I had a tough conversation with a client this week.
For the last 10 years, he’s been trying to grow his subscription business with a 30-day free trial. He’s been happy taking profit out of the business but has hit a plateau over the last few years.
He gave his internet marketing team a budget of $100.00 per free trial member to acquire new customers using online marketing. After two years, membership numbers are up but profit is down. He had no idea what had happening but suspected his new members may not be profitable. He was right.
I dug in. After a few minutes with his customer data in Excel, I showed him that only 30 percent of these new members were converting from free trial to paid. (He got 50 percent from his other marketing methods.) And although his subscription revenue is $39 monthly, his profit is just $11.00 each month. Thus, at his rate of conversion, it takes him more than 18 months to recover the $100.00 subscriber-acquisition cost. I was able to help him set a more reasonable marketing budget that would be profitable at his member value.
But more importantly, there’s a bunch of people who will tell you that subscription revenue is today’s biggest business innovation. It is powerful, and I am grateful each month when I see all the subscription revenue automatically deposited into my checking account.
While subscription revenue is powerful, it can be a dangerous trap. It’s a trap that I’ve fallen into more than once.
In 2006, I had a business that could generate as many new members as I wanted at $140.00 per new member. At that price, the subscription revenue alone took six months to recover my marketing investment. I didn’t have any outside cash and didn’t have six months of marketing dollars in reserve to scale the business.
Therefore, I choreographed a series of upsells into the new member welcome sequence. I discovered that I experienced much higher retention rates on members who purchased any of the upsells. That makes sense, right? people who invest more money are more committed.
I discovered something else interesting as well. The members who saw the upsell sequence but didn’t buy also had higher retention rates than those who never saw the upsell.
The insight I got on this was that while they didn’t buy the more expensive product, they were happier with what they had. They valued their subscription more. They thought, “I don’t want to spend more money to get all that, but I am happier with what I’m getting for my money now that I understand what else is available.”
As for cash flow, the increased revenue from the members who bought the upsells allowed me to recover my marketing costs within 14 days. I was able to reinvest my marketing dollars 12 times faster and scale my membership business breaking through all previous growth plateaus.
Too many subscription companies are ignoring the reality of the subscription business. It often costs more to acquire a new customer than the subscription revenue alone can recover. These companies either burn through cash as they try to scale or they stagnate at some membership plateau they never seem to break through.
This subscription plateau was discovered and successfully dealt with by publishers several decades ago. By offering annual packages, lifetime memberships, and higher priced products as well as multiple subscription levels, they were able to increase lifetime member value to support their membership growth. And this was during the days of direct mail.
It was a lot more expensive to generate new customers in the 1980s using direct mail than today online. But the economics worked because they understood the basics of cash flow forecasting and the turnover of their marketing dollars. The faster you can turn over your marketing investments, the quicker your business will scale.
The antidote for membership plateaus is understanding your membership numbers and choreographing an upsell sequence that increases your member lifetime value. These are the difficult conversations I often have with clients to help them move beyond the hype of the subscription continuity membership world into building a real business.
As a CPA turned marketing copywriter, I have a unique combination of skills that allows me to understand the math of marketing. If you feel like you’ve reached a new member growth plateau and want greater visibility into your new member marketing system, send me an email at RS@RobertSkrob.com.