These days all kinds of businesses seem to be moving to a subscription model, whether it’s meal kits like Blue Apron, shaving accessories like Dollar Shave Club, or movie tickets like MoviePass. Even many non-contractual purchases now have a subscription component: if you buy a new car, they immediately walk you over to the service department to lock you in to a maintenance plan. When executed properly, subscription relationships are ideal from the seller’s standpoint, because they are ongoing by definition. Essentially you’ve taken a non-contractual relationship and made it contractual. Not only are you selling more, but you’re gathering behavioral data, which helps identify the high-value customers much more quickly than sporadic purchasing.
However, customers aren’t always as enamored with the idea of committing to repeat purchases. As a result, these businesses often face challenges in the form of high acquisition and retention costs paired with lots of customer churn. Below are the three main reasons subscription businesses have difficulty reeling customers in and keeping them on the hook:
- A lot of people don’t want to be locked into anything. How many people would get married to someone they find attractive upon first meeting them, or even after a single date? While deciding to sign up for boxed deliveries isn’t as drastic, most customers need a trial, a first repeat purchase, and then a second repeat purchase before they decide that they want to commit to a product or service for several months. In my research I’ve found that the timing of the first repeat purchase is very different than the next purchase and so on. Even if a customer has tried your product or service and likes it, it doesn’t mean they are ready for a relationship. It could take another purchase cycle, or maybe more. And if you push it, the customer can feel that they’re being forced into the relationship before they’re ready for it. Some people simply have a higher threshold of commitment and need a softer sell and to see more benefits first.
- Trying isn’t buying (but many companies think it is). Back to the relationship analogy–when is your prospective mate “locked in?” Is it after 6 months, or when you’ve moved in together? In the same vein, many companies believe a customer is acquired because they’ve signed up for a 3-month trial and they’re in the CRM. However, some customers need longer than 3 months. This thinking is likely what has gotten Blue Apron and others into trouble with reports of abysmal retention rates. A lot of those people probably were never real customers in the first place!
- Data is a double-edged sword. One of the best aspects of a subscription model is that you get a great sense of purchase and usage behavior. When you have this type of data it’s easy to ping customers and remind them that they could be watching more movies, taking more classes, etc. to ensure they are getting the best value for their membership.
This usage data might give you a good indicator of possible churn and an opportunity to prevent it by offering lower priced plans or discounts. However, companies must exercise caution here. As Columbia marketing professor Eva Ascarza (and her co-authors) found in a 2016 research study, “…being proactive and encouraging customers to switch to cost-minimizing plans can, surprisingly, increase rather than decrease customer churn: whereas only 6% of customers in the control condition churned during the three months following the intervention, 10% did so in the treatment group.” Sometimes allowing inertia to carry the subscription along for a few more months may be the better route than essentially reminding the customer how much they’re spending and that they had been meaning to cancel.
Subscriptions and Customer Lifetime Value
I always say that high-value customers are born, not created. You can’t turn an inherently lousy customer into a good one with even the most well-placed promotions or messages. On the other hand, though, many customers may have that inherent goodness or value in them, but the company fails to fully see or unlock it. Marketers should always look out for behavioral indicators in addition to purchasing patterns that indicate a customer might have the potential to be high-value. For example- do they engage with your communications? Do they share your social media posts? Do they post positive reviews of your products online? Perhaps these customers have more potential to yield value and should be nurtured.
Unlocking Customer Value with Messaging
Subscription relationships offer more opportunities to engage customers through marketing than purely transactional ones. However, bombarding customers with promotional messages may not be the best way to coax them into a committed relationship with your brand. You might want to try a softer sell, sending the customer helpful information, inviting them to check out new offerings, and just being there to answer their inquiries on their favorite device.
Incorporating texting and mobile messaging into your marketing arsenal is an underutilized tactic, but ideal in many ways when trying to build and maintain a relationship with a customer. A customer can send a quick text like this one:
…and go about their business as they receive a prompt answer:
Even if messaging doesn’t get the customer to buy or renew, how they interact with it yields important information. April might say “Yum, that sounds great- thanks!” or let the agent know that she isn’t a fan of those options. In either case, the company now knows that April is a vegetarian and whether or not she is happy with the service. They’ve also opened up a conversation with her, making her more likely to reach out when she has a question or concern in the future. Although April feels that she’s received exceptional customer service and personalized attention, the company has actually saved money on retaining her as a customer because the text channel costs a fraction of phone. That same agent is likely texting with a dozen other customers at the same time.
Getting customers to sign up for a subscription service and then stay engaged is no easy feat. The goal should always be to acquire and retain high-value customers without spending a fortune to do so. Text and mobile messaging is a great avenue to explore to address some of these challenges.
About Pete Fader
Peter S. Fader is the Frances and Pei-Yuan Chia Professor of Marketing at the Wharton School of the University of Pennsylvania. His expertise centers around the analysis of behavioral data to understand and forecast customer shopping and purchasing activities. In 2015 he co-founded predictive analytics startup Zodiac, which was acquired by Nike in 2018. He recently co-founded Theta Equity Partners to commercialize his more recent work on “customer-based corporate valuation.”