Subscriptions: What's Old Is New Again-Sort Of


Article ImageSubscriptions used to be the exclusive domain of publishers, but not any more. Today, the subscription revenue model is the business strategy of choice for everything from software to snacks. There's a burgeoning business of "box" subscriptions: coffee, underwear, food, nail polish, razors, and anything else you can fit in a box and people will pay for to receive on a regular basis.

The recurring revenue that comes from subscribers is predictable and scalable. The subscription business model is powerful because a company can continue to sell services over and over again at a low cost per sale. This allows subscription businesses to market much more aggressively than most other industries. With a good retention rate, you can afford to break even-or even take a small loss-on the cost to acquire a new customer. Your retention sales pay you to grow. Plus, private equity firms find ongoing subscriptions to be an extremely sexy revenue model. While not new or disruptive, financial professionals love to see built-in, recurring sales.

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Here's the catch: Managing subscription revenue takes a rigorous approach, whether it is your only line of revenue or one of many. Subscriber behavior is unique to your market and to how you are pricing and selling your service (e.g., online, via apps, or through a sales team). Unfortunately, many subscription companies focus nearly all of their marketing activity on acquisitions, while assuming renewals will take care of themselves. Cost per acquisition is all the rage, as are exciting marketing tactics (content marketing, social media, behavioral targeting, SEO, search engine marketing, and nurture emails, etc.). However, much less time is spent on the key metrics and strategies impacting retention. Make no mistake, retention is equally-perhaps even more-important to a subscription-based company's financial health. For companies selling subscriptions, here are a few tips.

Have a robust, CFO-approved financial model-This is a numbers business. It's not a back-office task. If you are not a finance professional, get help from one. The best subscription businesses are obsessed with numerous metrics, including retention metrics such as voluntary churn-and its cousin involuntary churn. Lifetime value (LTV) of the customer is also key to profitable customer acquisition campaigns. Since subscriptions are generally lagging indicators of the health of a business, a comprehensive subscription-focused financial model that provides analytics for the early detection of potential issues and empowers decision making at many levels of the business is a must.

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Get ready for the "card not present" storm-Nothing puts a damper on a subscription business like declined cards. Next year will be a scramble for subscription businesses because of issues related to the new chip-based payment cards. Those "card not present" errors can result in an unexpected top-line revenue reduction. Consider an account updater service (provided by Visa, MasterCard, Discover, and, more recently, American Express) to stay on top of updated payment card information.

Know your customers and their subscription experience-Think about your service from their point of view. Why would customers want to have an ongoing relationship with you? What are you offering that provides them value on a month-to-month basis? As they become subscribers, how are you "onboarding" them? A good onboarding strategy can lift renewal rates by 20%.

Don't assume subscription marketing follows the same rules as traditional marketing-You are not selling a product; you are selling an experience. Your marketing strategies need to leverage this important differentiation. Subscription acquisition marketing uses very different tactics than subscription retention marketing. One requires audience development, conversation marketing, paywall, and landing-page optimization-plus lots and lots of testing. The other (retention) involves onboarding and relationship campaigns to keep subscribers interested and engaged so that when its time to renew, it will be an easy, "I'll keep it" decision. Always ask yourself if your company developed the plans, and does it have the right people in place for both?

Build or buy technology platforms with your eyes wide open-Whether choosing a vendor or an internal IT team to handle your transactions, make sure you are tapping into resources with extensive recurring billing and subscription management expertise. Do your due diligence and confirm that the many best practices for managing recurring revenue will be followed.

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Subscriptions are a detail-oriented business that can quickly underperform if an organization is not on top of the details. If executed well, the built-in, recurring sales can fuel your growth and put you squarely on top of the "hot" subscription economy.