by Jennifer Lonoff Schiff

10 tips for running a profitable subscription-based business

Oct 12, 2015
CRM SystemsE-commerce SoftwareInternet

Experts in customer acquisition and retention and ecommerce share advice on how to create and sustain a successful recurring-revenue business.

ecommerce subscription ts
Credit: Thinkstock

The subscription-based business model is far from new. But as ecommerce and mobile commerce have taken off, so has the recurring revenue model, with dozens of new subscription-based businesses – from software services and app providers to subscription box companies like Birchbox and BarkBox – popping up each year. However, while it is often easy to attract new customers to a subscription business, especially if you have good marketing, keeping them (for more than a few months) is another thing. And without recurring revenue, you can’t have a recurring revenue business.

[ Related: How Ecommerce Businesses Can Beat the Competition in 2015 ]

So what steps can (and should) businesses that plan to or currently use a subscription model take to decrease customer churn and ensure a steady revenue stream? Following are 10 tips from experts in customer acquisition and retention and executives from successful subscription-based businesses.

1. Do research to determine if the subscription model is right for your business. “The entire scope of the business has to make sense for a subscription model,” says Francisco Gimenez, cofounder and CEO, eSalon, which provides made-for-you hair color. “First, it is important to have a product that your clients want and need replenished on an ongoing basis.” Then ask yourself the following questions, he advises: “Is there a large enough market to sustain the business? Does anyone else have a similar offering? Can you deliver your product on a consistent basis? How does your subscription service fix a problem or add value to the lives of your customers?”

2. Test your concept by using Kickstarter or Indiegogo. “Use crowdfunding to validate your market,” says Scott Lininger, CEO of Bitsbox, a subscription box that teaches kids to code. “Before we launched Bitsbox, we ran a Kickstarter campaign to make sure that people actually wanted our stuff. This gave us a production scale to shoot for and was a lot of fun, too. The capital you can raise (equity free) is nice, too.”

3. Let people try before they buy. “Give people the opportunity to try your product and get hooked on it before charging them,” says Chris Bumgardner, CTO, UrbanSitter. “Consider testing a free trial. Also keep pricing simple. At first, our subscription pricing structure was $25 for the first month, then $10 for each additional month,” he adds. “Customers found this to be confusing, so we simplified to $15 per month and saw an increase in subscription rates.”

4. Offer discounts for longer-term subscriptions. “There really are two types of consumers: ones who see themselves using your product forever, and those who are looking to give it a try,” says Chad Reid, director of Communications, JotForm, a form builder. By offering customers a variety of subscription options, and offering a discount to those who agree to pay upfront for six months or a year, you have a better chance of attracting more customers and increasing your revenue.

5. Stay on top of your customers – and make renewing easy or automatic. “Through our retention marketing work with companies such as The Honest Company and Dollar Shave Club, we’ve learned personalized communications is one of the biggest factors in reducing churn and re-engaging customers,” says Jerry Jao, CEO, Retention Science. “Collect as much data as you can about your customers and email them personalized offers and information to coax them to renew before they churn, which is usually at the three-, six- or twelve-month mark.”

“Enable clients to auto-renew, or have a frictionless system for renewals,” says Janet Kosloff, cofounder and CEO, InCrowd, a provider of real-time market intelligence. “When you make it easy for the customer, they’re more inclined to stay.”

You can also make renewing automatic (giving the customer the option to opt out).

6. Offer something outside the box. “Successful subscription companies add value outside of the solution itself, often through content or community,” says Anne Janzer, an author and marketing consultant. “Companies like Birchbox, Dollar Shave Club and Blue Apron deliver much more than what’s in the box. Dollar Shave Club sends a newsletter filled with games and humor; Birchbox has online magazines, etc.” There are different ways to add value. You can do it “through content, community and stories,” she says. Just do it “in a way that is consistent with the brand identity.”

7. Don’t skimp on packaging. “Packaging matters,” says John Monarch, CEO, Direct Outbound, a fulfillment company that handles shipping for dozens of subscription box products. “Don’t use a USPS flat rate priority box. It looks and feels cheap. If you’re a premium business, have premium packaging,” he argues. “There are plenty of ways to make it easy to ship while looking high quality and keeping costs low [that can] make a huge difference in how your customers perceive the box and can increase retention significantly.”

8. Use a fulfillment service. “There are dozens of companies that help subscription box businesses with the dirty work of picking, packing and shipping,” notes Lininger. “Unless you love paper cuts and glue-mouth, do yourself a favor and find a partner for this. It’s surprisingly cheap and easy if you do it [right].”

9. Provide excellent customer service. “Make sure your customer support reps bend over backwards to help your subscribers,” says Kat Fulton, founder, “In our email communications, it is our policy to always say ‘Thanks for going VIP!’ to our VIP subscribers. Our niche is filled with passionate people, so we match their passion with our gratitude.” As a result, “while the industry standard for membership retention is three months, our average stay time is 13 months, and we’re very proud of it.”

[ Related: 11 Tips for Improving Your Company’s Customer Support ]

10. Use analytics to spot problems and decrease churn. “Track everything with analytics, especially your conversion funnel and attribution for digital spend,” says Bumgardner. “Define your key performance indicators and make sure your team sees these dashboards on a regular basis (e.g., acquisition cost and lifetime value).”

“Average revenue per user (ARPU), average revenue per paying user (ARPPU), average customer lifetime value (ACLV) and monthly recurring revenue (MRR) are just a few of the metrics that you’ll want to keep an eye on, depending on which model you pursue,” adds Bryta Schulz, senior vice president Marketing at Vindicia, a provider of enterprise-class subscription billing. “Track these against customer acquisition costs, and make sure you’re achieving return on investment.”

Also consider creating “cancellation surveys to understand why customers are churning, and use the findings to alter your product and customer communications to combat churn,” says Bumgardner. Similarly, “consider sending net promoter score (NPS) surveys to proactively gain insight into opportunities for improving your product and pricing.”