Subscriptions: Driver Of This Decade
Subscriptions are a clear favourite amongst consumer (and DTC) businesses. The way they’re positioned to customers may differ depending on the business model, but it’s definitely a route to gain a ‘longer-term share’ of the customer’s wallet.
Inspired by the SaaS economy, consumer-tech subscriptions definitely aim to fit themselves into people’s lives. While they have a clear benefit (or value proposition), they actively showcase the LTV that a customer can bring to the business.
The decade of 2020-2030 is clearly going to see maturity in the subscription economy in consumer tech. Not just that, the stiff competition and innovation around subscriptions are also going to benefit the consumer to add more dimensions to their lifestyle while increasing the burn in their wallet.
Whether or not a customer chooses to ride on subscriptions is still a choice. But if he does, these are tenets of the subscription economy, which every business MUST resolve:
I) Convenience: while we would traditionally go and pick things up offline, it’s now all available either at our fingertips or at our doorstep.
II) Availability: if a customer is choosing to have a product available regularly, it MUST be available at all costs. Unavailability or delays isn't a luxury that subscription businesses can afford.
III) Choice: not all consumers are good at making decisions across multiple options. So subscriptions should aim to make decision-making easier for customers, based on their requirements or preferences.
As a business, you’d fall into one of the three categories. And your offerings would be tailored to suit your category:
1. Replenishment: they allow consumers to automate the purchase of commodity items, daily lifestyle products, groceries, etc.
2. Curation: they seek to surprise and delight by providing new items or highly personalised experiences in categories such as apparel, beauty, and food
3. Access: Here subscribers pay a monthly fee to obtain lower prices or members-only perks, primarily in the apparel, food, media, fitness, and medicines, sectors.
A subscription business should be laser-sharp in its offerings and differentiators based on the category you’re in. Based on ‘need-based' categories or ‘want’ based categories, the communication, deliveries and pricing would have to be tailored.
To get some tactical insights into subscriptions, here’s how I break down the subscription purchase & post-purchase funnel. Based on the journey through the funnel, the behaviour and action steps would ideally differ for your business.
A) Hear about subscription: this is where customers would most likely hear about your subscription model either through online channels (ads), product labels (QR codes) or through in-app / website communications.
B) Familiar with subscriptions: Based on analytics, you would ideally be able to gauge if they’re familiar with your subscriptions or not. They would check out commercials, evaluate competitors, FAQs on deliveries, etc.
C) Try One Time: As a test, they would try out your subscription at least one time, or for a pilot product.
D) Consistently Subscribe: Based on the one-time experience, they would purchase repeatedly.
E) Referral: Based on their experience, they would bring more people on to the subscription model.
F) Unsubscribe: Oops. We know what this means.
Now, onto some strategic calls with subscription businesses.
Metrics for Subscription Businesses:
There are several top-line factors that matter for a subscription business:
● pricing to the consumer
● gross profit margins for the business
● frequency of subscription
● annual membership fees in addition to ongoing recurring subscription fees
But if I have to boil all of these down to one key metric that every subscription business should pay attention to, it is the annual gross profit value of a subscriber. To calculate the annual subscription gross profit:
Consider annual revenue per subscriber minus the cost of goods sold (COGS).
If the average monthly subscription for the business is INR 100 per month, for example, with INR 50 in monthly COGS, the annual subscription gross profit is INR 600
Most subscription businesses would look at this key metric to guide their business decisions or even valuations. It helps guide different verticals within a business to optimise for this one number.
Retention Metrics:
One of the biggest factors while scaling a subscription business is its retention metrics. I break down retention metrics into three categories. And it’s best to divide the business into different cohorts based on the type of product or service:
I) Customer Retention: This is the % of customers that remain subscribers in every cohort.
II) Revenue Retention: This is the % of revenue in each cohort, as long as the cohort is active. An indicator of a healthy subscription model is obviously when revenue retention is higher than customer retention.
III) Usage Retention: This is the % of customers in each cohort that continues to use the product over time.
It’s essential for a subscription business to track its metrics closely. The potential for paybacks on CAC are enormously high if the model is built well.
Further, a good subscription business would have very quick payback on customer acquisition costs, perhaps even instant payback.
For a subscription business, it’s the combination of the above factors (payback period, cohort retention, subscription gross profit, and conversion rate) that drive the ratio of LTV/CAC, which is an important metric to track the success of a business.
Referrals and loyalty programs are only an organic by-product of how good my usage retention is. Netflix is one of the best examples (globally) of how personalised a subscription recommendation could get.
*The author is Saksham Mendiratta, Founder of Lights Out Studio & Ventures
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