Acquiring customers in retail is challenging. Even more so when a merchant has adopted a subscription commerce business model. Unlike a regular retail purchase — which has little long-term risk to customers should they regret their purchases — buying a subscription-based product isn’t just about buying a good or a service; it’s about engaging in an ongoing relationship.
The reward is high: Subscription service customers tend to have a higher-than-average lifetime value, but the initial challenge going in the door is harder. As a result, and perhaps unsurprisingly, Recurly found in a recent study of the subscription service space that these types of merchants tend to expend more time and resources acquiring customers than other types of retail businesses.
The trend remains true for all types of subscription services: Increased activation energy is visible whether one is looking at a business-to-consumer (B2C) service offering media access or subscription boxes or a business-to-business (B2B) SaaS platform. Recurly said these types of subscription-based businesses need to take a more strategic approach when it comes to attracting customers to their platforms — and then converting those initial interactions into long-term relationships.
“We focused this study on two things,” Recurly Senior Product Manager Emma Clark told PYMNTS in a recent conversation, “coupons or discounts and free trials, and how they function as customer acquisition tools.”
The results were interesting — even surprising.
Free Trials Done Right
Using a free trial period as a customer acquisition tool, according to Clark, has a strong track record for converting consumers — with a few caveats, of course.
The first, she noted, is that while trial periods work well across the board, they are most effective in segments where the cost of providing the service is low, such as media-streaming.
Physical goods, because they involve physical products, obviously, have a higher cost associated with extending those free trials, Clark explained, which tends to make them a more expensive acquisition tool.
It’s why “box-of-the-month club” subscription companies are less likely to offer free trials, she said. Discovery isn’t as important to the offering: The consumer usually knows what they’re getting. However, some offerings do come with a surprise as an inducement to sign customers on and encourage them to stay longer.
Trials work best, Clark said: Enrollment allows customers time to educate themselves on the service and the value it provides. Getting the length right, she noted, is key. The standard for media and streaming services is about two weeks — enough time to understand an offering and how it works, but not enough time for a customer to wade through an entire catalog’s content. Other options involve use-based trials, where consumers can stream so much content or see so many articles before they pass out of the trial phase and are pushed toward making a conversion.
The overall goal is to offer consumers enough to consider a product, without giving them all the value up front so they have reason to churn when the trial period is over.
Avoiding that churn, she said, is critical — it shouldn’t depend on whether a business asks for a credit card in a transaction, though consumers who pre-enter a card do tend to churn less at the end of a trial period (but that isn’t a complete-enough picture).
“You really have to look at the month after a customer has received their first charge, because that is where the churn often happens. Offers that don’t ask for the card will see lower conversion, but they have less churn,” Clark explained.
However, caution arises when taking a form of payment out of the equation, creating a barrier to entry; services that do this will likely see more interest, with more consumers signing on, so they need to be ready to meet demand.
Recurly’s study of subscription services turned up a few surprises — like the fact that B2C businesses are more successful in retaining subscribers who started with a longer trial period than their B2B counterparts.
“Our initial analysis didn’t uncover any obvious reasons why that is the case; that is actually on our list of things to dig into next,” Clark admitted.
Although trial periods didn’t have as clear an impact on acquisitions, they did have a very notable effect in another area Recurly studies: coupons and discounts.
Doing Discounts Right
Recurly was interested in whether using a coupon or discount at the time of sign-up influenced a consumer’s lifetime relationship with the business. Once again, they saw a net-positive effect.
“We saw, across the board, that customers who started with a coupon or discount had a longer life cycle,” Clarke said.
But, she noted, again, there were caveats. The most notable: The effect was much more visible in the B2B space than in its B2C counterpart. Recurly found that B2B businesses tend to use coupons somewhat differently than their B2C counterparts.
“In B2B, we are not seeing this as a promotional tool to draw people in; they use it as a pricing strategy to attract customers for a longer period of time. So, for example, there is a discount for buying the service annually instead of paying for it monthly,” Clark explained.
In the B2C space, on the other hand, discounts and coupons are leveraged via promotions nearly exclusively.
“Customers have been trained at this point to really see 20 to 30 percent as a fairly good discount and 50 percent off as a really good deal,” she said.
A 50 percent off discount may attract customers, but it’s also a very big bite out of one’s price to offer, which means Recurly strongly encourages retailers to create a detailed plan to figure out how those discounts are going to lead back to sustained profitable sales. Signing people up to a service and keeping them enrolled, Clark noted, is only a good thing if a business can profitably serve them.
“If you train customers, they will always expect a deep discount. That is not a promotional tool; that is just changing your pricing strategy using discounting,” she explained.
Businesses must remember that a free trial or discount plan is not a long-term business strategy — though, done right, either can be a highly effective acquisition strategy to get customers in the door.
Once they’re there, however, subscription services — with their vast and recurring data sets — have an opportunity to do more for their customers in ways unrelated to pricing.
“These opportunities can vary based upon the business. For example, a subscription box that sells a variety of products should tweak their subscription offering a few months into the subscriber’s lifecycle to cater to that customer’s likes and dislikes. In short, regardless of acquisition method, the value proposition subscriptions are offering must stay relevant if their customers are to remain long-time subscribers. Where you have to actually come in and assure that the customer sees the value of your product is when they have actually made the decision to try it. That is that key moment where you have to reduce friction and ask, ‘What else can I do to satisfy them?’” Clark said.
You can see the full results of the study here.