Subscription Commerce:

Mapping & Measuringthe Subscriber Journey

When you truly understand the subscriber’s journey and it’s KPIs, you stand a better

chance at earning their trust and their money.

— — — — —

The Subscriber’s Journey

The following is a description of the main events that occur as a visitor discovers your product, becomes a paying customer, and transforms into a loyal subscriber.

We’ll take a look at each of these events and then we’ll discuss KPIs like churn rate, customer acquisition cost (CAC), recurring revenue and customer lifetime value (CLV).

Signing up free users

Billing subscribers for the first time

Renewals

MILESTONE:

Signing up free users

It is incredibly important to sign up free users because they constitute the

majority of the customer base that becomes paying subscribers.

MILESTONE:

Billing subscribers for the first time

Once a free trial ends or a user decides to upgrade from the freemium product to a paid version, the user must submit payment. Some companies collect payment information before letting visitors sign up for the trial or freemium product, but most wait until the initial billing event.

It must be absolutely clear from the start that users are signing up for recurring payments.

Don’t be ambiguous. It only leads to a tarnished reputation down the line—not to mention increased costs and lost revenue due to spiking customer contacts, refund requests and chargebacks.

MILESTONE:

Renewals

-In subscription commerce, you are most concerned about gaining a predictble, recurring revenue stream.

Get customers in now in order and upsell them later. This gives you less revenue upfront, but greater potential revenue downstream.

Up until now, we’ve focused on the important milestones of the subscriber lifecycle.

Now, we’re going to talk about the KPIs associated with these events.

The only way for your subscription business to thrive is by growing

renewals. To see how well you are thriving, you must monitor

the following KPIs:

Customer acquisition cost

Churn rate Recurring Revenue

Customer Lifetime Value

KPI:

Customer acquisition cost

Consider your answers to the following questions, as they all factor into an important subscription KPI: customer acquisition cost (CAC).

How much do your email marketing efforts cost?

How much do your search engine marketing (SEM) efforts cost?

How much does your ecommerce solution cost?

What are your payment terms with affiliates? Are they paid per signup or per transaction, and does that commission continue for each renewal?

=

CAC = Total cost of acquiring subscribers

Total amount of new subscribers

To calculate CAC, total all of your costs for acquiring customers as a single number. Next, divide that total by the number of new subscribers gained from these marketing efforts.

If each month your company acquires 10,000 customers and spends $350,000 on all those acquisition efforts (including email marketing, SEM, ecommerce, etc.), your monthly CAC is

roughly $35 per customer.

There are a number of other factors that go into calculating CAC, like employee salaries, infrastructure costs, etc. The point to remember is that acquiring customers takes time, money and

human resources.

Customer acquired each month 10,000

Marketing costs $350,000.00

CAC per customer $35.00

In its simplest form, the churn rate is calculated by establishing how many customers canceled in a given time period.

KPI:

Churn rate

Churn rate % = x 100Number of canceled subscriptions

(Time period x Number of active subscriptions)

If you had 10,000 active subscribers at the beginning of a month, and by the end of the month you had 7,500 active subscribers, your monthly churn rate would be 25 percent.

MonthlyChurn Rate % x 100

2,500

( 1 x 10,000 )=

Interval

Amount of active subscribers 10,000

Amount of canceled subscribers

Churn Rate 25%

KPI:

Churn rate

1

6,000

Now, imagine a scenario where you’re effectively increasing the

number of subscribers who sign up each month and decreasing the

number of subscribers who cancel each month.

In this scenario, you acquired 10,000 subscribers in the first month; 11,000 in the second; and 12,000 in the third. Meanwhile, 2,500 subscribers canceled that first month; 2,000 in the second; and 1,500 in the third. Your total of acquired subscribers is 33,000 and your total canceled subscribers is 6,000. Your monthly churn rate is now at 6 percent.

MonthlyChurn Rate % x 100

6,000

( 3 x 33,000 )=

Interval Total32

Amount of active subscribers 33,00012,00011,000

Amount of canceled subscribers 6,0001,5002,000

Churn Rate 6%4%9%

KPI:

Churn rate

But churn does not occur in a vacuum. To calculate the true impact of your churn rate, forecast how many users you’ll need to acquire to reach your revenue goals.

For example, let’s say on January, 1, 2016, you have 100,000 subscribers. To reach your revenue goals, you need 200,000 active subscribers by January 1, 2017. For the next twelve months, you need an average of approximately 8,400 new users every month.

KPI:

Churn rate

What happens to your forecasting if you have an average monthly churn rate of 4 percent?

To reach your goal, you’ll actually have to acquire an average of 11,834 subscribers every month.

KPI:

Churn rate

Recurring revenue is fairly simple to figure out. Take the amount of revenue generated by a subscriber and divide that number by the amount of billing intervals.

KPI:

Recurring revenue

+ + + ...

Recurring revenue =

Monthly recurring revenue

Annual recurring revenue

Revenue generated

Revenue generated Revenue generated

In the case of a single subscription that costs $9.99 per month, the monthly recurring

revenue is $9.99 per subscriber, while the annual recurring revenue is $119.88.

Billing interval

Billing interval Billing interval= = OR

What happens when you increase the number of subscribers each month?

Monthly price

Total

$9.99

Monthly intervals

Revenue each monthly interval

Monthly Recurring Revenue

1 quarter

$ 329,670

$ 329,670

3

$ 119,880

$ 109,890

2

$ 109,890

$ 104,895

1

$ 99,900

$ 99,900

Number of subscribers

Revenue from active subscriptions

33,000

$ 329,670

12,000

$ 329,670

11,000

$ 209,790

10,000

$ 99,900

Returning to our churn rate scenario, your company acquires 10,000 subscribers in the first month, 11,000 in the second, and 12,000 in the third. At $9.99 per subscriber, your company is generating $329,670.00 in quarterly recurring revenue.

There are two methods for increasing recurring revenue. The first is to acquire more subscribers, and the second is to increase the value of each subscription by persuading subscribers to upgrade

to a more expensive plan.

According to subscription metrics guru Joel York, the simplest way to calculate CLV is by dividing your recurring revenue by your churn rate.

KPI:

Customer lifetime value

CLV = Recurring revenue

Churn rate

$ =

Reviewing our previous scenario: Your company acquires 33,000 subscribers in three months, but loses 6,000 subscribers to churn over that time period. Each subscriber is paying $9.99 each month. At the end of the three months, your company has generated $329,670 in recurring revenue from all active subscriptions with a 6 percent churn rate.

Your CLV, therefore, would be $5,439,555.00, or $164.84 per customer.

CLV = $329,670

6%

Monthly price $9.99

Monthly intervals

Monthly Recurring Revenue

CLV

1 quarter

$ 329,670

$ 5,439,555

3

$ 109,890

$ 2,877,120

2

$ 104,895

$ 1,208,790

1

$ 99,900

$ 399,600

Number of subscribers

Monthly churn rate

CLV per customer

33,000

6%

$ 164.84

12,000

4%

$ 239.76

11,000

9%

$ 109.89

10,000

25%

$ 39.96

How upgrades and downgrades affect recurring revenue and CLV

Consider the scenario where the subscription is for a number of licenses for a given product or service. It is common for downgrades to occur, for example, if an employee leaves a company. The company now needs fewer licenses. This affects CLV negatively.

Other important scenarios that negatively affect CLV include cancellations, refunds and chargebacks. These will all raise your churn rates and decrease recurring revenue rates — both of which have enormous impact on your CLV. Make sure you have a well thought out plan for reengaging these lapsed subscribers in order to lessen the impact on CLV.

Make sure you have a well thought out plan for reengaging these lapsed subscribers in order to lessen the impact on CLV.

KPI:

Customer lifetime value

$ =

Conclusion

To find one real friend in a lifetime is good fortune; to keep him is a blessing.”

- Baltasar Gracian

All too often, you think of customers as commodities—interchangeable goods who will always be available to add to your business’s bottom line. The fact of the matter is that your business is a commodity for your subscribers.

If your business lives and dies by subscriptions, you need to understand the map of your subscriber’s journey and its relevant KPIs. Make sure that your ecommerce arsenal has capabilities to support subscribers at each stage of their journey and to accurately report subscription specific KPIs. This will ultimately reduce headaches and provide business stability for the future.

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cleverbridge provides global subscription billing solutions that help companies build long-term customer relationships and grow recurring revenue streams. With its flexible, cloud-based billing and monetization platform, cleverbridge integrates seamlessly with client systems, simplifies subscription business models and delivers an optimized online customer experience. Leveraging cleverbridge expertise, technology and services, clients monetize products and services more effectively, rapidly expand their global subscriber base and maximize customer lifetime value. Headquartered in Cologne, Germany, cleverbridge has offices in Chicago, San Francisco and Tokyo.

To learn more about cleverbridge, please contact inquiry@cleverbridge.com or visit www.cleverbridge.com.