April 15, 2016 | Authored by: Vindicia Team Blogs
New vs. existing: Why companies on a subscription billing model should shift their customer strategy
The matter of customer retention versus acquisition is one that's often debated. Studies show it's more costly for a business to recruit new customers than to maintain healthy relationships with older ones. However, every professional knows neither group can be ignored, especially when the business runs on a subscription billing model. Older customers sustain a company, and acquiring new ones helps it grow in terms of both revenue and market share.
So what's the right balance? Optimove, a company that uses market data to help businesses reach their customers, conducted a study on what it called the revenue mix - that is, a business's revenue ratio of new to existing customers. The company studied over 180 different brands in various growth stages. It wanted to determine if there was such a thing as a perfect revenue mix and how that mix shifts as a business grows.
Brand ages and new customers
Optimove categorized the brands it studied into four groups: Running-in-Place, Rockets, Healthy Grown-Ups and Old Cash Cows. Those in the first group were either stagnant or declining in revenue during the last three to five years, and they averaged a five-year compound annual growth rate of less than 2 percent. These companies also had a dramatically high ratio of new-to-returning customers, acquiring about 90 percent of their revenue from first-time individuals. This also correlated with customer churn rates that were higher than the sample average. Thus, Running-in-Place brands weren't successfully converting these new customers into long-term subscribers and were unable to grow as a result.
Rockets are young brands experiencing a lot of success. They're less than seven years old with a five-year CAGR of over 100 percent. Their revenue mix was less skewed toward new customers, as all Rockets derived at least 30 percent of their profits from current shoppers. About 80 percent of them had a revenue mix that was more evenly split - about 50 percent new and old customers. Rockets also had churn rates 50 percent lower than the sample average. This indicates that in order to shift from a Running-in-Place to a Rocket, companies mustn't spend all of their energy on customer acquisition but put some of it toward retention instead.
Healthy Grown-Ups are older than Rockets with a five-year CAGR between 20 and 60 percent. These companies had a significant share in their markets and a large, dedicated user base. They committed their efforts to reducing their churn rates, which were 60 percent lower than the sample average. Existing customers accounted for 60 to 80 percent of a Healthy Grown-Ups' revenue.
The final group, Old Cash Cows, shared similar CAGRs to Running-in-Place companies. However, 90 percent of their revenue came from existing customers and they saw lower churn rates. While Old Cash Cows had operated for years, Optimove warned these businesses are in danger of not innovating, and their small number of new customers could quickly lead to reduced profits.
Shifting strategies based on age
Based on this research, one can understand that the decision to focus on retention versus acquisition varies depending on the stage of a business. Startups should obviously focus on acquiring new subscribers, but not switching focus to retention early enough places them in the Running-in-Place category. What started off as a successful business quickly stops growing.
The best way to find success is to gradually switch strategies from one completely focused on acquisition to one that blends retention into the mix. Viewing these two as parts of a whole as opposed to isolated policies helps businesses on a subscription billing model maximize their average customer lifetime value. Maintaining a healthy ratio of new and old customers creates a stable base of profits while driving growth and innovation.
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