Tracking customer lifetime value (LTV) is common practice across many segments. Still, PYMNTS research has revealed a gap in LTV tracking among subscription merchants that more companies are waking up to as retention moves to the forefront of subscription strategies.
In a recent panel discussion for the “Tough Question’ Series,” PYMNTS’ Karen Webster was joined by Darryl Hicks, founder and CEO at FlexPay, Zach Apter, CMO at Mindbody, and Joe Settineri, CFO at MyFitnessPal, to discuss the new awareness around retention and tracking the metrics that help subscription firms keep hard-won customers in the fold at a delicate time.
While the panelists generally agreed that the pandemic had mixed impacts on subscription businesses depending on whether they were digital — in the case of MyFitnessPal — or supporting live interactions — in the case of Mindbody — those disruptions are settling down, improving the outlook in 2023. But soaring customer acquisition costs (CAC) drive more subscription businesses to focus on retention, which has sagged for lack of attention.
Hicks pointed to a Harvard Business School study showing that companies that increase retention by as little as 5% grow profitability by 45% to 95%, saying, “that might seem a little counterintuitive, but for those of us who are in the subscription space, we know that the customers you already have are much more profitable” than acquiring new ones.
He said this is part of a rising “cultural mission” inside of subscription merchants, where the use of data to drive LTV and engagement is becoming more important than adding new subs.
Mindbody’s Apter sees the LTV issue as treating root causes versus symptoms. When a subscriber calls to cancel, “what you want to do is move upstream and ask what things that customer experienced that motivated them to want to cancel,” he said, “and could you have done anything about it way earlier in their user journey?”
PYMNTS and Flexpay research found that only 17% of subscription firms are tracking failed payments — which average a 9% revenue loss — while nearly 60% measure churn and retention, which often comes too late to stop a subscriber from dropping out. It indicates the disconnect regarding which metrics matter and the changes happening as this awareness spreads.
At MyFitnessPal, Settineri said, “For us, it’s one word, and I’ll say it three times for dramatic effect: engagement, engagement, engagement. The more someone engages, the less likely they are to leave, and that’s one of the biggest drivers.”
See also: Tracking Failed Payments
As the discussion moved between the value over time of organic subscribers versus those obtained through marketing spend, Webster noted a key finding of the Flexpay study is creating the position or function of a chief subscription officer to monitor for churn before it happens.
Such a person would be likely to know, Hicks said, that for existing subscribers, “if there’s a way you can extend that lifetime value by a little bit, so much more of that revenue goes straight down to the bottom line. It’s so much more margin rich” than trying to replace lost subscribers.
That’s true even among subscriptions with highly engaged user bases, as failed payments are confusing and upsetting, giving otherwise satisfied subscribers a reason to leave. It comes back to tracking the right data and taking corrective action before subscribers defect.
Apter explained that for a SaaS platform like Mindbody that provides scheduling and sells its ClassPass subscription for fitness and wellness vendors on the platform, “It used to be sort of 3 to 1 LTV to CAC was acceptable. Now, you need to be north of 5 to 1, and in some cases as high as 8 to 1 or 10 to 1” to keep the subscription side healthy.
For MyFitnessPal, which is accessed across various devices, platforms and geographies, a single view of LTV-to-CAC data can be hard to come by. “I would love it if I just had one product that I could understand with one LTV number,” he said.
Often there’s disharmony within organizations as to who is ultimately responsible for managing LTV and CAC, which is part of the problem subscription merchants are trying to solve.
“Put the title aside. Chief subscription officer. I think it’s cool. I think it’s fancy, but what it is is that there’s somebody who has accountability,” Hicks said. “What I see across the top performers is that there’s a central point of accountability. Somebody owns these metrics.”
At that point, there’s a knowledgeable, accountable person who can inform the organization on what the primary metrics and actions are that lead to higher LTV and decreased CAC.
See also: Failed Payments Hit Health and Fitness Subscription Sector Profit Margins Most
As to how payments play into the larger issue of LTV, Apter said that for Mindbody’s ClassPass “integrated payments are an essential part of our overall value proposition to a studio fitness bar or salon customer. But with respect to the consumer experience, the way that I would characterize it is we are trying our very best to make the experience of the payment and the fact that you’re even buying anything as invisible as possible.”
For MyFitnessPal, most of its payments pass through Apple or Google, so it’s less about payments friction than onboarding: “In terms of the act of the payment, if you’re going through Google, Apple, that’s hopefully very seamless,” Settineri said, “But for us, it’s all about if we’ve made your experience delightful all the way up to that point.”
But when subscription payments fail — as they will for reasons that can’t always be 100% controlled — Hicks said, “I think that the best possible recovery if a payment fails is to get down into the payment rails and fix it without your customer ever even knowing that there was a problem in the first place.”
In Apter’s view, that comes down to doing “the data science or the analytics work to bridge that causal connection. That requires innovation, it requires a slightly higher level of capability than traditional data engineering or BI. But once you do that, then you’ve got a surgical, precise way to control and manage your business.”
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