Subscription Commerce: Mapping & Measuring the Subscriber Journey
— — — — — When you truly understand the subscriber journey and its KPIs, you stand a better chance at earning their trust and their money.
The Subscriber Journey The following is a description of the main events that occur as a visitor discovers your product, becomes a paying customer, and transforms into a loyal subscriber. Signing up free users Renewals Billing subscribers for the first time 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).
MILESTONE: Signing up free users It is incredibly important to sign up free users because they constitute the majority of the customer base that becomes paying subscribers.
MILESTONE: Billing subscribers for the first time Once a free trial ends or a user decides to upgrade from the 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. It must be absolutely clear from the start that users 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 subscription commerce, you are most concerned about gaining a predictble, recurring revenue stream. - Get customers in now in order and upsell them later. This gives you less revenue upfront, but greater potential revenue downstream.
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.
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
= KPI: Customer acquisition cost Consider your answers to the following questions, as they all factor into an important 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?
CAC = Total cost of acquiring subscribers Total amount 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. Customer acquired each month Marketing costs CAC per customer 10,000 $350,000.00 $35.00 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.
KPI: Churn rate In its simplest form, the churn rate is calculated by establishing how many customers canceled in a given time period. Churn rate % = Number of canceled subscriptions (Time period x Number of active subscriptions) x 100
KPI: Churn rate 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. Monthly Churn Rate % = 2,500 ( 1 x 10,000 ) Interval x 100 Amount of active subscribers Amount of canceled subscribers Churn Rate 1 10,000 6,000 25%
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.
KPI: Churn rate 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 of acquired subscribers is 33,000 and your total canceled subscribers is 6,000. Your monthly churn rate is now at 6 percent. Monthly Churn Rate % = 6,000 ( 3 x 33,000 ) Interval x 100 2 3 Total Amount of active subscribers 11,000 12,000 33,000 Amount of canceled subscribers 2,000 1,500 6,000 9% 4% 6% Churn Rate
KPI: Churn rate 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, 2016, you have 100,000 subscribers. To reach your revenue goals, you need 200,000 active subscribers by January 1, 2017. For the next twelve months, you need an average of approximately 8,400 new users every month.
KPI: Churn rate What happens to your forecasting if you have an average monthly churn rate of 4 percent? To reach your goal, you’ll actually have to acquire an average of 11,834 subscribers every month.
+ KPI: + ... + Recurring revenue 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. Revenue generated Recurring revenue = Billing interval 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. Monthly recurring revenue = Revenue generated Billing interval OR Annual recurring revenue = Revenue generated Billing interval
What happens when you increase the number of subscribers each month? Returning to our churn rate scenario, your company acquires 10,000 subscribers in the first month, 11,000 in the second, and 12,000 in the third. At $9.99 per subscriber, your company is generating $329,670.00 in quarterly recurring revenue. Total Monthly price Monthly intervals $9.99 1 2 3 1 quarter 10,000 11,000 12,000 33,000 Revenue each monthly interval $ 99,900 $ 109,890 $ 119,880 $ 329,670 Revenue from active subscriptions $ 99,900 $ 209,790 $ 329,670 $ 329,670 Monthly Recurring Revenue $ 99,900 $ 104,895 $ 109,890 $ 329,670 Number of subscribers
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.
$ = KPI: Customer lifetime value According to subscription metrics guru Joel York, the simplest way to calculate CLV is by dividing your recurring revenue by your churn rate. CLV = Recurring revenue Churn rate
Reviewing our previous scenario: 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 6 percent churn rate. CLV = $329,670 6% Your CLV, therefore, would be $5,439,555.00, or $164.84 per customer. Monthly price Monthly intervals Number of subscribers Monthly Recurring Revenue Monthly churn rate CLV CLV per customer $9.99 1 2 3 1 quarter 10,000 11,000 12,000 33,000 $ 99,900 $ 104,895 $ 109,890 $ 329,670 25% 9% 4% 6% $ 399,600 $ 1,208,790 $ 2,877,120 $ 5,439,555 $ 39.96 $ 109.89 $ 239.76 $ 164.84
How upgrades and downgrades affect recurring revenue and CLV 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.
$ = KPI: Customer lifetime value Other important scenarios that negatively affect CLV include cancellations, refunds and chargebacks. These will all raise your churn rates and decrease recurring revenue rates — both of which have enormous impact on your CLV. Make sure you have a well thought out plan for reengaging these lapsed subscribers in order to lessen the impact on CLV. Make sure you have a well thought out plan for reengaging these lapsed subscribers in order to lessen the impact on CLV.
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 who 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.
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 [email protected] or visit www.cleverbridge.com. Cologne, Germany Chicago, USA San Francisco, USA Tokyo, Japan Brabanter Str. 2-4 350 N. Clark Street 333 Bryant St. Wakamatsu Bldg. Level 7 50674 Cologne Suite 700 Suite LL120 3-3-6 Nihonbashi-Honcho Germany Chicago, Illinois, 60654 San Francisco, California, 94107 Chuo-ku, Tokyo 103-0023, Japan p +49 221-222 45-0 p +1 312-922-8693 p p +81 (0) 3-6869-2200 f +49 221-222 45-19 f +1 312-376-1854 f +81 (0) 3-6701-1969 +1 415-617-9482