Thanks to Nihar Kulkarni and James Roberts of Roswell NYC for providing this post.
Subscriptions are essential to the health of many businesses, but are they right for your business? We’re going to explore WHY subscriptions are so important, as well as their wide variety of applications across a spectrum of industry verticals. But first, let’s get some homework done and understand some key metrics: MRR and LTV.
Monthly recurring revenue (MRR) is like a salary. It’s a predictable amount of monthly income that allows merchant businesses to better forecast future cash flow and plan ahead on how to use that (*somewhat) guaranteed revenue in the short run to plan for long-term growth. It can lessen your dependency on external cash resources (for example, business lines of credit, term loans, outside investors eating up percentages of ownership) to fund your short-term liabilities. As a direct-to-consumer brand, this can mean less reliance on discounts to incentivize sales and generate revenue when needed. This in turn means higher margins and happier B2B relationships with wholesale clients who don’t see you as a competitor.
Next up is the holy grail of ecommerce sales metrics: lifetime value (LTV). LTV roughly translates to all the money a customer or group of customers will spend on your products throughout their lifetime. Morbid to think about, but nonetheless critical to understand. The actual calculation varies based on who you speak to. However, at Roswell we equate it to:
Average order value (AOV) x Frequency of purchase (FOP) x Average customer lifespan (ACL)
There are several reasons why this stat matters the most, the first being that it encapsulates all of the other KPIs you have traditionally monitored. Low conversion rate = lower AOV, lower FOP, lower ACL—and vice versa. Supplementing strategies to increase conversion and AOV, coupled with a strong retention marketing strategy to drive FOP, results in—you guessed it—high LTV.
And how do you increase FOP with minimal ongoing marketing efforts? That’s right, subscription. We get our Bully sticks at home from BullyBunches.com and we don’t even think about how it got here, but our little Morkie Zuri sure is happy, and that’s what matters.
The majority of brands have an FOP closer to one, as the majority of marketing efforts are placed on top of funnel strategies. But coupling paid search, social, and SEO with subscription and retention marketing is a true recipe for growth. LTV is so important because it indicates the potential true value of your brand. This KPI should guide your marketing budget, resource investment, inventory decisions, and forecasting. It tells you whether you can spend more now to attract customers knowing their average value over time will be worth it. It’s also an indicator of whether people like your product and if they are willing to buy it again and again.
In fact, the true value of your business can be determined by multiplying your customer LTV by your total existing customer base. If you can increase your LTV by 20%, that essentially increases the value of your paying customer base—and therefore the value of your business—by 20%.
We all know how hard it is to acquire new customers online, and how new customers convert only half as much as returning customers. Paid Digital Marketing has faced tremendous upheaval over the past two years with the pandemic, increased competition, and changing privacy rules. We’re all working hard to acquire those new customers!
So, why not focus as much energy as possible on increasing the value of each and every one of them? This is just another way subscriptions can play an enormous role in increasing the overall health and value of your business. One of our clients, a new CPG food brand, is already generating 26% of their revenue from subscriptions.
If you’re considering starting a subscription program for the first time but aren’t convinced about user adoption, consider that currently, roughly 51 million consumers in the US are using D2C subscriptions.
Subscriptions for all
Now that you understand those key metrics, is a subscription model right for your business? Don’t think about subscription as it applies to something you use, run out of, then need again. Of course, that is one use case, but what about memberships that provide exclusive product access, free shipping, customer perks, and gated content? Where there is value, there is an opportunity to use subscriptions to provide access.
With the industry move to Shopify’s unified checkout, the user experience is even more seamless, as users are not taken to a third-party checkout, which can be a jarring experience that increases conversion friction (not to mention wreaking havoc on your analytics). With tokenization standardized in Shopify Checkout, customers can now have their payment options stored securely, and using Recharge’s highly evolved subscription infrastructure platform, users naturally check out with subscription and one-time products without even realizing the years of research and development that was put into giving them what they want—when they want it.
Get me on Recharge!
Roswell NYC has migrated countless merchants to Recharge. Our approach is a three-pronged strategy:
- Integration of Recharge with your Shopify backend inclusive of full product database set up, settings adjustments, and customer subscription admin tools
- Migration of legacy subscriptions on day one to Recharge and subsequent token mapping in Shopify to ensure no disruption in recurring orders coupled with migration of the delta of new subscriptions on launch day
- Front end customer experience development on PLP, PDP, Subscription Upgrade in Cart, Subscription Administration in Customer Account Dashboard
But don’t just take our word for it, check out these examples:
What makes a successful subscription customer experience (CX)? When analyzing a cohort (looking at groups of people that subscribed at a certain time, and observing how their behavior changes over time) it is essential to understand your churn rate. It’s even more important to understand how to reduce it. Let’s take a look at your options:
- Recharge’s Novum theme provides the optimal out-of-the-box subscription administration experience. Let customers decide their subscription journey, rather than dictating it to them.
- Provide simple, functional, and easy-to-understand UX on all touchpoints of the subscription experience. PDPs and Subscription Landing Pages should easily guide customers to understand the benefits of subscribing. In-cart subscription upgrades are akin to cross-sell. Their product is in the cart as a one-time purchase—remind them that they can upgrade to a subscription!
- Automatically re-target customers who have canceled with incentives to re-engage their subscription via out-of-the-box integrations with Klaviyo and Attentive.
Let’s sum it up
Anyone who is actively engaged in paid digital marketing to grow their business knows all too well that acquisition costs have increased as digital marketing competition increases and privacy rules impact targeting methods. Find your subscription opportunity and present it through storytelling elements on PDPs and Subscription Landing Pages. Integrate or migrate to Recharge (feel free to call us!), and focus on reducing churn. Then watch your LTV grow.