May 12, 2020 | Authored by: Ian Zeifman
5 common mistakes to avoid when switching to a subscription business model
Despite the serious business challenges resulting from the COVID-19 pandemic, the expansion of the subscription-based economy doesn’t appear to be slowing down.
In fact, Disney just announced that its Disney Plus streaming service has reached 54.5 million subscribers worldwide. And AMC Networks revised its subscriber growth targets for its streaming video services, expecting to hit those targets two years ahead of time. Last week the company announced that Acorn TV, Shudder, Sundance Now, and Urban Movie Channel will have 3.5 million to 4 million paid subscribers by the end of 2020, rather than the end of 2022.
Let’s face it, there’s a lot to like about subscription business models in these uncertain times: recurring revenue streams, less overhead, ease of expansion, etc. It’s no wonder that so many organizations are either expanding their existing subscription services or switching to a subscription model from their current business model.
According to the Subscription Trade Association’s annual report, three-quarters of consumer-facing businesses will offer subscription services by 2023. But to be successful in today’s challenging environment, businesses expanding into subscriptions must plan carefully and be prepared to evolve quickly.
Companies that have failed to properly prepare for the nuances of the subscription-based economy might stumble right out of the gate with a poor business strategy or platform launch. They may lack the agility and responsiveness necessary in this dynamic market.
In particular, businesses should avoid these five common mistakes when expanding or switching to a subscription business model:
1. Creating an ineffective pricing model
When launching a subscription service, some companies will do whatever they can to stand out from the competition and appeal to prospective customers. Newcomers may aggressively undercut other market players with their prices, which can help jumpstart customer acquisition efforts. However, these strategies may sometimes go too far, significantly reducing revenue and requiring far more time to turn a profit with any new subscription.
Another common pricing misstep is to establish a flat rate for subscription services without any tiered options. That lack of payment flexibility limits the appeal of subscription offerings, preventing businesses from reaching the widest audience possible.
Finding the right price points requires experimentation, agility, and iteration. For instance, different price points can be used in A/B testing. This testing can be performed via digital promotional campaigns to measure which pricing or offers elicit the best response, or which free trial or freemium offer performs best in converting leads into paying subscribers.
2. Launching an incomplete promotional strategy
Speaking of promotional campaigns, free trials and discounted introductory rates are standard fares in the subscription space. Customers expect these kinds of deals whenever they sign up for a new subscription, so having an enticing promotion is essential.
As subscription fatigue and growing competition become a pressing concern for digital businesses, creating a well-rounded promotional strategy will help reach customers who might otherwise tune them out. However, subscription promotions must be deployed with considerable care to get the maximum impact.
Some businesses may lack any concrete strategy for managing promotional offers, creating free trial programs and introductory rates without any market research to support those decisions. In addition, those same organizations may not assess the effectiveness of promotional campaigns after the fact. Only by thoroughly analyzing acquisition and engagement strategies and data can subscription businesses see what’s working and what needs to be refined.
3. Failing to stay connected
It takes effort, patience, and consistency to stay connected and engaged with subscribers, even in the best of times. However, in these difficult times, this becomes even more of a challenge. As subscribers are increasingly experiencing changes with family, school, work, socializing, and simply living life, it’s more important than ever to stay relevant, flexible, and essential.
Once the service has been launched and subscribers have signed up, it’s important to retain customers by offering flexibility and reliability as part of the business. Successful subscription businesses are revisiting their customer retention strategies, allowing customers to pause, unsubscribe, downgrade or upgrade in hopes that customers will remain through and after the pandemic.
And to prevent passive churn, it’s important to ensure that involuntary payment transaction failures do not result in lost subscribers. Even when customers are happy with their subscription service, unintended payment failures often result in interrupted relationships or even cancellations. Cancellations due to preventable payment failures can make it difficult to grow or even sustain a business – particularly during these times.
To meet these challenges head-on, subscription businesses need to view the subscription lifecycle holistically, understanding how customer retention is inextricably tied to the customer journey, driving ongoing revenue streams and customer lifetime value. Focusing on retention now will mean more long-term customers after the dust settles
4. Ignoring valuable analytics and metrics
Analytics should support every facet of subscription service delivery, from customer acquisition to billing to churn reduction. Every decision made about the subscription business should be driven by hard data. Subscription platforms and business plans need continual iteration and refinement to optimize service quality, customer experience, and internal processes.
Capturing subscription metrics and running routine analytics helps bring execution gaps to light, giving organizations the insight needed to make proper course corrections. For instance, if new subscriptions are up, but the average customer lifetime value remains stagnant, that would strongly suggest that new users are canceling services before they become profitable.
Some subscription businesses may put too much stock in the wrong metrics while ignoring other factors that provide true insight. For example, monthly recurring revenue, average revenue per user, and customer acquisition cost can tell far more about the health of the business than raw subscription figures.
5. Using ill-suited billing systems
Relying on a legacy billing system can limit the success of a subscription business, undermining business vitality. A traditional billing system is unlikely to provide the agility needed to account for the various nuances of subscription services, causing headaches for both customers and staff members.
Providing a frictionless, subscription-focused billing process is extremely important, as this touchpoint directly impacts the customer experience. Subscription companies need billing systems that are designed from the ground up to support their particular business model, as well as facilitate rapid expansion.
On-prem, legacy billing platforms are often unable to scale up and keep pace with growing subscription business demands, whereas cloud-based subscription billing solutions are better suited to quickly build out capacity and new capabilities as needed.
Resources to help you succeed
To avoid these common mistakes and gain insight into subscription business success, read our eBook The Subscription Lifecycle: Subscription Business Success Requires Intelligence at All Phases of the Subscription Lifecycle. And for guidance in how to stay engaged with subscribers, read our white paper Staying Connected to Subscribers in Today’s Challenging Environment.
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