Today, every SaaS (software-as-a-service) platform offers paid subscriptions to their customers. However, they often have to deal with customer churn due to payment failures. In fact, companies lose 20-40% of their customers because of payment failures.Â
These failures occur during subscription renewals due to multiple client-side errors such as insufficient funds, card declined errors or an expired card. This is one of the significant reasons for involuntary churn in the industry. This not only impacts the company revenue flow but also impacts the customer experience.
In this article, I will explain the problem with renewals and how we solve this at Signeasy by introducing a grace period for all customers.
The problem when renewal fails
Let’s say a company has many paid customers who have opted for a monthly subscription. Now there is a customer, for example, let’s call him John, who has purchased a subscription plan costing $50 per month. In this case, the Monthly Recurring Revenue (MRR) associated with John is $50. Assuming John purchased the plan on January 1, 2023, he will be charged $50 again for the new subscription term on February 1, 2023. Simply put, John’s billing cycle occurs on the 1st of every month.
In the above example, the company expects to receive $50 from the customer on the 1st of every month. However, the payment will fail if a customer’s card expires on January 30 or there isn’t sufficient balance or credit available on February 1.
When this happens, it directly impacts the company’s revenue, as the expected MRR of $50 is not collected successfully. This can have a significant impact, especially if the company has a large customer base.
When a payment failure happens, the company’s usual practice is to immediately disrupt or suspend the service offered to the customer under the subscription. Clearly, this approach is not user-friendly, as it abruptly blocks the customer from using the paid services. As a result, it leads to involuntary churn, where customers unintentionally discontinue their subscriptions.Â
Introducing grace period
Instead of immediately discontinuing services, a more user-friendly approach would be to provide a grace period, allowing users a few days to resolve their payment issues. During this time window, the user gets ample time to identify and address the underlying problem with their payment. For example, if it’s a card-related issue, they can talk to their bank and arrange the required backup, which typically takes 2-5 days.Â
This approach, known as the Grace Period, is a much more favorable solution for both the company and the user. It allows the user to continue using the platform and gives them an opportunity to fix the payment issue within the designated period. This prevents immediate service disruption and ensures a positive and delightful experience for the user.
More details on the grace period
The grace period has become a widely adopted feature in billing platforms. Major platforms like iOS and Android natively support this functionality. Enabling and setting up the grace period is straightforward through the respective dashboards. The industry's standard grace period duration is typically set to 14 days across all platforms.
For web applications, unlike mobile apps with native subscription software (such as Google Play and App Store), there are reliable billing and payment platforms available, such as Chargebee and Stripe, which effectively handle these functionalities. A detailed discussion on this topic will be covered in a separate article.
Is having a grace period enough?Â
Absolutely not! Merely enabling a grace period is not sufficient. We must proactively inform and keep the user updated through different communication channels. One effective way is to send email notifications to customers regarding payment failures and provide clear instructions on the necessary steps to resolve the issue.Â
But relying solely on email may not be enough in all cases. Customers can overlook or miss emails for several reasons, such as being mistakenly marked as spam, getting lost among other emails, or the customer’s email inbox being full.Â
Another common scenario where email communication fails is if the customer has changed their email address but needs to be updated in the billing software. Or if the customer has separate email addresses for general use and billing, a major communication gap arises.Â
To overcome these challenges, adopting additional communication channels or employing multiple touchpoints is essential. This can include sending SMS notifications, using in-app notifications, or even automated phone calls. By leveraging multiple channels, we can ensure that customers receive crucial payment failure notifications and prompt them to take the necessary actions to rectify the situation.
At Signeasy, we have implemented an information nudge feature within our product. This nudge appears as a banner at the top of the homepage. Something like below.
The purpose is to inform users about payment failures directly within the product interface. Doing so ensures that customers are promptly alerted to the issue and can take immediate action.Â
The alert banner displays a clear message and includes a payment link call-to-action (CTA) button. This helps to facilitate quick resolution by providing users with a direct and convenient way to address the issue within the given timeframe.Â
How long should your grace period be?
The grace period should always be less than your subscription plan’s renewal cycle
Grace period setting is typically tied to the plan’s renewal cycle. Keeping the same grace period for all your plans is recommended and simpler.
If your plan’s renewal cycle is 30 days, i.e., monthly, the grace period should not exceed 30 days. While it’s technically possible to set a grace period of more than 30 days, doing so can create confusion in the long run. This is because your billing platform will continue to generate pending recurring unpaid invoices every month.Â
The grace period should be applied once per invoice per billing cycle. Access to subscriptions and paid features must be revoked if the payment issue remains unresolved after the grace period.
The grace period can only recover payments from customers who have the intent to pay
The purpose of a grace period is to allow users to actively use the product to resolve payment failures and continue their subscriptions without service disruption. However, a separate approach is required to re-engage customers who are not engaging with the product.
One possible technique to engage inactive customers is through one-time offer campaigns targeting this user segment. These campaigns can include special promotions, discounts, or incentives to encourage these customers to reactivate their usage and renew their subscriptions. By adopting such strategies, companies can increase the chances of returning them to the active user base.
Conclusion
To prevent customers from involuntary churn and foster strong customer loyalty, it is crucial for businesses to introduce a grace period policy. With a grace period, customers are given a specific timeframe to resolve their payment issues, thus avoiding unnecessary account cancellations.Â
This approach demonstrates empathy and understanding toward customers’ circumstances and promotes open communication and cooperation. We create an environment that encourages retention and long-term collaboration by offering a temporary reprieve and emphasizing the value they bring to the business.Â
Implementing a grace period proactively supports customers through financial challenges, reaffirms our commitment to their satisfaction, and ultimately drives customer loyalty.
We introduced the grace period feature in the Signeasy platform a year ago, and I’d like to share some numbers to illustrate its effectiveness.Â
Within a span of 10 days, we had a total of 88 customer accounts in grace. During this time, our billing platform attempted a total of 161 payment retries for these users. We successfully recovered payments from 39 customers.
These numbers clearly demonstrate the impact and potential of the grace period feature. It not only helps in reducing churn but also simplifies the process of recovering payments. Based on these results, we strongly recommend integrating this feature into any billing system.Â
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