Often, we think about and manage one revenue bucket at a time, WIN, KEEP, or GROW. Doing this we can be more focused and the goals are more clear. However, when making changes to improve one revenue bucket, we should consider any effects on the other ones. What follows is a clear example of one of these situations.
The first two revenue buckets subscription companies must manage are WIN and KEEP. You have to win customers and keep customers in order for a customer to be profitable. By profitable, we mean the LTV (Lifetime value) is greater than the CAC (Customer Acquisition Cost). Ideally, the LTV is greater than 3 times the CAC.
Imagine you set a price for your subscription product. For simplicity, let’s call it $100 per month. You launch marketing and sales programs to convince buyers it is easily worth that much money. You are able to win customers with this strategy, but not as many as you’d like. However, your churn rate is incredible, lower than 1% per month. To summarize, WIN is less than ideal but KEEP is stellar.
Then, someone has a brilliant idea: “If we offer the first 3 months at $10/month we will WIN more customers.” After gaining some level of consensus and launching the program, it’s a huge success. You win twice as many customers with this new customer acquisition strategy. WooHoo!!! But then 3 months go by and suddenly churn skyrockets. The reason is obvious. Many buyers thought your subscription was worth $10/month but not $100/month. They left when the price they had to pay dramatically increased.
OK, but was launching this promotion a good or bad decision? The way to tell is to create a cohort out of buyers who signed up using the new promotion. (A cohort is a subset of customers used to calculate metrics around specific tactics, market segments, or other business decisions.) Then, you can calculate the LTV and CAC of this new cohort to determine if they are profitable. Do they generate more or fewer profit dollars than the buyers who buy at full price?
Interestingly, the Economist just decided to eliminate a deeply discounted offer to win customers: Retention by Subtraction: How The Economist Reduced Churn. They found that their price sensitive customers were not profitable enough.
What should you do? It may make sense to offer deep discounts to attract buyers. If it dramatically lowers your CAC, more people get to experience the value you deliver, and many choose to stay long term, then it’s possibly a good decision. The numbers should tell you.
Tags: pricing, subscription pricing, winkeepgrow