Subscription Commerce:

Mapping & Measuringthe Subscriber Journey

When you truly understand the entirety of a subscriber’s journey, you stand a better chance at earning their trust and their money.

Your ability to generate recurring revenue over the course of a long-term customer relationship also depends on knowing how to measure the key performance indicators (KPIs) of a successful subscriber journey. Without subscription KPIs, you won’t be able to report your successes or find opportunities to increase your revenue over the long haul.

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The Subscriber’s Journey

The following is a description of the main events that occur as a visitor discovers your product, becomes a paying customer, and eventually, transforms into a loyal subscriber.

We’ll take a look at each of these events and then we’ll discuss KPIs like churn rate, customer acquisition cost (CAC), recurring revenue and customer lifetime value (CLV).

Signing up free users

Billing subscribers for the first time

Renewals

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MILESTONE:

Signing up free users

A successful subscription business model typically begins by offering people free trials or freemium products. These are two distinct marketing tactics, but they have something in common: They give users the chance to see the value of your offering, and they give you the opportunity to hook people into becoming enthusiastic users of your product or service.

Take a look at Spotify. They offer a freemium model that allows users to listen to millions of songs for free. However, these free users are obligated to listen to advertisements every few songs. By upgrading to the premium version, users can listen to their songs uninterrupted by ads — all for a monthly payment of $9.99. Additionally, Spotify offers a 30-day free trial of the premium version which lets users get a taste of an uninterrupted listening experience.

It is incredibly important to sign up free users because they constitute the majority of the customer base that becomes paying subscribers.

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MILESTONE:

Billing subscribers for the first time

Once a free trial ends or a user decides to upgrade from their freemium product to a paid version, the user must submit payment. Some companies collect payment information before letting visitors sign up for the trial or freemium product, but most wait until the initial billing event.

Tried and true conversion optimization tactics associated with traditional ecommerce can be very helpful in persuading a free customer to become a paying subscriber.

An email marketing campaign with timely and relevant messages, for example, is indispensable for converting free users. Additionally, merchants should implement a seamless in-app flow for users to submit their payment details. This provides merchants the ability to capture payment from subscribers precisely at the point when they are interacting with the product.

No matter where users are submitting payment information, it must be absolutely clear from the start that they are signing up for recurring payments.

Don’t be ambiguous. It only leads to a tarnished reputation down the line — not to mention increased costs and lost revenue due to spiking customer contacts, refund requests and chargebacks.

MILESTONE:

Renewals

In the early days of online selling, the main goal for a business was for customers to “Buy Now.” Get visitors in the door, and persuade them to submit payment through a checkout process. With subscription commerce, it’s still important to get those initial conversions. But now, retaining them as paying subscribers involves an additional layer of effort.

While customer churn is poison for a subscription business, renewals are its antidote. Securing initial payments and subsequent renewals involve similar processes, so continue to use email and in-app messaging to facilitate those events.

If you focus too much on revenue per visitor (RPV), you end up employing a short-term solution by raising prices and getting as much money from each visitor as quickly as possible.

In subscription commerce, you are more concerned about gaining a predictable, recurring revenue stream, so it is wiser to reduce barriers to payment by aligning value with cost:

Gain customers now and upsell them later. This gives you less revenue upfront, but greater potential revenue downstream.

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Price your product according to the value that it’s worth so that your customers are satisfied over the long haul.

Years ago, LinkedIn Premium cost $21.95 a month. Users who sign up today

pay $51.95 a month. However, those who signed up at the old price still pay

$21.95 and their invoice displays a $30 discount.

Clearly, LinkedIn didn’t want to increase their churn rate by charging loyal customers the higher amount when the price was raised.

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Up until now, we’ve focused on the important milestones of the subscriber lifecycle.

Now, we’re going to talk about the KPIs associated with these events.

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As digital marketing and analytics expert Avinash Kaushik explains, focusing on conversions in a subscription billing model is like declaring a relationship a success after a one night stand.

In a traditional perpetual license model, success is measured in terms of conversion rates and RPV. Focusing on conversion rates and RPV is smart, but they only measure short-term success.

The only way for your subscription business to thrive is by growing renewals. To see how well you are thriving, you must monitor the following KPIs:

Customer acquisition cost

Churn rate Recurring revenue

Customer lifetime value

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KPI:

Customer acquisition cost

Acquiring both free users and paying subscribers involves significant costs. Subscription businesses have to monitor these costs against the amount of customers they acquire.

Consider your answers to the following questions, as they all factor into our first subscription KPI: customer acquisition cost (CAC).

How much do your email marketing efforts cost?

How much do your search engine marketing (SEM) efforts cost?

How much does your ecommerce solution cost?

What are your payment terms with affiliates? Are they paid per signup or per transaction, and does that commission continue for each renewal?

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CAC = Total cost of acquiring subscribers

Total number of new subscribers

To calculate CAC, total all of your costs for acquiring customers as a single number. Next, divide that total by the number of new subscribers gained from these marketing efforts.

If each month your company acquires 10,000 customers and spends $350,000 on all those acquisition efforts (including email marketing, SEM, ecommerce, etc.), your monthly CAC is

roughly $35 per customer.

There are a number of other factors that go into calculating CAC, like employee salaries, infrastructure costs, etc. The point to remember is that acquiring customers takes time, money and

human resources.

Customer acquired each month 10,000

Marketing costs $350,000

CAC per customer $35

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Your subscription business needs customers to engage with your product. One of the ways to measure that engagement is through the churn rate.

Churn is a measure of how many subscribers drop off from one subscription lifecycle event to another. The more churn your business experiences, the less engaged your customers are. In its simplest form, the churn rate is calculated by establishing how many customers canceled in a given time period.

KPI:

Churn rate

Churn rate % = x 100Number of canceled subscriptions

(Time period x Number of active subscriptions)

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If you had 10,000 active subscribers at the beginning of a month, and by the end of the month you had 7,500 active subscribers, your monthly churn rate would be 25 percent.

Now, imagine a scenario where you’re effectively increasing the number of subscribers who sign up each month, and decreasing the number of subscribers who cancel each month. In this scenario, you acquired 10,000 subscribers in the first month; 11,000 in the second; and 12,000 in the third. Meanwhile, 2,500 subscribers canceled that first month; 2,000 in the second; and 1,500 in the third. Your total number of acquired subscribers is 33,000 and your total number of canceled subscribers is 6,000. Your churn rate over the entire three month period stands at six percent.

Monthlychurn rate %

Monthlychurn rate %

x 100

x 100

2,500

6,000

( 1 x 10,000 )

( 3 x 33,000 )

=

=

Interval

Interval

1

Total321

Number of active subscribers

Number of active subscribers

10,000

33,00012,00011,00010,000

Number of canceled subscribers

Number of canceled subscribers

2,500

6,0001,5002,0002,500

Churn rate

Churn rate

25%

6%4%9%25%

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But churn does not occur in a vacuum. To calculate the true impact of your churn rate, forecast how many users you’ll need to acquire to reach your revenue goals.

For example, let’s say on January 1, 2014 you have 100,000 subscribers. To reach your revenue goals, you need 200,000 active subscribers by January 1, 2015. For the next twelve months, you need an average of approximately 8,400 new subscribers every month.

What happens to your forecasting if you have an average monthly churn rate of four percent?

To reach your goal, you’ll actually have to acquire an average of 11,834 subscribers every month.

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Recurring revenue is fairly simple to figure out. Take the amount of revenue generated by a subscriber and divide that number by the amount of billing intervals.

KPI:

Recurring revenue

+ + + ...

Recurring revenue =

Monthly recurring revenue

Annual recurring revenue

Revenue generated

Revenue generated Revenue generated

In the case of a single subscription that costs $9.99 per month, the monthly recurring

revenue is $9.99 per subscriber, while the annual recurring revenue is $119.88.

Billing interval

Billing interval Billing interval= = OR

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What happens when you increase the number of subscribers each month? Returning to our churn rate scenario, your company acquires 10,000 customers in the first month, 11,000 in the second, and 12,000 in the third. At $9.99 per subscriber, your company is generating $329,670 in quarterly recurring revenue.

There are two methods for increasing recurring revenue. The first is to acquire more subscribers, and the second is to increase the value of each subscription by persuading subscribers to upgrade to a more expensive plan.

Monthly price

Total

$9.99

Monthly intervals

Revenue each monthly interval

Monthly recurring revenue

1 quarter

$ 329,670

$ 329,670

3

$ 119,880

$ 109,890

2

$ 109,890

$ 104,895

1

$ 99,900

$ 99,900

Number of subscribers

Revenue from active subscriptions

33,000

$ 329,670

12,000

$ 329,670

11,000

$ 209,790

10,000

$ 99,900

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With the subscription billing model, customer lifetime value (CLV) is the primary KPI. There are a number of different ways to calculate CLV, which is part of the challenge of utilizing this measure in the first place. Whether it means using “crude heuristics” or “complex predictive analytics” (to quote the relevant Wikipedia article), calculating the lifetime value of a subscriber always depends on one’s familiarity with other important metrics like recurring revenue and churn.

According to subscription metrics guru Joel York, the simplest way to calculate CLV is by dividing your recurring revenue by your churn rate.

KPI:

Customer lifetime value

CLV = Recurring revenue

Churn rate

$ =

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Reviewing all our previous scenarios: Your company acquires 33,000 subscribers in three months, but loses 6,000 subscribers to churn over that time period. Each subscriber is paying $9.99 each month. At the end of the three months, your company has generated $329,670 in recurring revenue from all active subscriptions with a six percent churn rate.

Your CLV is $5,439,555, or $164.84 per customer.

CLV = $329,670

6%

Monthly price $9.99

Monthly intervals

Monthly recurring revenue

CLV

1 quarter

$ 329,670

$ 5,439,555

3

$ 109,890

$ 2,877,120

2

$ 104,895

$ 1,208,790

1

$ 99,900

$ 399,600

Number of subscribers

Monthly churn rate

CLV per customer

33,000

6%

$ 164.84

12,000

4%

$ 239.76

11,000

9%

$ 109.89

10,000

25%

$ 39.96

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How upgrades and downgrades affect recurring revenue and CLV In any successful long-term relationship, you should expect people to change. Subscription commerce is no different, and your subscribers’ needs are likely to shift over time. Therefore, it’s important to understand how upgrades and downgrades affect recurring revenue and CLV.

In the ideal subscription scenario, the customer signs up as a free user and later converts to a paid subscriber after they submit payment.

Let’s say the subscription is for virtual storage space. If the subscriber reaches their storage space limit, the hope is that they will upgrade to a more highly priced package. This is the sweet spot of a subscription business where recurring revenue and CLV are increased while churn is decreased.

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Consider the scenario where the subscription is for a number of licenses for a given product or service. It is common for downgrades to occur, for example, if an employee leaves a company. The company now needs fewer licenses. This affects CLV negatively.

Other important scenarios that negatively affect CLV include cancellations, refunds and chargebacks. These will all increase your churn rate and decrease your recurring revenue — both of which have enormous impact on your CLV.

Make sure you have a solid plan for reengaging these lapsed subscribers in order to minimize the impact on CLV.

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Conclusion

To find one real friend in a lifetime is good fortune; to keep him is a blessing.”

- Baltasar Gracian

All too often, you think of customers as commodities — interchangeable goods that will always be available to add to your business’s bottom line. The fact of the matter is that your business is a commodity for your subscribers.

If your business lives and dies by subscriptions, you need to understand the map of your subscriber’s journey and its relevant KPIs. Make sure that your ecommerce arsenal has capabilities to support subscribers at each stage of their journey and to accurately report subscription-specific KPIs. This will ultimately reduce headaches and provide business stability for the future.

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Our capabilities go beyond traditional ecommerce needs with comprehensive functionality to manage dynamic customer lifecycles in a way that reduces churn and maximizes customer lifetime value. With cleverbridge’s subscription management capabilities – including recurring billing, real-time marketing, centralized customer data, advanced reporting and analytics, customer self-service and seamless integration – clients have a full set of tools for building customer relationships and driving more revenue.

To learn more about cleverbridge, please contact inquiry@cleverbridge.com or visit www.cleverbridge.com.