The Key Role of Payment Orchestration in the Subscription Economy

PayXpert

PayXpert
Published 06/09/2023 · 4 min read

More than 80% of households in the UK alone are signed up for at least one subscription service. (Source: Whistl.co.uk ). In the US, the average consumer has four subscriptions (source: McKinsey).

The global subscription economy will be worth over 1.3 trillion EUR by 2025, with current year-on-year growth of close to 20%. Let's look closer at what characterises the subscription economy and how payment orchestration should be at the very heart of the model.

Six Characteristics of the Subscription Economy

In the subscription economy, businesses build long-term customer relationships by offering subscription plans that provide continuous value and convenience. This model has gained significant popularity across various industries, including software, media and entertainment, e-commerce, healthcare, etc.

Examples of subscription-based services include streaming platforms like Netflix and Spotify, software-as-a-service (SaaS) products like Adobe Creative Cloud, and membership-based services like Amazon Prime.

Key aspects of the subscription economy

This includes:

  1. Recurring Revenue: Businesses benefit from predictable and recurring revenue streams, providing financial stability and the ability to forecast revenue more accurately.
  2. Customer Retention and Loyalty: Subscriptions encourage ongoing customer engagement and foster long-term relationships. Businesses focus on providing consistent value, improving customer experience, and building loyalty.
  3. Flexibility and Personalisation: Subscriptions often offer customisation options and flexibility to cater to customers' evolving needs. Subscribers can choose from various plans or tiers based on their preferences and budget.
  4. Non-Stop Product or Service Updates: Subscription-based businesses continuously enhance their offerings, providing regular updates, new features, and content to keep customers engaged and satisfied.
  5. Data-Driven Insights: The subscription model generates valuable customer data, including usage patterns, preferences, and feedback. This data helps businesses gain insights into customer behaviour and preferences, enabling them to optimize their offerings and marketing strategies. This is often referred to as “zero party data”, as it is willingly shared personal data that are compliant with regulations like GDPR.
  6. Scalability: The subscription model allows businesses to scale rapidly by acquiring new subscribers while also focusing on retaining existing ones. It provides opportunities for growth and expansion.

The subscription economy is a win-win concept for businesses and customers both. Businesses benefit from predictable revenue, increased customer lifetime value, and opportunities for upselling and cross-selling. Customers gain convenience, access to many products and services, and often cheaper options than traditional buying methods.

How to Create a Winning Subscription Model

There is an apparent link between the growth of the subscription economy and the sharing economy’s growth. Many companies naturally pertain to both, and the basic principle of reduced importance of ownership is at the core. Consumers are increasingly willing to invest in convenience, reduced complexity, and increased flexibility as contrasts to ownership.

Three cornerstones must be in place to fully take advantage of these trends.

Learn from your customers

Getting back to the point regarding “zero-party data”, in a subscription model, user data accumulate through all interactions on the platform. Using this information to understand each user's specific needs will guide product development. It will also improve the user experience and customer journey on the platform.

Personalisation! Personalisation! Personalisation!

We say it again, personalisation is crucial. A 2020 McKinsey study showed that 76% of customers get frustrated by brands not offering personalised experiences. These are also willing to pay a higher price for a product if the shopping experience is personalised. Investing in personalisation features is bound to bring substantial ROI.

Focus on Loyalty

The subscription market is, in general, extremely competitive. If your service doesn’t deliver, there are 100 more ready to receive your customer with open arms and enticing subscription offers.

Creating a fantastic customer experience is naturally the best guarantee of success. Concretely, valuable loyalty programs are solid building blocks when constructing this. Furthermore, paying attention to general digital trends will inform you how to implement solutions before your customers start to request new functionalities.

Payment Orchestration and Subscription Payments

An integral part of delivering a satisfactory experience for the customer is the checkout and payment. All efforts to create a personalised and optimal customer experience are futile if the payment process fails.

The best guarantee to avoid this is to depend on payment orchestration for this part. Payment orchestration manages the flow of payments, considering multiple payment methods, providers, and channels. This involves integration with a payment gateway that handles all payment methods in a streamlined fashion.

Increased payment authorisation rates

Payment orchestration contributes to increased payment authorisation rates through several mechanisms:

  1. Smart Routing

Payment platforms can send transactions to different banks and processors based on rules and real-time data analysis. Payment orchestration identifies the most suitable route for each transaction by analysing factors such as historical transaction performance, geographic location, and acquiring bank capabilities.

  1. Dynamic Routing Optimisation

This feature allows for continuous monitoring of transaction success rates and adjusting routing strategies accordingly. If a bank or processor has problems, the platform can redirect transactions to other options that are more likely to work. This ensures that transactions are directed towards the most reliable and efficient payment providers.

  1. Payment Method Optimisation

Payment orchestration allows merchants to offer customers a wide range of payment methods. By analysing transaction data and performance, payment orchestration platforms can identify the payment methods that consistently yield higher authorisation rates for specific customer segments or regions. Optimizing the available payment methods based on their performance helps maximize successful authorisations.

  1. Fraud Management

Payment orchestration platforms often integrate with advanced fraud detection and prevention tools. These tools can more effectively identify and mitigate fraudulent transactions by leveraging machine learning algorithms and data analysis. Lowering the risk of fraud reduces the likelihood of declining legitimate transactions, thus improving authorization rates.

  1. Retry Logic and Decline Recovery:

The platform can implement intelligent retry logic for declined transactions. By retrying failed transactions with different methods or channels, payment orchestration improves the chances of successful authorisation. This decline recovery mechanism helps capture missed payment opportunities and improves authorisation rates.

Tokenisation for secure transactions and a higher conversion rate

Tokenisation in data security replaces sensitive data with a non-sensitive equivalent called a token. This token has no meaning or value that can be exploited.

Card data is entered only once. Tokens are generated and will be used to process future payments directly. Check-out is completed with a single click since the card data is already in the system as a token. This is a fundamental driver of increased conversion rates.

This solution is advantageous when subscribers’ cards expire. The payment can go through even without providing the new card information to the merchant.

Subscription business models may have widely different concepts and complexity levels. However, as they are built on recurring revenue, a cornerstone for both the customer experience and optimising ROI is choosing an omnichannel payment gateway that smoothly handles payment orchestration.

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