churn
shopify
Subscriptions
How does the No.1 e-Commerce Platform in the world, Shopify is trying failed payments?
Tzachi D.
Aug 4, 2024
Failed payments that leads to ‘Passive’ hashtag churn is a hidden Revenue Killer 💳 for SaaS Businesses. In the world of subscription-based services, customer retention is critical. It's a bad customer experience. It's a risk to lose the payment and a bigger risk to your net revenue LTV. One of the biggest challenges in maintaining customer loyalty is passive churn. This type of churn can undermine revenue and affect long-term growth. Understanding how passive churn operates and how companies address it is crucial for anyone involved in subscription management or eCommerce
What is Passive Churn?
Passive churn refers to the unintentional loss of customers due to failed payments. These failures can occur for various reasons, including expired credit cards, insufficient funds, or technical issues with the payment gateway. Unlike active churn, where customers consciously decide to cancel a subscription, passive churn happens silently and can severely impact a company's revenue and customer lifetime value (LTV).
Who is Shopify?
Shopify currently stands as the leading eCommerce platform globally, hosting over 4 million stores across 175 countries and generating $7.1 billion in revenue in 2023. In 2024, Shopify’s monthly recurring revenues surged to $149 million, marking a 35% increase. Additionally, their payments and merchant solutions division grew by 21% to $1.6 billion, which "management said was driven in part by the increased penetration of Shopify Payments" (source). Notably, Shopify now earns more from payment solutions than from its core monthly recurring revenue.
How Does Shopify Deal with Passive Churn?
To manage passive churn, Shopify employs what we at FlyCode refer to as a fixed-interval retry strategy, attempting to recover failed payments 11 times every two to four days (see figure). While this approach demonstrates Shopify’s proactive stance on addressing passive churn, it is a legacy method that ultimately achieves much lower success rates compared with using an AI and machine-learning-based payment optimization.
How Can You Do It Better?
According to Andreessen Horowitz, integrating fintech offerings SaaS business can increase revenue per customer by 2-5 times and unlock new market opportunities. Vertical SaaS companies, such as Mindbody, Toast, and Shopify, typically started by reselling financial services but are now embedding these financial products directly into their vertical platforms. As technology and customer expectations evolve, it becomes crucial for subscription-based businesses to adapt. Solutions like FlyCode represent a new wave of innovation, marrying data science with business strategy to create tangible results.
Conclusion
We love Shopify, but it's a bit of a legacy approach that ultimately reduces retry success rates vs. using a ML & AI based payment optimization
Passive churn presents a significant challenge for subscription-based businesses, impacting both revenue and customer retention. While Shopify’s current approach to managing failed payments demonstrates a commitment to addressing this issue, embracing advanced methods such as machine learning and AI-driven payment optimization could lead to more effective results. As the industry progresses, leveraging innovative solutions will be key to staying ahead and maximizing revenue potential.
