Building habits, tracking metrics and engaging customers. All you need to know about the subscription economy in this decade.
The financial year is coming to a close and this past year has been immense learning for any technology business. There’s so much that’s changing every month, that you almost feel irrelevant if you don't adapt and evolve. Amidst all the noise, try and find things that restore your sense of calm. For me, it’s this Sunday newsletter.
This is one habit that keeps my weekend discipline in check. It’s something that I’ve stayed incredibly consistent with, for the past 8 months now. Surprising, but the gratification of knowledge & network have been immense.
Today, we’re on to 1900 subscribers. I don't have a long-term vision with this one, but I definitely want to keep writing consistently. So if you’ve been added by a well-wisher or you’ve signed up yourself, it’s going to be a fun journey from here on. You are part of 1900 avid readers of experiential (read: tactical) content on product, design & technology. No ads I assure.
Before we dive into this week’s power packed topic, we recently announced the launch of our new Angel Investing arm: Lights Out Ventures. This should be another exciting journey to embark on.
Now onto the fun stuff. I’ve been working with advising a bunch of tech businesses that rely heavily on subscriptions. And I definitely wanted to document my experience of working with some of them. So here’s everything you need to know, if you are ‘High Growth Business built on Subscriptions’
- Food & Beverages: healthy snack, coffee, gourmet boxes, daily meals.
- Wellness: nutraceuticals, mindfulness.
- Learning & Recreation: education, games
- Fashion: apparel rental, surprise boxes, socks.
- Personal Care: intimate hygiene, grooming, cosmetics.
- Rentals: furniture, decor, lifestyle, automobiles, EV
- Pet Care: a whole new world of subscriptions
- OTT & Media: entertainment, movies, music
- Delivery: groceries, dairy, medicines
- Fitness: home workouts
- LIfestyle: access, routines, clubs
- Safety: Insurances
Whether or not a customer chooses to ride on subscriptions is still a choice. But if he does, these are tenets of subscription economy, which every business MUST resolve:
- Convenience: while we would traditionally go and pick things up offline, it’s now all available either on our fingertips or at our doorstep.
- Availability: if a customer is choosing to have a product available regularly, it MUST be available at all costs. Unavailability or delays isn't a luxury that subscription businesses can afford.
- Choice,/: not all consumers are good with making decisions across multiple options. So subscriptions should aim to make decision making easier for customers, based on their requirements or preferences.
As a business, you’d fall into one of the three categories. And your offerings would be tailored to suit your category:
- Replenishment: they allow consumers to automate the purchase of commodity items, daily lifestyle products, groceries, etc.
- Curation: they seek to surprise and delight by providing new items or highly personalised experiences in categories such as apparel, beauty, and food
- Access: Here subscribers pay a monthly fee to obtain lower prices or members-only perks, primarily in the apparel, food, media, fitness, medicines, sectors.
To get some tactical insights into subscriptions, here’s how I break down the subscription purchase & post-purchase funnel. Based on the journey through the funnel, the behaviour and action steps would ideally differ for your business.
TOFU (top of funnel)
- Hear about subscription: this is where customers would most likely hear about your subscription model either through online channels (ads), product labels (QR codes) or through in-app / website communications.
- Targeting the core demographic or HXC (high expectation customer) who would most likely convert to a paying subscriber. Based on the sector, not all customers will turn into paying subscribers; it’s essential for marketing & product teams to be able to identify the ones who will and build the benefits of the model for them.
- Running ads & communications on the right channels to increase awareness of your subscription benefits. It should ideally solve for all 3: convenience, availability and choice.
B) Familiar with subscriptions: Based on analytics, you would ideally be able to gauge if they’re familiar with your subscriptions or not. They would check-out commercials, evaluate competitors, FAQs on deliveries, etc.Tactical Steps:
- Increase the sharpness of your analytics to understand who’s keen to subscribe. Focussed retargeting, individual calls or exclusive offers would help convert them to a paying customer. A huge part of converting a customer ‘familiar’ with the subscription to an actual paying customer would be testimonials or customer reviews. That’s ideally when they would check-out every piece of customer information out there from existing or past subscribers.
- This is where you amplify the benefits that a paying subscriber would get. It either fits into their lifestyle, daily needs or simply a status symbol. But going above and beyond what’s written out there on your websites or apps, is what this step is about. Many subscription businesses offer a free tier, or a free or paid trial, to enable consumers to try out the experience before becoming a paid subscriber.
BOFU: (bottom of funnel)
C) Try One Time: As a test, they would try out your subscription at least one time, or for a pilot product.
- Once you’ve hit the jackpot, the only thing that would make them go away is: if your initial communication has flaws. For me, one of the biggest reasons to unsubscribe has been: not worth the value / hype or unavailability of products, as proposed.
- But speaking more broadly, this is your one time paying customer. The sales process is not yet finished and hence they would have still to be pitched a lot more on why they should continue. Here’s where you bring in loyalty, more offers, exclusivity benefits, feedback calls or anything that gets you to understand their rationale of subscribing or unsubscribing (in the future).
D) Consistently Subscribe: Based on the one time experience, they would purchase repeatedly.
Evangelism for good or bad happens out here. Focus on the quality of service and documenting any anomalies in the payment pattern. You would typically set triggers for renewals, taking feedback and throwing in a benefit or two to keep them motivated.
E) Referral: Based on their experience, they would bring more people on to the subscription model.
- While it’s tough to control the outcome across a larger set of customers, you would be able to identify trends or reasons for unsubscribing in the early days of your subscription model. Being able to actively work on them is an obvious one.
- Feedback calls go a long way in trying to ensure that they don't spread negative reviews about your business.
Now, onto some strategic calls with subscription businesses.
Metrics for Subscription Businesses:
There are several top-line factors that matter for a subscription business:
- pricing to the consumer
- gross profit margins for the business
- frequency of subscription
- annual membership fees in addition to ongoing recurring subscription fees
But if I have to boil all of these down to one key metric that every subscription business should pay attention to, it is the annual gross profit value of a subscriber. To calculate the annual subscription gross profit:
Consider annual revenue per subscriber minus the cost of goods sold (COGS).
If the average monthly subscription for the business is INR 100 per month, for example, with INR 50 in monthly COGS, the annual subscription gross profit is INR 600
Most subscription businesses would look at this key metric to guide their business decisions or even valuations. It helps guide different verticals within a business to optimise for this one number.
One of the biggest factors while scaling a subscription business is it’s retention metrics. I break down retention metrics into three categories.And it’s best to divide the business into different cohorts based on the type of product or service:
I) Customer Retention: This is the % of customers that remain subscribers in every cohort.
II) Revenue Retention: This is the % of revenue in each cohort, as long as the cohort is active. An indicator of a healthy subscription model is obviously when revenue retention is higher than customer retention.
III) Usage Retention: This is the % of customers in each cohort that continue to use the product over time.
It’s essential for a subscription business to track it’s metrics closely. The potential for paybacks on CAC are enormously high if the model is built well.
Further, a good subscription business would have very quick payback on customer acquisition costs, perhaps even instant payback.
For a subscription business, it’s the combination of the above factors (payback period, cohort retention, subscription gross profit, and conversion rate) that drive the ratio of LTV/CAC, which is an important metric to track the success of a business.
Future Potential of Subscriptions:
Rather than word-of-mouth referrals, every subscription business must focus on improvising the quality of personalised choices that it provides to its users. The more personalised and accurate you could get with your offerings, the more likely your usage retention would be.
Referrals and loyalty programs are only an organic byproduct of how good my usage retention is. Netflix is one of the best examples (globally) of how personalised a subscription recommendation could get.
Well, that’s it for me in this one.
Until next time,