Subscriptions are a hot topic for direct-to-consumer (DTC) brands in 2021. With some major growth in the eCommerce subscription market already underway, every online business should be thinking about how it can create recurring revenue streams.
We’re taking the opportunity to share some of our strategic advice for optimizing and scaling subscription programs.
When it comes to challenges facing DTC businesses, rising customer acquisition costs are one of the main impediments to growth. For certain brands who have the proper product-market fit, an automated subscription service (that handles the transaction for both the business and the customer) provides an opportunity for revenue growth via reduced acquisition costs and increased retention.
When working with subscription brands, we try to think about the online shopper’s holistic experience. From their initial touchpoint with the brand, all the way to the moment that they cancel, there are opportunities to increase customer lifetime value and other metrics.
Below, you’ll learn about core subscription success metrics, followed by how to scale your subscription program depending on your business size. Let’s dive in!
Three core eCommerce subscription metrics
Growing your subscription program is an ongoing effort that requires leveraging your data insights to pinpoint tactics that help your brand grow. Watching for changes in adoption, frequency, AOV, CLV, and churn are key to understanding what is or isn’t working.
When we work with DTC brands on their subscription business, data is the only tool we have to understand the customer experience at scale. We try to break down the data into two pieces:
- What is blocking customers from becoming subscribers?
- What is causing them to cancel?
This information is extremely useful for new brands and should be monitored regularly. But, what we’ve learned is that it can be even more useful when it’s combined with other data; like purchase frequency, product type, and price. This data can help you identify gaping holes in your subscription strategy that can generate more revenue if fixed. Data and analytics should guide decisions and help your business make predictions. Not only is it important for evaluating performance, but it also can help inform product development and necessary adjustments to your subscription experience.
1) Increasing lifetime value
Lifetime Value (LTV) can be defined in a number of ways, from fairly simple to incredibly complex. In its most basic format, LTV can be calculated as frequency * average order value * margin * 1/churn rate as explained here.
For example, we had a hypothesis with our client, Native, that decreasing frequency would lead to less churns attributed to “I have too much.” Using the formula above, our hypothesis was that a decrease in subscriber frequency would result in an outsized, positive effect on churn rates. With this in our back pocket, we were delighted to see that churn CLV actually increased despite the decrease in customer frequency.
In effect, CLV becomes an important metric when analyzing your subscription program over time. With subscription programs, you will not see the results of any tactics that you implement until you have several cohorts of customers that experience the change. Yes, in general we want to improve AOV and decrease churn, but these numbers only become helpful when we look at the bigger picture. Our strategists highly recommend implementing one tactic each month so that you can review the CLV data from that month’s cohort and compare against previous cohorts.
2) Increasing average order value
We have found that average order value is one of the trickiest metrics to increase for eCommerce merchants. Subscriptions are based on an agreement between the merchant and the customer that they can save time and money by automating a transaction. When a merchant asks a customer to add to their subscription to increase AOV, they break this agreement. This creates some level of risk. A customer who is actively reviewing their subscription is more likely to pause or cancel than a customer who is not.
Thus, we want to be careful in our tactics to increase AOV. Recharge’s integration partner ARPU allows customers to add to their next order without navigating to the customer portal. This is a great tactic because it keeps the customer focused on increasing AOV rather than cancelling. On the flip side, Recharge’s new Novum Theme allows customers to add products to their subscription from the customer portal. Customers can add one-time products to their subscriptions, which will boost overall AOV.
3) Decreasing churn
The best way to lower churn rate is to create a product that customers literally can’t live without. Like coffee, for example.
Caffeine jokes aside, churn is really all about the effort to find the perfect product fit for your customer. For instance, if you consume one bag of coffee every month, a monthly coffee subscription may be right for you. But, some months you may prefer a light roast while others, a dark roast. Some months you may have friends over who will drink some coffee, and some months you may decide to drink tea instead.
A subscription solution provider like ReCharge gives customers the tools to address all of these: change flavors, pause subscription, and order the next shipment now. To ensure your customers are getting the most out of these tools, we highly suggest using the Recharge Novum Theme for the customer portal, which was loosely based on the work that we did with Native.
Once your self-service tools are easily accessible, the next step is to analyze your cancellation reasons. The cancellation reasons are probably the most valuable part of your entire website because they provide direct feedback on how to make your business better. Using the answers from real customers, you can better understand how to make that perfect product fit for your customers.
Let’s say you sell a funky t-shirt of the month. While it may be difficult to find the right frequency and design for every customer, you can still find out if a certain type of t-shirt runs small or is itchy. Responding to and fixing this type of problem will result in less churn in the long run.
It’s also incredibly important to personalize your cancellation options to create a lasting relationship with the customer. A customer who loves the brand but had a bad experience can and should be rewarded for providing valuable feedback. To make this bit easier, you can use Recharge’s out-of-the-box self-service cancellation prevention tools; like apply an immediate discount to the next order
Finally, it’s important that your subscription program messaging is clear up front on your product page. Many customers accidentally subscribe to your product, which creates for a regrettable experience 1-3 months down the road. Make sure the subscription is clearly labeled on the product page, cart page, and checkout.
How to scale your subscription program
As an agency that has created new subscription programs for merchants in many verticals and at all lifecycle stages, we’ve developed processes and tactics that focus on growth. The key to successful subscription scaling, no matter what stage, centers around leveraging data to inform continuous optimization.
Scale from 1k-10k subscriptions
According to Mckinsey & Co., there are three main types of subscription:
If you’ve hit 1,000 subscribers, that means you have successfully found product-market fit for subscriptions in one of these three categories!
The next step will be to evaluate your margins, acquisition costs, and customer lifetime value to understand where the biggest opportunities for growth are. We often see that the first 1000 customers are extremely loyal but that loyalty drops off as the subscription base grows. Thus, it’s critical to prioritize a roadmap of tactics that will create healthy growth.
Creating a strategic roadmap starts with establishing KPIs and performing monthly analysis of testing ideas. One key element of this process is looking at customer data through a customer segmentation analysis or churn analysis to understand why and when customer churn.
When it comes to growth tactics, some might include updating the default shipping frequency, increasing the discount for subscriptions, and creating an automated email campaign for customers who have purchased three times, offering them a one-time discount to buy a subscription. These are very simple tactics that can lead to growth.
One critical consideration at this stage is if you want to combine a rewards program on top of your subscription program. In other words, do you want to give users points in addition to the discount they receive for purchasing. Be sure to do a thorough analysis of your margins before layering these together.
Scale from 10k-100k subscribers
Once you have reached the 10,000 subscriber benchmark, the first thing you should do is celebrate. The second thing you should do is revisit your subscription roadmap. (Yes, you should have a roadmap just for your subscription program, especially if you want it to grow!)
At this stage, retention is equally as important as acquisition. If you haven’t updated your customer portal, now is the time. Create strong incentives for the customer to stay subscribed. Review the solution partner ecosystem for apps that can encourage users to improve AOV or reduce churn. A few apps that we’ve used are Churnbuster and ARPU, both to great success.
Acquisition at this phase starts to become more complex. With a large enough base, you should be able to create look-alike audiences from your subscription base that can be used to attract new potential subscribers. A one-off promotion on subscriptions can bring in large groups of new subscribers but can also lead to higher churn rates as these customers may be less qualified. Tactics at this phase should be closely monitored and iteratively tested.
The best part about getting to this phase is that you will likely have a number of long-term VIP customers. These customers can be segmented into a special group to get regular feedback, which will often drive insights around product issues, potential new products, and subscription program issues.
Are you interested in starting or optimizing your own subscription program? Or maybe you’re still exploring your options, looking to get an external point-of-view before making a final decision? If so, contact us today.