How to grow revenue, minimize fraud from subscription business models
The online subscription services industry has grown exponentially in recent years. According to data from the last year, 78% of adults globally use a subscription service. So it’s safe to say the subscription business model has changed how consumers shop.
Most would rather opt for an experience that’s convenient and tailored to their preferences than spend hours looking for products themselves and pay more for them. In many cases, with online subscription services, consumers can control the products they get without too much effort.
The subscription business model is also an excellent way for e-commerce merchants to create unique shopping experiences, build brand loyalty, strengthen customer relationships, and gain a steady revenue stream. Of course, this business model comes with challenges.
Some companies have resorted to deceptive marketing tactics to get more subscribers, resulting in friendly fraud chargebacks, reputation damage, and potential legal trouble. Meanwhile, fraudsters take advantage of free trials and sign-up offers to commit promo abuse, online streaming fraud, and payments fraud.
But as long as e-commerce merchants understand and address the potential fraud risks associated with online subscription services, this business model can be a great way to expand revenue streams and create long-lasting customer relationships.
Focus on the customer experience to improve growth
These days, consumers know what they want and likely won’t buy products unless they have meaning and personal relevance. So if a merchant is going to offer online subscription services, they need to provide quality products tailored to the customer’s needs.
And when merchants create a unique customer experience, they build better brand loyalty and trust with their customers. They can offset customer acquisition costs by creating a steady cash flow from returning customers.
Additionally, if customers enjoy the products in their subscriptions, they may be more likely to buy additional products outside of the subscription box. They may be likely to promote the brand, too. And word-of-mouth promotions can help drive marketing initiatives. Merchants may also consider offering referral bonuses for loyal customers to encourage them to spread the word.
Converting customers can take time and patience. Merchants can also offer product recommendations, personalized discounts, and loyalty rewards to bolster their subscription business model.
Overall, the best way to make a subscription business model grow and become profitable is to create a sense of community for customers. Use the subscription business model to provide a service that makes the customer feel valued and part of a larger narrative and community.
Avoid deceptive marketing tactics that damage brand reputation
While online subscription services are a great way to boost revenue and customer relationships, converting and retaining customers can be difficult. Some companies have resorted to deceptive tactics to increase conversions, such as automatically enrolling customers in a subscription or making it difficult to cancel services.
Customers will likely dispute those charges with their banks or credit card companies as fraudulent. And some banks are making it easier for customers to do so by implementing mobile app features that allow them to dispute unwanted recurring charges.
Of course, the responsibility falls on merchants to repay disputed claims. And that responsibility costs e-commerce companies billions of dollars in returned revenue each year, as well as customer service and bank fees for undoing transactions.
But customers may also complain about the brand on social media or leave negative product reviews, hurting the company’s reputation and chances of gaining future subscribers.
Additionally, the company could face legal trouble and fees for enrolling customers in subscription services without express informed consent. According to the Restore Online Shoppers’ Confidence Act (ROSCA), post-transaction third-party sellers are prohibited from charging a consumer unless they have disclosed all terms of services and received consent from the consumer.
Protect recurring payment models from friendly fraud chargebacks
Recurring billing is simple and convenient for both the customer and the merchant, but it comes with challenges.
Customers will often forget they subscribed to a service or cancel their subscription and be surprised when they see the charges on their bank or credit card statements. More often than not, customers will dispute those charges with their banks or credit card companies.
Technically, the customer enrolled in the subscription, but they may have been unaware that they did, forgot about the subscription, or experienced buyer’s remorse. And when they dispute the charges for a refund, they’re committing accidental friendly fraud.
Unfortunately, merchants foot the bill for those disputes, losing billions of dollars in returned revenue, canceled subscriptions, chargebacks, and fees to undo transactions. And because the issue is so common among online subscription services, acquiring banks usually categorize merchants that engage in recurring billing as high risk.
To minimize the potential for customers to file disputes, Visa and Mastercard now require merchants to gain cardholder approval at the end of a free trial before they start billing for the subscription.
Understand how free trials and sign-up bonuses attract fraudsters
Although friendly fraud accounts for most fraud claims regarding online subscription services, fraudsters still run rampant, abusing sign-up bonuses and using stolen credit cards to buy subscriptions.
Offering free trials or sign-up bonuses, such as giving away the first subscription box free, is a great way to attract new customers. But some fraudsters will continually sign up for free trials by way of new account fraud and resell products at steep discounts.
As a result of these promo abuse schemes, businesses lose sales and revenue, waste their marketing spend, lose merchandise, increase their chargeback rates, and lose potential customers.
3 fraud prevention tips for subscription business models
Building your business with online subscription services can seem daunting, but it can be a lucrative business model. In the last year, subscription business revenue grew 11.6% while S&P 500 sales declined -1.6%. But there are ways to combat fraud risks before they become an issue.
1. Disclose terms of service and cost of subscriptions
Minimize the chances of a customer filing a dispute for a subscription by being transparent about the terms of service, billing cadence, and subscription cost. Also, provide easy online options for canceling services or turning off auto-renewal at the end of a free trial.
Additionally, send regular reminders to customers who have signed up for a service before the billing cycle begins to help prevent unnecessary disputes. This way, if a customer decides to cancel, you’ll increase the likelihood that they’ll leave with a positive impression of your business.
2. Use organic growth tactics to increase revenue
Instead of relying on customers forgetting about their subscriptions or deceiving them into purchasing a monthly subscription, invest in getting to know your customers.
The key to a successful subscription business model is creating tailored and personal relationships with your customers. The longer a customer subscribes to a service, the more tailored their collection becomes.
And when you’re able to bring value to your customers, the more likely those customers are to provide good online reviews and recommendations to other potential customers. In turn, you can elevate your brand reputation and bring in more loyal customers to increase revenue.
3. Invest in a digital fraud solution that assesses risks pre- and post-authorization
Implementing a subscription billing fraud prevention solution is one of the best ways to protect your business from losing revenue to criminal payments fraud pre-authorization. But you’ll want to make sure that the solution integrates tools for friendly fraud prevention and chargeback management post-authorization.
Post-authorization tools are essential because they allow you to collaborate with banks in real time when a customer files a dispute. These tools provide dispute inquiries and chargeback alerts that can help you make informed decisions about how to proceed, saving merchandise and revenue.
For example, in some cases, you can automatically relay the status of a refund to stop chargebacks in progress. Or you can deflect chargebacks by relaying transaction details that can help customers recognize purchases. You can also stop shipments as soon as you get a chargeback alert to prevent inventory loss.