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[Podcast] 4 Essentials to Growing Subscription Revenue

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This article is taken from the Build Your Queue podcast below, Season 3 Episode 29 with Patrick Campbell, CEO and Founder of ProfitWell.

Your business runs on subscriptions, which means you need to consistently bring in more members, keep them longer, and encourage them to spend more.

So how do you do it?

Growing subscription revenue start with asking these four questions:

  • What makes people want to subscribe?
  • How can you use freemium services as a customer acquisition channel?
  • How do you increase a customer’s value over time?
  • What are good vs. bad approaches to handling retention?

We’ll help you answer these questions, so you can walk away knowing how to convert and retain more subscribers for your SaaS company, gym, club, media company, or any other subscription based service you may offer.

PC: ProfitWell

1. What makes someone want to subscribe?

How can you get someone to commit to your business month after month and not lose them to lack of use or to another competitor?

Your ability to form relationships with your customers (whether it’s as a trusted guide, coach, or value added service) is baked into how you increase recurring revenue as a subscription based service.

Why?

Because customers expect you to continually provide value equal or greater to what they're paying you. The key is to establish trust with them, so they know you’re good on your word to bring them that value.

Customers want your subscription-based service to:

1. Be trustworthy

2. Improve over time as your business grows

3. Offer value each month

4. Equal the cost to the value you give each month

You have to thoroughly understand your customer and their pain points in order to offer value month after month.

 

A pain point is a specific kind of problem a prospective customer is trying to solve.

For a potential B2B software customer those pain points could be:

  • How many customers do they have?
  • How much revenue do they make?
  • How many employees do they have?

For a consumer product (like entertainment or magazines) it could be:

  • What’s their price range?
  • How many kids do they have?
  • What specific genres are they looking for?

And for gyms or clubs those pain points could be:

  • What kind of equipment do they need?
  • How many family members want to come with them?
  • What’s their price range?

Knowing these pain points can help you target prospects who are the best fit for your business model—and customers who are a good fit for your offers are the customers you’ll retain when you solve their problems.

Related: How to Create (and Target) Custom Buyer Personas

2. How can you use freemium services as a customer acquisition channel?

Once you’ve found a prospect who’s a perfect fit for your service, how do you convert them and make sure they stay?

You need an offer that’ll hook them without draining your company of money.

Premium content or free services have often been seen as a slippery slope for businesses to lose quick money, but the net dollar retention for freemium products is much higher than any other acquisition channel for subscription based businesses.

PC: ProfitWell

According to IAB and Forbes, freemium is a pricing strategy where you offer your service at no cost to the consumer as a way to establish the foundation for future transactions before they hit paywalls. This could come in the form of a free trial for software companies or free training sessions for gyms.

Offering freemium services is an acquisition tactic instead of a monetization strategy. Think of them as an ebook or blog post you are using to give the prospect as taste of what you’re offering.

This is especially great for customers who don’t want to talk to a salesperson, but would rather see what your business can offer on their own time. Freemium services can also keep new prospects coming in even when your team is out of the office, like during evenings and weekends.

That's why industry titans like Spotify, Netflix, Stitcher, Luminary, Amazon, and the New York Times all use freemiums as an acquisition tool.

What if you can’t justify offering freemium services yet?

Services typically have hard costs. Usually these hard costs are small, and it's cheaper to offer some services for free in order to get a customer than it is to get a new paying customer through advertising—but sometimes those hard costs are too expensive to give things away.

Educational content or guides are essentially another form of freemium services that cost absolutely nothing to make.

You can promote your free content on social media platforms like Twitter or Tik Tok, and build trust with potential customers when:

  • Your gym offers free daily fitness tips
  • Your software company shares a free ebook on an area of expertise you have
  • Your beauty magazine publishes free beauty tutorials

This content has to be awesome and provide value (so don’t create it just to create it). The quality is how you build trust and get people to actually buy. Having support and access they can reach on their own terms is the greatest way to appeal to customers and win their trust.

People don’t necessarily want to be on a phone with a sales person, but they do want to be able to get quick answers to their questions. That’s why text is a great example of a channel customers can use to reach you whenever they need more advice or guidance on the topics you’re establishing yourself as an expert on.

So in addition to sharing your new content, give customers a way to reach you for more information with things like chat bots or SMS Chat.

Sharing your expertise and being readily available is just one other way you can convert customers in a way that’s similar to freemium services. You’re essentially providing free value to get over the initial trust barrier between you and the prospect before asking them to make a transaction.

3. How do you increase a customer’s value over time?

Average customer lifetime value is one metric your subscription based business wants to consistently increase. But how do you encourage people to spend more with you in a way that’s tasteful and feels organic?

Remember that after you convert a customer, the work has only just begun. Customers want to feel like they’ve made the right decision to subscribe to your service by getting continuous value—and that value is the way to get them to spend more.

PC: CleverTap

Gyms, for example, only have so much space they can provide, so it’s okay to raise prices based on capacity. B2B software also tends to be more valuable when more people in an org use it, so pricing on number users often makes sense.

The key is to stay transparent with your customers about why there are any price changes and to make sure you continue to add value and features as you increase your price. You can do this by continuously updating customers on changes or improvements you’re making through things like newsletters or text updates.

It’s also recommended that price changes come in the form of add-ons, so customers can choose to purchase them, as opposed to seeing a sudden, unexplained jump in their bills.

Add-ons can include:

  • Access to coolers and food at a gym
  • An upgraded software feature for a CRM
  • Additional access to research from a magazine subscription
  • Ad-free streaming options for a podcast 

The point is that they always add extra value that warrants the extra price.

Not everyone will want these add-ons, but the few who do can significantly add on to your MRR.

How do you handle churn?

Your goal is for existing customers to always be spending more to offset the people who churn, or cancel their subscription.

Normally when you think of churn and cancelations you have two big reasons—strategic or mechanical.

People who churn for strategic reasons are the ones who weren’t great fits for your service in the first place, or they’re switching to something else that suits their needs better. These customers are significantly harder to ring back in.

On the other hand, people who churn for mechanical reasons are ones who enjoy your service, but are missing payments because of technical errors you can easily prevent (like their card declined).

It’s common that 20% to 40% of credit card customers are lost to payment failures.

That’s why you need a subscription model that requires touchpoints for customers who stop making monthly payments. Try to always ask someone why they’re leaving, so you can determine if they simply had their card declined, or if they truly have found a business that better suits their needs.

From there you can try to provide a solution to get them to stay. For example, if they never got a chance to use your product, you could offer them the next month 50% off.

No matter how good your service is or how much value it adds, people are going to cancel their subscription. Just be prepared to ask them why and collect data when they do.

4. What are good vs. bad approaches to handling retention?

You'd think discounts would work like freemium, but in most cases discounts work as a scalpel, not sledge hammer.

Why?

Discounts are good used sparingly and in certain situations (like keeping a customer from churning who hasn't had a chance to use or see value from your service). But they're not great for using all the time as a customer acquisition tactic.

In fact, businesses see an inverse relationship between discounts and retention. Typically the higher the discount, the worse your cancelation numbers will be—because those people are only converting because of the discount and not a prior relationship you’ve established with them (like freemiums or content would do).

The only time discounts tend to make an impact is if they are offered after the customer has had a chance to use your product.

So you typically want to keep discounts on initial purchases to 20% or less, and you want to use discounts sparingly when a customer might leave after they've been paying full price.

You're essentially giving away money, and you only want to do that to create opportunities to build trust.

Focus on lowering your churn and increasing acquisition before revenue growth.

The data you collect from churn is only useful if you use it, so let it inform the decisions you make for your subscription based business. A good goal for a startup is to reach a place where you can be data driven and take time to apply attribution to things based on their ability to retain customers.

What is causing you the most headaches, and what is the biggest hurdle keeping you from growing? Pick one area you need to improve the most and start there.

  • Do you need to increase outreach for your declined credit card problem?
  • Are you providing the right content and freemium services to hook your target customers?
  • Do you know your typical customer’s pain points?

It’s not all about revenue streams. The name of the game is lowering churn and increasing acquisition for subscription businesses.

Related: [Podcast] 4 Steps to Creating a Loyal Brand Community