B2C subscription businesses are booming.
Need proof? Simply open your bank account statement and add up all the monthly recurring fees you’re paying for services like Netflix, Audible, news subscriptions, apps for fitness or meditation, your monthly grocery box delivery...
For me, it adds up to $152 a month 🙂 That’s $1,824 yearly.
Wouldn’t it be nice to own a piece of this growing "subscription" pie?
In this article, you’ll find tips on how to make your online subscription business grow, focusing on the perspective of your client acquisition strategy.
I recommend it mostly to B2C subscription business owners and owners-to-be.
But, if you are building a B2B subscription business (Software as a Service, education platform for businesses, or B2B service delivery subscription) 80% of the advice presented here will still apply.
Make sure you’re sitting comfortably as I have tried to make this read quite comprehensive.
Read on to discover:
- 4 Key Performance Indicators (KPIs) that are crucial for the success of a subscription business model
- Checklist of 17 tactics you should employ to work on the 4 KPIs simultaneously
- Visualization of an impact these KPIs have on your subscription business growth
Growing your subscription business from scratch can be a challenge, especially when you have no digital assets or brand to leverage.
And just when you think you have figured out a growth strategy — your business goes into a frustrating stagnation.
But trying to grow subscription businesses can also be a lot of fun.
In fact, assisting owners with this particular business model is one of Tribe47’s favorite challenges.
Since opening our doors, we’ve had the pleasure of helping several subscription businesses grow the number of their subscribers —we’ve even had the opportunity to optimize their products.
Amongst the businesses we have assisted are:
- Online yoga subscription — our job was to build up the brand, increase traffic, and expand the base of paying subscribers from scratch;
- Online fitness subscription — our job was to assist a famous European fitness personality to implement a process for growth after their product launch and find a way to mitigate high churn;
- Mental health mobile app — our job was to manage the transition from an on-demand business model to a monthly subscription model and to achieve better growth;
- Online library of teaching manuals — for this recently acquired project we are building the conversion funnel based on content, webinars, and direct sales calls. This model is angled slightly more towards B2B subscription businesses.
The majority of our favorite cases are B2C businesses funded by relatively small monthly subscription payments. In these companies, the growth of a user base is essential to reaching satisfying business goals.
4 KPIs For Subscription Business Success
The growth of a subscription business comes down to working simultaneously on the following metrics:
KPI #1 – New Website Users
Website traffic is not just about volume. You need to ensure a constant flow of fresh traffic to your website.
If you are working with a mobile app, instead of website users, think about unique app store visits.
Growing new users of your website requires:
- Having solid marketing strategy fundamentals (Persona, know-how on competitors & Unique Selling Proposition)
Are you clear on who your Buyer Persona is, who your competitors are, and how you differ from them? Without solid fundamentals, effective traffic growth will be a bumpy journey. Defining these fundamentals cannot be avoided. The earlier you do this, the easier your road forward will be.
- Building up multiple traffic sources from Day One
Your traffic strategy should not depend solely on one traffic platform (on Facebook for example). It’s best to simultaneously build both organic traffic channels (via SEO and social media strategy) and paid traffic channels (at least by using Facebook’s paid traffic platform and Adwords).
- Building a network of external influencers, ambassadors and affiliate partners
You can leverage your partners as sources of additional traffic whenever your other traffic sources slow down (due to the seasonality of your business for example). Rather than signing up with multiple affiliate platforms, look for relationships with influencers who are already speaking to your target subscriber.
- Using tactics to expand your reach on traffic platforms
On platforms like Facebook and Instagram, this is about using video content and engaging image posts to warm up audiences and create brand relevance. The more people who are touched by your message enough to engage with it, the higher the traffic you will be able to drive to your website (straight from posts and via remarketing to previously engaged audiences — like video watchers or people who engaged with your posts via likes, comments or shares).
- Paid traffic scaling skills
Your Media Buyers should have experience in scaling media budgets on paid traffic channels. Running ads for an established brand is a whole different job from gradually scaling budgets for a new business. Have your media buyers done it before? This requires a solid methodology in experimentation and testing. A smart way to find a good media buyer is to ask them HOW they test and to request an example of campaigns they have scaled (with details of how).
KPI #2 – Conversion Rate (user to paying subscriber)
This metric is quite self-explanatory.
However, it goes much beyond on-site optimization techniques, like A/B testing or smart pop-ups (which, by the way, are the topics for a whole separate blog post 🙂
In younger subscription businesses especially, the conversion will depend a lot on how you design your customer acquisition journey outside your website or app store.
Conversion rate optimization in subscription businesses is about:
- Your end-to-end funnel strategy
You should plan the communication flow that your new user will be exposed to starting from their first interaction with your content on the traffic platform to the moment of purchase. A well-designed flow builds up the desire to join your subscription gradually, presents your offer from multiple angles, and is rooted in the psychology of sales (this is a subject for a whole different post). For now, try to identify if you have planned the communication flow and decide how you will review it on an ongoing basis to identify potential elements that might spoil your website conversion (like misleading yet viral content pieces which bring you lots of traffic).
- Content marketing that preps for sales
Especially in the early stages, strategic content distribution will help you to not only expand your traffic but also to increase your conversion. Your content should start a conversation that leads smoothly to your product, without mentioning your product in an insistent way. You can read more about this in a blog post we wrote – click here.
- Building and nurturing your freemium subscriber's list
On this list, you can have people who used your free trial or demo product, your newsletter subscribers, lead magnet subscribers, and people who signed up via your messenger bot, and you can send them direct Facebook messages. Nurturing them is about building a step in-between, where users can bond with you before becoming a paying subscriber. How to build up this list without cannibalizing your sales potential is a whole different subject. However, if you do this right, your freemium subscribers will always convert higher than non-subscribers.
- Using deep remarketing tactics
Remarketing allows you to present your product from multiple angles — which is necessary to generate sales. Deep remarketing means targeting people with different messages, depending on what stage of your funnel they are in. So, you’ll share one message with people who are seeing the product for the first time, another with your freemium subscribers, another with the people who visited your website, and another with your checkout dropouts.
- Onsite Optimisation
You need to have an ongoing experimentation procedure, always testing different elements of your site. Start from your headline and order menu & checkout. Watch this space — we will be writing about our top website optimization discoveries soon.
KPI #3 – Churn
By churn, we mean the percentage of paying subscribers who are canceling or not prolonging their subscription within the billing period.
Churn is usually measured monthly.
What is a healthy churn rate?
It depends on your subscription product. For software as a service subscription, a healthy churn rate is between 3% and 5%, yet it might be higher in the first years.
For B2C subscription services (for example for all the VOD platforms) a churn below 10% is considered healthy.
An important metric directly connected to churn is your Customer Lifetime Value (LTV) — which is the amount of money a subscriber pays to your business throughout their time as a subscriber.
How do you calculate your Customer Lifetime Value (LTV)?
LTV = ARPA / CHURN
ARPA – Average Revenue Per Account
LTV – Customer Lifetime Value
So, the lower your churn the higher your Customer Lifetime Value. We will come back to this metric later when we discuss the 4th KPI. Keep reading!
As they always say: it is much cheaper to maintain an old customer than to secure a new one.
Churn optimization is about:
- Adjusting your product to match the needs of your clients
Your product should satisfy the needs of your paying subscribers. If it doesn’t, your job is to quickly figure out what the key deal breakers are and make the necessary adjustments. And trust me, this is not always about offering top quality.
- Establishing multiple effective channels of ongoing communication with your paying subscribers
This is related to the previous point, as you won’t get accurate feedback about your product without effective communication. Effective channels of communication can include email, in-app messaging or private group — in-app or on popular platforms like Facebook.
- Tactics to re-engage your paying subscribers
Even if your product is really good and meets the needs of your paying subscribers, you need to make sure they are constantly engaged and their attention is brought back to the product. You can do this by announcing new features, launching new content for paying subscribers only or organizing seasonal challenges and competitions for your paying subscriber base. If your product is based on access to knowledge or to premium content — not having such a strategy in place will definitely impact your churn.
The plateau at 4,000 paying subscribers versus REAL growth — how optimizing KPIs can impact your subscription business growth
Now before we move on to the 4th KPI, I want to use an example to demonstrate the impact of the ongoing optimization of the 3 KPIs mentioned above (New Website Users, Website Conversion and Churn) on business growth.
Imagine a hypothetical subscription business that charges a monthly fee of $19 for access to an online library with high-quality meditation tracks.
It launches strong with:
- 10,000 new website users a month (acceptable traffic for the first few months if you are starting from scratch)
- 3% user to paying subscriber conversion (not bad for a new business with no brand built up yet!
- 17.44% churn (quite high!)
The digital marketing team brought in to launch this business focuses initially on conversion optimization as their primary goal and set this KPI at 5%.
They achieve it within the first 6 months and even exceed it.
The new average website user to paying subscriber conversion rate circles around 5.79%.
Also, over the first 6 months, they work on traffic.
As a result of their work, the team manages to establish several quite stable traffic sources that give them about 12k new website users a month.
Meanwhile, the product is not touched and nor is the entire spectrum of client-related activities that could be used to mitigate churn.
In fact, the team does not intervene with the product or processes that happen AFTER the paying user is acquired.
The owner is happy with how it goes.
She sees nice growth, so she eventually scales down the marketing expenses and turns to her other ventures.
She thinks that she just built herself a nicely growing business on autopilot.
[Side note – it is actually a common case with many subscription-based mobile apps.]
But, as you can see in the image below, this business experienced nice growth only until month 15.
Around the 23rd month, it reaches a sad plateau at about 4k paying subscribers.
With 5.79% conversion, 12k new website users a month, and a churn of 17.44%, the maximum number of new paying subscribers the business is able to acquire is 695 (12,000 * 5.79%).
So, the moment the business reaches about 3,984 paying subscribers it starts losing the same number of people it acquires — with a churn of 17.44% it loses exactly 695 paying subscribers a month (3,984 * 17,44%).
As a result, growth stops.
Now let’s see what happens if ALL the metrics (churn included!) are being systematically worked on over an entire period of almost 5 years and the KPIs are systematically raised up.
Here you can see an improvement reached by the digital team between month 1 and month 58 on the 3 metrics we have mentioned before (New Website Users; Conversion and Churn):
Here is the impact this hard work has on the paying subscriber base (which of course directly impacts your Monthly Recurring Revenue!):
The business is now set for growth and should reach 10k paying subscribers in no time.
KPI #4 – Customer Acquisition Cost
This final KPI is about how much you spend on acquiring one paying subscriber.
It’s my favorite KPI — mostly because it influences or is influenced by all the 3 previous KPIs mentioned above.
Plus it’s very tricky to calculate. More on this in a second.
CAC < LTV/3
CAC – Customer Acquisition Cost
LTV – Customer Lifetime Value
LTV = ARPA / CHURN
ARPA – Average Revenue Per Account
LTV – Customer Lifetime Value
Churn – Percentage of paying subscribers who are canceling or not prolonging their subscription within the billing period
Let’s say that your ARPA (your monthly subscription fee) is $19.
Your average monthly churn is about 9% (quite a bad churn for software subscription but alright for a content subscription business like a fitness app or yoga app).
In such a case your LTV = $19 / 9% = $211
So, your goal should be to bring your CAC (Customer Acquisition Cost) below $70 ($211 / 3).
The next big question is: what costs should you include in your Customer Acquisition Costs?
The biggest chunk of these costs will always be taken up by your media budget, affiliate commissions, and — in the event that your acquisition requires contact with a sales rep — success commission fees.
CAC = Your direct acquisition costs / newly acquired paying subscribers
Let’s say that in the above situation you have acquired within a month 300 new paying subscribers.
Within the same month you have spent:
- $10,000 on Facebook advertising (overall spend on content promotion, lead acquisition, and direct sales ads);
- $8,000 on Adwords (which includes your Youtube advertising, Search ads, and Google Display Network ads);
- $3,000 on Influencer fees;
- There were no sales commission fees.
In such a case your CAC = ($10,000 + $8,000 + $3,000) / 300 = $70
What’s always tricky is calculating the cost of your marketing team, software and digital assets production (like content production).
If you are thinking about growth though, I would always recommend that you don’t include these costs in the direct cost of acquisition.
It’s more worthwhile to instead think about how you can get control over these costs and stabilize them over time, without compromising on the quality of produced assets and the expertise of the team that works on your business.
Optimization of your Customer Acquisition Costs is about:
- The skillset of your Media Buyers
They should know how to target based on additional interests and lookalikes of current customers, maximize the potential of each traffic channel, and how to benefit from synergy (using multiple channels at the same time via remarketing for example).
- Your organic traffic acquisition strategy
There is no better way to drop your overall acquisition cost than by growing your organic channels. This can be done by working on your SEO and building an engaged online community on channels like Instagram or Facebook.
- Your referral strategy
Another great way to lower your overall acquisition cost is to encourage your paying subscribers or freemium subscribers to invite their friends to join. Creating a fully functional referral strategy might take some time (there is no one strategy that fits all), but the sooner you start the earlier you will succeed.
- Data analysis skills within your team
By collecting data from multiple sources and attributing it to the final conversion, or even better to the actual lifetime value of the acquired paying subscriber, you can discover the true potential of your traffic channels, and make smart decisions on which channels are ready for scaling, and which require more optimization. It is probably the most advanced part of your Customer Acquisition Cost optimization so you might need to engage Data Scientists / Analytics Experts to help you make sense of it.
In my next article, I will share 4 powerful growth hacking strategies for optimizing the 4 KPIs mentioned above.
But at the end of this article, I just want to touch base on…
The ultimate ELEMENT that impacts it all
I am talking here about the health and skillset of your digital marketing team.
Especially because — as you will see in the upcoming article — the best strategies impact a few of the KPIs simultaneously so you can hack your growth rate.
Below you can see the growth of one of the businesses we were supporting. Pay attention to the period pointed with an arrow (March to June), in which growth plummeted.
It happened as a result of a team crisis, not as a result of a change to acquisition strategy or traffic channels.
The team was changed and the skill combination within the new team didn’t match the requirements of the growing business.
Without this dip, the business would have over 5k paying subscribers by now, instead of slightly above 4k.
Some recommended further reading to expand your subscription business know-how:
- If you need more business justification and examples of successful subscription models, check out John Mullins’s article on recurring business models.
- If you want to learn more about the metrics in subscription businesses, check out “The Automatic Customer” by John Warrilow.
- If you are just still shaping your subscription business, this book contains different ideas, broken into neat categories — “Membership Economy” by Robbie Kellman Baxter.
> More book recommendations by Tribe47 can be found here.
Now, What’s Your Story?
Has this article sparked a question for you? Do you have a subscription business experience you would like to share? Post your questions and comments below or reach out to us via our contact form. We love learning more about this type of business and would relish the chance to help you grow.