Subscriptions are one of the core ways eCommerce DTC brands are facilitating business growth this year.
Experts predict that 3.0% of US retail eCommerce sales will come from subscriptions in 2021, totaling $27.67 billion, which is more than a $10 billion increase from just two years ago. By 2023, up to 75% of DTC brands will offer subscriptions to their customers.
As an eCommerce agency helping to build and optimize subscription programs for some of the most disruptive brands in the space, The Stable is collaborating with leading subscriptions solution, Recharge, to provide actionable advice around subscription growth.
In this latest blog series, we’re focusing on Enterprise Subscription Growth, and in this first article we’re zooming in on core success metrics and how to use Recharge’s out-of-the-box analytics solutions.
3 Metrics To Track For Subscription Success
The best way to really know your business and your customers is by digging into your analytics.
It’s easy to fall into the trap of thinking you know your brand inside and out, but assumptions and unconscious bias can lead you astray. You can make mistakes based on empirical evidence, instead of putting aside your “gut instinct” and letting the numbers inform your decisions.
But in an eCommerce world filled with an assortment of three letter acronyms (like LTV and AOV) it’s easy to feel a little lost on where to start. So let’s put on our dive gear and take the plunge with a deep dive on analytics for subscription success.
The Golden Trio AOV, LTV, and Churn Rate
Let’s talk about the three key metrics you should be tracking for your subscription business. By tracking this trio of foundational analytics you’ll be able to see how healthy your business is and where you may need to focus your attention.
First up is average order value (AOV), which is the average amount spent by a subscriber during checkout. If you have a low AOV your customers aren’t spending a lot. They could be only choosing your cheaper products or only checking out single products per cart. We’ll address ways to improve AOV shortly but first let’s keep running through the trio of key metrics.
Next is lifetime value (LTV), which we define as average recurring revenue per customer (the average lifespan of all customers). If your LTV is low it indicates that customers aren’t staying in your subscription program very long and aren’t spending much per order.
Which directly relates to our last key analytic, churn rate. Churn is the rate of customers who cancel their subscriptions. It’s usually expressed in a percentage, showing the number of customers who’ve canceled over your store’s total number of customers in a specific time frame.
As you’d likely expect, the lower the churn rate the better. Low churn rate indicates people aren’t leaving your subscription program (which means more orders and revenue for your business). We use the term retention to describe the act of reducing churn.
Now that we’re up to speed on the terminology, let’s look at ways to influence these analytics to improve your business.
Boosting Average Order Value For Your Subscription Business
The main way to increase your AOV is to look for opportunities for cross-selling and upselling by showing them new products to benefit and excite them.
Cross-selling is a sales tactic to increase the value of an order by showing customers related or complementary products or services they can add on to their original purchase. For example, you’re selling a coffee beans subscription and you show your customers branded mugs, coffee filters or coffee grinders.
The key here is personalization. The focus should be on improving the customer’s experience by showing them products they would like and be delighted by — not just trying to sell them a generic and unrelated expensive add-on product.
Upselling similarly attempts to increase the value of an order but instead aims to convince the customer to purchase a related but higher-quality, higher-value product or service. An example of this could be a pre-made food subscription box business that also has a higher more expensive tier of meal options made with premium ingredients.
Think of AOV as the building block of LTV value. If you want to increase the profitability of your customers over their lifecycle in your subscription program, start with looking for ways to increase their average order value.
Reducing Churn With Retention Strategies
Why are customers leaving your subscription program? Understanding the core reasons why subscribers are churning will help you fix your business’ leaky bucket situation (when you’re losing more subscribers than enter your subscription program).
The best way to find out why subscribers are leaving? Ask them. Using Recharge’s out-of-the-box suite of cancellation options (like an exit survey for example) you can find out why customers are cancelling. Then look for the patterns and see if you can remedy these situations.
For example, by utilizing an exit survey Native, the aluminum-free natural deodorant brand, was able to learn the number one reason subscribers were cancelling was because they had too much product. Armed with this data driven finding, Native experimented with decreasing the default subscription frequency for their customers. Nine months later they had reduced their churn rate and boosted their customer lifetime value. Two great signs of a retention strategy paying off.
One of the best ways a subscription business can reduce churn is by giving their customers as much flexibility and autonomy as possible. Let your customers know that they can adjust the frequency of their subscription delivery, skip a shipment, swap products or pause their subscription all together. At Recharge we crunched the numbers ourselves in 2020 and saw that when customers take any actions in their customer portal (like skip, swap or pause) there is a 15% lift in retention.
While it may feel concerning that a subscriber chooses to skip an order or pause their subscription instead of receiving your product, our data shows that engaged customers stay longer in your subscription program and spend more overall.
That’s a reduction in churn and a boost in LTV… speaking of which, let’s talk about lifetime value.
Increasing Lifetime Value for Subscribers
If you’re taking care of your churn and you’re looking for opportunities to provide engaging and personalized cross-selling and upselling opportunities you’ll improve your customer lifetime value. At Recharge, we calculate LTV based on the occurrences in the past for customers who have already exited the platform. The equation breaks down to: annual revenue per user / churn.
This methodology matches Shopify’s reporting for the total customer value metric, so that merchants have continuity reporting across the two platforms (in the future, we plan to refine this approach to include other calculations as we continually strive to always improve our analytics platform).
The important thing to note in that LTV equation is that it excludes customers who haven’t churned from your subscription program. These customers represent your most loyal subscribers and are your most valuable consumers. We recommend building a brand community around these fervent subscribers.
These are the customers you can lean on for product recommendations, test new services on, if they’re active on social media you can ask to use their user generated content or influencer marketing. These supportive brand advocates shouldn’t be skimmed over, they’re an incredible luxury that when embraced can pay dividends for growing your brand and providing your subscribers with products that delight them.
What Should You Compare Your Metrics To?
What is the gold standard for LTV? What should your AOV be? How can I discover the metrics of my competitors? Those are all very natural questions to have but the answers aren’t universal. For all those questions we would suggest switching the perspective from an external one to an internal one.
Don’t get caught up in the trap of comparing your metrics to your competitors or obsess over the number itself. Instead focus on how your numbers change over time, specifically the deltas (the changes in movement for each metric) and how you can affect it positively. You want to see positive growth with AOV and LTV over a select period of time (three months for example). Conversely, you want to see a reduction or flatline with churn.
But Wait, There’s More…
That’s all for our deep dive into the out-of-the-box analytics with Recharge. But we teamed up with our friends at The Stable to make this into a series on leveraging your analytics (especially for enterprise brands) to set yourself up to hit the ground running in 2022. So next up in our blog series is a more advanced look at enterprise data. Check back here next week to read that post as our blog series continues.
Want to chat your subscriptions business? Reach out to us here.