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The hidden growth engine – retention as acquisition

Jul 17, 2022 | By Subscription Insider

Article by Roy Barak, CEO, Vindicia

Traditionally, subscription companies put a heavy emphasis on customer acquisition, but retention is equally valuable.

Ecommerce and online transactions are booming. Subscription opportunities are here: the market is reaching over $1.5 trillion USD in value by 2025. Seventy-five percent of businesses surveyed said they plan to go direct-to-consumer in a subscription model by 2023. Pre-pandemic, the average U.S. consumer spent about $233 a month in subscriptions. During the pandemic starting in early 2020, consumers spent significantly more.

Considering current macroeconomic situations moving into 2022, consumers have been demonstrating more frugality and mindfulness when it comes to spending. Could that be due to subscription fatigue? Maybe. More conscious consumerism? Definitely. However, despite the chatter about subscription fatigue, surveys are revealing that most consumers plan to pay for at least one more subscription in the next twelve months…if that subscription is considered essential and special.

What’s more important for driving growth in this marketplace: acquisition or retention?

In the past, the trend among subscription companies has been to look at the total number of subscribers, including how many subscribers joined their service or platform every day, every month, and every fiscal quarter. Subscriber acquisition is a major driver for subscription companies, but it is also a major cost. The cost of acquiring (CAC) new subscribers range anywhere from $15 to $150, and that figure fluctuates depending on the subscription’s baseline price and subscriber lifetime value (CLTV). The longer a subscriber stays subscribed, the higher the CLTV is which lowers the overall cost of acquiring said subscriber (CAC).

Typically, companies acquire subscribers at a loss. To recoup customer acquisition costs, subscription companies focus on attracting new subscribers. However, new subscribers show a likelihood to churn when their experiences are not given the attention and dedication needed to produce a higher CTLV. Getting more and more subscribers is akin to a hamster running endlessly on a wheel that stays in place. The time, energy, and costs required to acquire a subscriber are too expensive when compared to the costs needed for a business to retain that subscriber and keep them happy. Retaining rather than acquiring subscribers is far more effective at driving down business spending and paving the way for long-term growth in this subscription landscape.

What does churn do to your subscription business?

Churn is the number of subscribers, or the amount of subscription revenue lost, in a single period. Churn can be calculated by looking at the number of subscribers a company has today versus the prior period. The goal in calculating churn is to identify the subscribers who have left, optimize processes and offerings, and reduce churn. This varies between subscription companies and membership-based companies. Subscription companies typically keep subscribers until they cancel.

Membership-based companies, on the other hand, usually require their members to actively choose to remain members through a renewal process. Subscription companies need to address these two following types of churn, and they can start by tracking active (voluntary) churn and passive (involuntary) churn separately.

Two types of churn (they hurt your business but are avoidable with the right software solution):

  1. Active/Voluntary Churn
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  2. Passive/Involuntary Churn
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Voluntary Churn

Voluntary churn is about reinforcing the value subscription companies deliver to their subscribers. Companies can use data to predict voluntary churn. For example, recently, Netflix started sending push notifications and email recommendations to subscribers. “You finished watching Show A. How about this show?” or “Here are the top 10 shows in your city.” Netflix can track who opens those email recommendations or clicks on push notifications and if their subscribers engage with their recommendations. If subscribers are engaging, the company probably has the right recommendation engine and the right engagement, and those subscribers are more likely to stay with a subscription company longer.

However, if subscribers are not engaging with the recommendations and not using the platform, the problem may be greater than the recommendation engine, which always needs tweaking. These subscribers are at risk of churning. To identify the problem, companies can look at these two cohorts of subscribers – those who engage versus those who don’t – and do AB or AZ testing with the recommendation engine, and subscriber engagement and behavior on the platform. Companies are constantly marketing to the customer and reinforcing brand value and increasing the perceived value to every single consumer.

Another consideration to reduce voluntary churn is to examine what value subscription companies bring to their subscribers that is different than the original reason the customer subscribed for. For example, a streaming subscriber may have signed up for Disney+ because they wanted to see an exclusive series only available on that direct-to-consumer streaming service. After they’ve watched that series, why will they stay?

The same is true of subscription boxes, news subscriptions, and other types of services. Subscribers signed up because the company offered them X. What happens when they’ve used, watched, or read X? Is there a reason for those subscribers to stay? Companies need to be sure they are continually offering value to keep their subscribers engaged enough to experience additional perceived value.

Involuntary Churn

Passive, or involuntary, churn occurs when a subscriber or member never intended to opt out of a subscription service. They wanted to renew, but when they logged into their newspaper subscription, streaming service, or subscription box, they found out their subscription had expired. It may have happened because a credit card expired and wasn’t updated in time, or the subscriber didn’t read a subscription company’s administrative emails to confirm or update a subscription.

Regardless of the reason for the involuntary churn, this creates a negative user experience for the subscriber which is a challenge for subscription companies. This is particularly true if the subscriber lost viewing history, user preferences, items stored in the cloud for SaaS services, or lost other important information they wanted to save.

In addition, when involuntary churn occurs, subscribers must make another buying decision. Do they want to log back in to update the information, or maybe it isn’t worth the hassle because they are only occasional users of a particular subscription service or membership? This creates friction and, when this occurs, companies will slowly lose subscribers for all the wrong reasons.

Some never wanted to leave, but maybe they’re mad the company “forced” them out unintentionally. Other customers simply don’t want to make the buying decision again. Companies need to ask themselves if they want to put their subscribers through negative experiences when they could potentially keep the business by implementing retention processes that don’t require an interaction with the subscriber.

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