Who doesn’t love a free trial? PYMNTS CEO Karen Webster knows a guy who loves them so much that he keeps an Excel spreadsheet outlining how he will eat for free for the next year using trials of meal kit delivery services.
That’s great for the guy, but someone is paying for those meals. Somewhere, those unconverted free trials are getting rolled into an astronomical acquisition budget that those companies are paying to win over new customers.
The saying, “You’ve got to spend money to make money,” has never been more true. Even when people aren’t gaming the system like the free meals guy, there are costs associated with attracting new customers … and with keeping the ones you’ve got.
The meal-kit startup Blue Apron is a perfect example. The company’s growth was at first fueled by new customers, requiring it to spend $94 on marketing per new customer — not a terribly large sum to make up, if those customers stuck with the service for a few months. But now, in a more saturated market, Blue Apron spends $460 in marketing for every new customer, and not enough are sticking around.
Blue Apron isn’t alone. As the subscription service model grows more common, competition grows fiercer, and “churn” — the point at which consumers decide the amount they’re paying exceeds the value of the service and opt out — has become almost inevitable. So how can businesses get it right?
Webster asked Dan Burkhart, co-founder and CEO of Recurly, to elaborate. Recurly collaborated with PYMNTS to produce the Subscription Commerce Conversion Index, which calculated an average conversion score of just 57.1 percent.
“If I brought that number home on a report card, I’d be grounded!” Webster said. Meanwhile, she noted, Adobe got an A++, with 222 percent sales growth since switching to a subscription-based model, and subscription box services grew 3,000 percent from 2013 to 2016 — so, somebody’s doing it right.
Annuity Revenue Streams
There’s a reason the tallest building in every city is an insurance building: Wall Street loves recurring revenue. Mortgages, bonds, insurance — all of these annuity revenue streams compound. They are the gift that keeps on giving.
If a subscription-based business can lock that in, said Burkhart, then the revenue tide can only rise. And consumers have no qualms about paying for purchases or services over a long period of time versus up front, as long as they perceive that they are continuing to receive value from it. In fact, they like it even better — it breaks down that “cognitive load” of making a major purchase, like spending $1,400 on Adobe Photoshop, into manageable monthly chunks.
“Any given subscription service provider is willing to go deeply negative to acquire customers, and the expectation is they need to retain these customers for a period of time in order to clear that hurdle and to convert that acquired customer into a profitable subscriber,” Burkhart explained. “You get that right, and it’s a wonderful compounding financial model.”
But, he added, “If you don’t, you find out about it pretty quickly.”
Balancing Consistency and Change
Burkhart said the trick is perpetual reinvention. If businesses remain static, their perceived value goes down. Customers may start to feel like they’ve tried the whole menu, or viewed or listened to the entire catalog of films or music offered by a digital subscription like Netflix or Spotify.
But Netflix and Spotify are still here, and for Burkhart and many others, renewing each month is a foregone conclusion. That’s because they both continue to introduce new titles and artists and new ways to personalize the experience to discover more great media. Netflix has its own exclusives series now, and Spotify invites artists to perform live in its Spotify Sessions that are streamed to subscribers.
“Shipping the same product over and over doesn’t work,” Burkhart said. “That reevaluation that occurs places the onus on the provider to continually overdeliver against their original promise. They have to continually win over the hearts and minds of subscribers or those subscribers will elect to leave the service — and churn.”
Of course, there’s got to be some continuity. A consistent, orderly experience has a lot of holding power. Burkhart believes this is one reason Facebook was able to oust its predecessor, MySpace. While MySpace improved on Friendster’s load times with a more successful scaling model, the customizable profiles caused the overall experience to feel disjointed.
When users are on Facebook, they know they’re on Facebook, and that’s great for the brand.
The Brilliant Basics
To become a Netflix or Spotify, a business needs to rest on a few key pillars — the “brilliant basics,” Burkhart called them.
Trust has the earliest potential in the conversion process. Right off the bat, consumers should know when and how much their credit card is going to be charged. They also want a clear path to upgrading, downgrading or pausing the subscription. They don’t want to be locked in.
Webster shared a story about a “miracle cream” that wooed her with a free offer — “Just pay shipping!” it promised and was shared with her by a friend on Facebook. Yet two months later, she found she’d been charged $88 each month because she didn’t opt out of the recurring offer that she didn’t realize she needed to cancel. So much for miracles. Burkhart said that early ringtone operators pulled a similar stunt. Customers would download one ringtone and later find out they’d been paying a monthly subscription fee that no one ever told them about.
Blow the trust element early, and good luck ever winning it back.
Burkhart said businesses need to consider the subscription experience as a whole. People know they have alternatives, so brands need to go the extra mile to stand out.
“Experience matters,” said Burkhart.
The excitement and mystery of a package coming makes a significant cognitive imprint, he said, and opening it triggers endorphins. Businesses can enhance that by sending emails ahead of time. A simple, “We’ve got something special for you!” can prime customers to experience that glow of enjoying something slightly unexpected. But if a great product is buried in a too-taped box that is difficult to open, that hurts the overall value proposition.
Businesses need to think about post-sale activity. It’s not enough just to make a one-time sale. To profit, the company needs those customers to keep coming back.
“It’s a powder keg of potential value if you get it right,” Burkhart said. “If you can win over the heart and mind of your consumer and get them back repeatedly, it is … far more cost-effective and valuable [than a] customer who may only come through once.”
The Theory in Action
Blue Apron seems to have figured that out. The company plans to add more products and options to grow revenue from existing customers. People will have more control over how many meals they want to make each week and more flexibility in wine selection and delivery.
This has the potential to keep customers using the service even when they have less time or money to invest in cooking, because they’ll have the option to keep using Blue Apron on a less frequent basis rather than canceling their subscription altogether.
We’re always on the lookout for opportunities to partner with innovators and disruptors.
Learn More