Think of a Netflix account.
Though people love the ad-free content and convenient digital access, it’s also nice to be able to enjoy that experience without having to actually remember to pay the bill each month in order to have access to the service.
That’s just one familiar and powerful example of the impact of recurring billing and the subscription model and why it is now being applied to everything from pet supplies, to cosmetics, to customer management software, to PowerPoint presentation alternatives.
Dan Burkhart, CEO and cofounder of Recurly, also believes that there’s much more to the subscription model than making it easy for a business to be paid and count on a recurring revenue stream.
“We are generally of the mindset here that the subscription model is really fundamentally a much healthier contract between businesses and their customers,” he said.
In referencing his own subscription to Netflix, Burkhart explained that he hasn’t actually had to think about the subscription itself for years, and that’s because the value he receives surpasses the $15 per month he pays for it.
“I’ve never had to go back and re-evaluate that,” he added.
“But I really do believe that transparency in the model is really critical. Consumers should have the ability to vote with their feet very conveniently and quickly if they ever feel the value isn’t as good or greater than the product received.”
This freedom of choice is what Burkhart believes really makes the subscription model work well.
Best practices, Burkhart says, are not only giving consumers the ability to first sample and later adopt a service in order to get comfortable with it, but they should also very easily be able to unhinge themselves and cancel if they no longer find value. Businesses should also make it easy for consumers to downgrade or upgrade their level of service and need to be able to hone in on the right price point that intersects cost of service and value received.
When Subscribing Gets Tough
Though the subscription segment can be seen as a very vibrant and vital piece of the commerce experience, like many things in payments, its simplicity belies the complexity that lies beneath. It turns out that its biggest advantage — an annuity revenue stream for the business — is its biggest challenge to manage.
Customer churn can be as high as 11 percent for some physical products, making it vital to have strategies in place to spur customer retention and understand profitable acquisition channels. Though subscription businesses typically spend more on acquisition due to the long-term relationships with the customer, that higher lifetime value tends to offset the actual costs of acquisition.
Recurly’s examination of some 25 million data points of subscription transactions across B2B and B2C products suggests that understanding subscriber churn is of critical importance so that companies can fine-tune the channels they are using to acquire profitable customers. And since subscription businesses typically put a lot of money at risk upfront to run promotional offers to acquire an annuity revenue stream, it’s critical to understand the relationship between the audiences they are marketing to and the underlying quality of the subscribers those channels bring in.
Having this insight can help a business cut back on the underperforming channels and push the pedal down in the direction of channels that are outperforming and acquiring customers profitably.
Burkhart says it’s almost like pruning a bonsai tree.
“Every marketer out there wants to effectively prune those underperforming branches, the branches that are sagging, so that the energy of the tree can be shaped in the direction that they want it to go,” he stated.
Recurly’s research also sheds insight on when and to whom coupons should be offered. The data revealed an unusually strong correlation between certain days of the year and promotion redemption rates that encourage sampling and trials of full-fledged subscriptions. Last year’s Cyber Monday was a striking example, as customers redeemed three times the number of promotions on that day alone as any other day in a two-week stretch including Black Friday.
Another area that drives churn — more precisely, involuntary churn — is credit card declines.
“We have access to a tremendous amount of information that we believe is helping business operators to connect the dots between those underlying patterns of credit card declines in a way that allows them to better contemplate what they need to do to avoid one of the most avoidable types of churn,” Burkhart added.
Involuntary credit card declines can lead to many hiccups in the payment process for subscriptions. But businesses can get a general idea about the typical lifespan of a subscription customer and the likelihood of credit card decline based on certain churn characteristics. For example, if targeting a younger income demographic, such as college students, businesses may see a very different pattern in credit card declines for their service due to the nature of insufficient funds, temporary holds, credit limit reached, etc.
The Subscription Evolution
One interesting breakthrough seen over the years in the subscription space is the evolution of the freemium model.
Burkhart described this as businesses stepping away from their traditional mode of selling through a transactional high-touch way and instead offering a taste of the service or product for free, using it as a “honey pot” to acquire long-term paying loyal customers.
The notion really kicked into gear, Burkhart said, about five to seven years ago and has remained a popular and often cost-effective means for consumer-facing companies to acquire customers.
“It’s a far more friction-free and cost-effective way to acquire loyal customers rather than taking the heavier-handed approach of trying to sell upfront and through contracts and higher-touch direct sales model approaches,” Burkhart explained.
He added that much of the friction in the subscription experience has been eliminated over the years through better payment processing and better customer experience models.
“We also see some evolution in the way companies are thinking through trial and adoption and cross-sell, upsell promotions and the entire lifecycle of marketing.”
From distance learning to media and entertainment, Burkhart says that subscriptions are gaining new ground across some very unique verticals, using the subscription model to give the consumers what they want and businesses the opportunity to monetize a new business or consumer relationship.
“Many of these verticals are using subscription models to offer consumers an ad-free experience, something that they are increasingly willing to pay for,” Burkhart noted.
Another example of the subscription model’s potential to cross- and upsell products in new segments is in the burgeoning field of smart devices. Burkhart cited the sales of home security automation and digital cameras as one such example. Though the cameras themselves are low-margin products, a company can offer them alongside a high-margin digital subscription and get remarkably high conversion rates.
“It’s a very effective model because it’s really similar to the old adage of giving away the razor and selling the blade,” Burkhart said.