's because all of you listening out there are running different companies with different customers and different customer demographics and customer profiles, and how we'll have different splits of transactions going to different payment methods. And this makes my job a little tougher. In general, before folks start using Paddle, we're seeing 3% monthly churn due to poor payment acceptance and failed payments. Again, this equates to more than 30% annual churn from failed subscription payments, which is something that we can fix and do something about. Now, we've built a calculator to help each of you answer questions around this and calculate your own performance, so you can make this relevant to you and your businesses and see how much money you guys are leaving on the table. And there's more on that in just a moment. So today we talked about payment acceptance really, really specifically, but this is just one of many different ways to improve churn. These techniques can reduce churn between 5% up to kind of 30% on your ARR. This is big money we're leaving on the table during a tough time, and we can help you roll some of this stuff out within weeks. I'd absolutely love and be thrilled to help some of you quantify the dollar churn you're losing out on due to infrastructure and some of the things that we discussed today. And if you visit the link on screen, you're going to head through to our dollar retention calculator, where you can start to fill in some information, completely self-serve, about your current customers and your current go-to-market, and that's going to give you an idea of how much money you're leaving on the table due to this poor infrastructure and things like payment acceptance. There's also going to be some folks on hand to help and guide you through. I really want the key takeaway from today to be, during a time when it's tougher than ever to acquire customers, and folks are more likely to churn than ever before, let's be doing our absolute best to cling on to the folks that we already have. And not be losing out on these passive customers who we're churning through involuntary churn right now. Let's go away and fix that problem. Thank you so much for listening. I'm hoping I've at least got a minute or so for a couple of questions. I'll do my best to get to stuff before I'm shouted at and kicked off.

Yeah, you do have time for a couple questions. We have some people in the Q&A have a very similar question. They want to know, how do the different currencies apply for the enterprise versus SMB?

So lots of this stuff really does differ depending on whether you're— based on your go-to-market and the types of customers you're serving. And there's a lot of variables here. So customers who are wanting to pay higher amounts are going to want to pay via different payment methods. Things like the impact currencies can have on acceptance and even acquisition in the first place again, are going to differ based on your ACV. So I'd encourage you to jump onto that calculator that we just linked before, and you'll be able to type in the information about how many customers you have, how much they're typically paying, and it should be able to make a really good estimate for you as to what impact this can have for your business based on the actuals of your business rather than me trying to fly through an answer on this straight away.

Awesome. Okay, you have a couple more. I'm gonna try and squeeze in here. For those asking the slides, the slides will be available. We'll send them out and the recording so you guys can rewatch Harrison.

There's a good one here, which is, how does payment acceptance change across countries and regions? That's a really great question, and payment acceptance is going to differ per region based on— but the biggest thing is if you're not working with local acquirers and you're trying to charge all these customers from wherever you set up your entity and your payment provider right now, any country outside of the one that you're currently set up in is going to be being negatively impacted due to, due to not working with local acquirers. And you're going to see varying performance per country, but all of them will be affected other than the one that you're actually currently set up in. That's a great question.

Awesome. Okay, I think you have time for one more if you want to pick the last question.

Sure. We've got, what are the digital wallet options for enterprise accounts in SaaS? This is an interesting question as well, because again, Digital wallets are something we know that often have a direct source of funds and improve payment acceptance. And I think there are actually a ton of digital wallet options out there available. And we should think about which ones are popular with B2C, like PayPal, and also which ones are popular with enterprise, which is the question. And actually, that is often going to differ per geo. So we see digital wallets like Sofort in Germany as popular, and iDEAL in the Netherlands as popular. That these most importantly have a direct source of funds and will improve payment acceptance. But again, more than happy to talk about this stuff just afterwards. Anyone listening, please do drop me a line on that email address you're seeing there, and I'd love to continue chatting about this stuff.

Yeah, thanks for being so open with our audience. We'll definitely send the other questions that came in to Harrison so that he can follow up with you guys. I know he's excited to talk to all of you. Yeah, thanks so much for joining Harrison today. It was super informative. Informative. Stay safe. I know you're in New York, which is a bit of a hotspot right now in the US, so stay safe. Thank you for joining, and we'll see you guys at our next session. Thanks again.

Thank you, everyone. It's been a pleasure.