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Why Subscriptions are So Attractive?

26.05.2020

… and how so many businesses can use subscription thinking

The three phases and the key Metrics

A subscription business runs on MRR (Monthly Recurring Revenue), however, getting customers to renew their subscription or even upsell them is much, much easier than getting them to sign up in the first place. This is why most subscription companies split the “selling” process into three teams: Hunting (signing up new logos), Onboarding (getting new logos activated), and Nurturing (churn prevention and up selling).

My ‘killer’ sales team needs to focus on getting new companies to sign up and the rest is easy right?

Watch what happens to the successful team-orange-line when I add customer churn (opposite of renewal rates) and expand the time horizon. The killer team-orange sales team I spent so much money on is wasted if my churn is high.

Customer lifetime value can be calculated reasonably accuratly once you know your renewal rates. You can look up the math, but the important thing is that reducing the churn rate in half means doubling the average time your customer will be subscribed and doubles the value of that customer. Thus the effects magnify as we get closer to 100% retention. 94% retention and 97% retention means 2x lifetime revenue!

This then changes how we should think about customer facing spending. In Customer Success / Customer On boarding, doubling the yield % has the same effect as doubling the sales volume. This team should be duration limited, not spend rate limited. I have never seen a customer success team initiative that produced yield improvements within the time limit but had an unacceptable ROI.

Nurturing / Churn prevention teams operates over a long time; however, you already have customer trust so mistake consequences are smaller and slower. Additionally, most churn prevention and up selling is relatively inexpensive (eg. email campaigns) and can be done by relatively inexpensive people. By the nature of the mission and tools, costs are almost always not an issue.

Now we get to hunting. If the other two teams are working properly and the product is good, then we should have strong metrics on which new customers will result in a high lifetime customer value. Using this, we can compare costs of customer acquisition against the value of the customer being acquired. The best metric is a percentage of lifetime value or months of MRR. The activity of optimizing the yield and churn usually results greater insight into who is a bad customer. This results in salespeople that can spend far more money/time per won deal, but with far more constraints on what is a “good” deal.

This thinking process becomes a learning systems where it is constantly tuned. Other customer groups or products can be added with their own churn/MRR/Yield/cost-of-customer-aquisition economics. (eg. strategic vs opportunistic)

Finally, this type of modeling creates highly predictable cash flow and reduces the “forecasting crunch”. It also changes funding sources from high risk/return venture investors to lower risk/return private equity or even banks.

Great, but what if my product/service is not a subscription? I would argue that Lavazza coffee signing up a cafe to use their coffee is really a subscription by another name. It has the same high cost of signup, a risk of early failure (activation), and a predictable churn rate. Chocolate bars to supermarket, outsourcing engineering services to a bank, laptops for an enterprise can all be viewed from subscription economics.

What business can’t be thought of as a subscription? How could it be? If it is a bit subscription-like, what do my economics look like from that perspective?

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