EP58: How to Build, Market and Sell Profitable Subscription-Based Products and Services with Kathy Sexton
Kathy Sexton is a CEO and Publisher at Subscription Insider. She is an executive leader with specialties in market strategy, brand development and digital information products.
In this episode, Kathy talks about how to build, market and sell profitable subscription-based products and services, the different subscription payment operations that drive higher profitability and also shares different customer success solutions that is available in the subscription industry.
Why you have to check out today’s podcast:
- Learn how to calculate expected Customer Lifetime Value (CLV) value in order to create profitability quicker in your subscription business
- Learn how to use customer data to optimize your subscription pricing
- Rules and regulations that you should understand about subscription deals
“Make your products easy to cancel, make it a great experience and people will come back.”
– Kathy Sexton
Get COV’s Pricing Metrics:
The Most Important Pricing Decision in a Subscription Business Course at https://www.championsofvalue.com
01:31 – How she got started in subscription and what is her mission in the subscription industry
03:32 – What companies does subscription economy cover
06:22 – The differences and similarities of subscription companies
08:08 – Of take-rate, acquisition rate, and retention rate
14:02 – Are insurance companies under a subscription economy
14:48 – Cohorts versus direct marketing
18:20 – Big Pricing issues in the subscription industry
19:50 – What is a negative option
24:15 – Rules and regulations that you should understand about subscription deals
“Talk to your customers deeply and really understand them. Understand the nuances that don’t come through a survey.” – Kathy Sexton
“Honestly with any business, you want to have that direct relationship with your customer. So if they have any issue, they come to you first and not to some third-party provider, the worst thing you want is just to have a cancellation. No reason why you’ve lost that business and no way to recover it.” – Kathy Sexton
“Good business is making it easy, very understandable, and then people are going to want to do business with you.” – Kathy Sexton
People / Resources Mentioned:
Connect with Kathy Sexton:
Connect with Mark Stiving:
Full Interview Transcript
(Note: This transcript was created using Temi, an AI transcription service. Please forgive any transcription or grammatical errors. We probably sounded better in real life.)
Kathy Sexton: I would really want your listeners to talk to their customers deeply and really understand their customers. What I want you to do is to understand the nuances that don’t come through a survey.
Mark Stiving: Welcome to Impact Pricing, the podcast where we discuss pricing, value, and the recurring revenue relationship between them. I’m Mark Stiving, today our guest is Kathy Sexton. Here are three things you want to know about Kathy before we start. She is the CEO and publisher at Subscription Insider. That’s why we’re talking to her. She’s really important. She was on the Board of Directors of Software and Information Industry Association for many years and she’s an avid skier with a wrist injury. I’m thinking you don’t do it right if you’re skiing on your wrist. Welcome, Kathy!
Kathy Sexton: Well, I wasn’t trying to ski on my wrist. You know, sometimes it happens.
Mark Stiving: Sometimes, sometimes. Okay, so tell us about this subscription thing. How did you even get into subscriptions in the first place?
Kathy Sexton: Well, I’ve worked with a number of different business models, both software B2B and consumer-driven models that were advertising-driven and subscription-driven but geared towards consumers. So I’ve worked in it for years and had a deep interest in that, learned it in the trenches both on the B2B and B2C side and then worked in an industry association where we really supported companies that were really trying to understand the intersection of technology and whatever business model they were in. And a few years ago I actually literally had a near-death experience and decided, you know what, I really to do something that is really for myself and something that I can grow. And the subscription industry, the subscription economy’s just booming and given my background and experience in it, I want Subscription Insider focused across the whole subscription industry. And our mission, Mark, is one of education and empowerment. We want to help executives, whether they’re just starting out, whether they’re managing, you know, multi-millions of members and subscribers to help them do their job better and be more profitable whether they’re in finance, whether they’re in marketing where they’re in tech or whether the executive-in-charge of everything. So my mission is to help everybody get smarter.
Mark Stiving: Nice. That’s kind of like our mission too, as we like to help people get smarter and we focus mostly on pricing and value.
Kathy Sexton: Important, very, very important part of the equation.
Mark Stiving: Yeah. Pretty nice. When we talked last time, which we had a chance to just so the audience knows, we had a chance to chat a little bit a week or so ago. You had mentioned that you do B2C and B2B. Also, I’ve spent no time thinking about we ship out the physical products on a regular basis. Is that much of your business or is that something that people are really interested in?
Kathy Sexton: Well, the subscription economy has millions and millions of recurring revenues, subscription, and membership companies in it now and subscription box and direct to consumer is a big, big segment of it and it’s worth billions of dollars. The subscription economy, yes, it includes B2B, SaaS and IOT, but think entertainment. Those videos that you’re streaming, that is subscriptions, the newspapers that you’re reading online or other types of information, those are subscriptions. Your memberships to AAA are subscriptions and even your subscriptions to telecommunications, whether they’re wireless companies or cable companies, those are subscriptions. So we work with all different companies across the subscription economy. As I mentioned, they could be startups and they could be these multibillion-dollar companies that are just really trying to understand the latest strategies for dealing with something so they can get that extra little edge of retention and profitability.
Mark Stiving: Nice. And I guess the reason I asked that question is it feels like the box subscriptions is such a different business than SaaS online B2B type subscription business.
Kathy Sexton: That is a great, great question. And it is, and it isn’t. Do I sound like a consultant?
Mark Stiving: Right. There’s gotta be similarities.
Kathy Sexton: But the thing is this fundamental that are truly the same, but how you’re executing those fundamentals might be different. So when you’re looking at the financials and the payment processing and the recurring revenues and handling and managing failed payments, if you’re looking at retention and best practices of retaining your customers and understanding your customers and using retention best practices, there’s a lot to be learned from SaaS, from entertainment to be learned from the subscription boxes. There are some really great lessons that can go across the different types of business models that are in the subscription industry, but how they execute them might be different because it is a different model.
Mark Stiving: Okay. So as you were describing that, that makes so much sense to me and I’m going to put it in pricing terms for just a second. You could take a subscription box company and a SaaS company and say, well do they price differently or do they price the same? And I would have given probably the exact same answer.
Kathy Sexton: Yeah.
Mark Stiving: There’s so much similar and yet there are differences because of the situation or the environment and we just deal with it to the best we can. So I often think of a pricing best practices or first principles to say this.
Kathy Sexton: Well, I’ll give you an example of things that are similar that are different. I literally was just working with an expert on payment processing and there are some trends that impact recurring revenue that any subscription or membership company needs to know about. If you’re a SaaS company, your subscription is really like the lifeblood of a company that’s buying that software. So whether it’s a lower price point or a higher price point, your subscription is the lifeblood of supposedly, you know, we are assuming of that company. Now, when you’re looking at a box company, it’s a consumer. If you’re looking at a box company that’s targeting 20-year olds, they actually might be buying their recurring revenue products with debit cards or other types of digital wallets that are not traditionally considered as payment methods because that’s what they do today. So the basic process and the basic tactics of managing failed payments and tracking them and all of that is similar, but because your audience is different, how they interact with your brand is all going to be different.
Mark Stiving: That makes all the sense in the world. Absolutely. Do you write much on pricing in your magazine? Do people talk about pricing? Is it an issue? I mean I personally know it’s an issue, but I’m just curious how much the executives think it’s an issue.
Kathy Sexton: It’s something that is of keen interest across everybody that I talk to and a lot of confusion and lack of understanding about what is the best pricing strategy and understanding, you know if you’re recurring and you’re offering monthly versus an annual and what’s that price difference between that monthly and annual? How does that impact the take rate at the front end and how does that impact the lifetime value? So people understand that the pricing can have a really significant impact on their business and you know, trying to understand, I mean that’s the lifeblood and trying to make sure that they’re doing it right and killing it. Doing it well.
Mark Stiving: Yeah. It’s kind of interesting that a lot of people focus on that. What’s the take rate going to be, or what’s my acquisition rates going to be? And then I trade that off against, well, what’s the retention rate going to be? And I love that you said those two. And it’s also pretty typical to me that most people don’t talk about the third bucket, which is equally important, if not more so. And that’s how I grow those customers, right? How do I get them to buy more from me than they bought last month?
Kathy Sexton: Yup. Yeah, it’s your intake, it’s your attention and then it’s your expansion. And you know, if I can get on my soapbox a little bit about tracking all this stuff, it’s so important for anybody that’s listening. And I’m sure you, I know you talk about this all the time, understanding where you get your customers from and setting up a system so you can track that customer through their lifetime and truly understand the lifetime value by acquisition source is so important for you to create profitability quicker in your business. And a really simple example is if you get somebody in via pay-per-click and your product is $100 a month, they stick around for two months. Woohoo, you got $200 all right, but what if they came in via a referral channel and they stick around for eight months? That’s $800 and that information can inform how you want to invest in each of those channels and get more aggressive where you’re going to have more profitability. And it’s shocking to me, literally shocking. I have been in rooms with hundreds of people from some of the biggest subscription brands you could think of that you would think are the most sophisticated at this. And I will ask, how many of you, raise your hands, can measure your profitability by acquisition channel and maybe a couple of hands will go up and it’s shocking to me because that is the lifeblood. And then you take that concept and then you’d be able to twist the prism a little bit to understand the pricing, to understand other dimensions in your business. Then you’re really in control and you can really understand what’s going on. And it’s a skillset, that I think as an industry we could be stronger at. And I also see the beginnings of some great technology that’s helping people track this in a more efficient way through the subscription management platforms, through some, you know, add-on technology and data providers. So it’s a growing awareness that is much needed in to be managed. So I’ll get off my soapbox now.
Mark Stiving: I actually love that soapbox. I didn’t realize that is such a big problem. Let me explain what you just said. Using the words that I would normally have used and that is what’s the cohorts of clients that we’re going to take an assure against. And the way I think about this, and I’d love to hear your opinion on what you see out there. The way I think about this is every single customer, I could have a bunch of different data points or pieces of information about it. So what part of the country do they live in or what program did they come under? What month of the year did they join us or what was the marketing plan that I use to capture them or, so those are just data points that I could use for that customer? Right now I can step back and take all my data and say, well, let’s look at the cohort of customers who joined us in March. Okay, so that’s a cohort. Is March more profitable than other things and what was the cohort of people who came through referral and are they more profitable? Yeah, I would think that everybody’s doing this.
Kathy Sexton: Well, I think there might be discerning awareness and talking about this, but the tools to really do it and the skillset across organizations I don’t think is deep enough. So for example, with SaaS, I think the SaaS industry as a whole is maturing with this type of data and so they’re getting some tools and discussions and a lot more awareness on this type of discussion across the different teams. You look at the subscription boxes as a whole. There are some companies that are really sophisticated with this and then there’s some that are still focused on the acquisition and bring in everybody in the top and they’re still learning that retention lesson, which is a tough lesson to learn if you’re not focusing on that as a recurring revenue company. So it’s, you can drown in data, but you still can’t see the forest through the trees. And it’s really looking at the right data with the right filters and understanding how it’s impacting your business and where you can pull some different levers.
Mark Stiving: I guess I could see that. Do you think of insurance companies as subscription companies?
Kathy Sexton: That’s actually really interesting because they do bill, you know, year after year. And I’ve actually think I’ve had one or two insurance companies come to our events, but I wouldn’t include them in my traditional example when I list.
Mark Stiving: Okay. I was going to use them as an example, but let me use the New York Times instead. Right. So the magazine or newspaper or something like that. So when I think of a very traditional type subscription business, I could see how they’re not doing the things we just talked about in terms of cohorts because it’s never been part of their thought process or their lexicon. Whereas the new people coming out, this is what they learned. This is how you learn the business is to go run cohorts. Does that make sense or not?
I think that it’s an assumption that is not necessarily going to prove itself out. And the reason why I say that is some of these companies have some brilliant that have been around for a while, have some brilliant, I mean off the charts, brilliant people and in a skill that’s referred to as direct marketing and a lot of the newer kind of companies and tactics and all that stuff kind of, maybe they won’t admit it, but look down on that. But here’s the thing, you talk to somebody in direct marketing, they know the profitability of every single thing in their business and they can scale because they’ve worked with thin margins and they can scale things. And typically these companies are very, very sophisticated. Some of the stuff that the New York times and the Wall Street Journal and the Washington Post and all these, they are doing some amazingly sophisticated things with a paywall, with AI, with you know, the skill sets that they have. So their skill sets. So I don’t want to say it’s an incorrect assumption, but I think that just because something’s new and just because people are using the word cohort, it doesn’t mean that they’re really driving their business and using that as an effective way to grow profitably. Where some of these other companies who’ve been doing it for decades have learned some really, really hard lessons and have brought in some people with some of this new skill sets with AI and you know, all the data and all that stuff and they’re doing some really interesting things. I mean the New York Times has really transformed itself in many different ways. So actually that’s a great example of using some old old skills and new skills combined to really, really grow.
Mark Stiving: Yeah. Nice. Nice.
Mark Stiving: Time out for a quick ad.
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Mark Stiving: All right. Where do we want to take this? Tell me the biggest well, we’ve already talked about the biggest pricing issue. Do you have any other big pricing issues in the subscription industry?
Kathy Sexton: Well, I think that, well software has to grapple that there are several different things that I think people need to be aware of. Number one with the offer. Many companies in recurring like to offer a free trial, many tests with freemium or do sampling or do other things. And I think those are really, really good to trust and to try because free trials can bring in people to test out your product. There’s just things you need to be aware of that if you’re in eCommerce you’d be oblivious about the rules and regs that the government wants you to adhere to when it comes to free trials in terms of notification, the free trial ending, ability to cancel in the same way that they’ve joined. There are increasing amounts of regulation that are coming out of DC and the States related to free trials and this increased action against companies too as well as making claims. So you have to be aware of what you are allowed to do. So you don’t get into hot water inadvertently. And consumers these days, business and consumers are much more sophisticated about what the rules are and if they think you’re crossing that line, they will let you know.
Mark Stiving: Yeah. And do you write about the rules in your magazine?
Kathy Sexton: Oh yeah. Yeah. We work with a lawyer who actually an expert in auto-renew as the lawyers call it a negative option and a negative option, the definition is when you take a free trial, you’d have to give your credit card and then as soon as the trials are done, you start getting charged. The consumer does not have to, you know, doesn’t opt-in again to give you the card. So the negative option, there’s a lot of regulation and rules around that. So yeah, we write a lot about that and it’s with increasing frequency because there are just a lot of things going on. There are companies that are just doing outright fraud that the FCC is going after. And then there are companies that are just not doing things in a smart way, like making it difficult to cancel and that’s caused a lot of regulatory examination to make sure that it’s easy to cancel. And honestly, I mean, you know this, if you make your product easy to cancel, it might seem counterintuitive, but people will come back. It just might mean that they don’t need your product for now. And if they have a great experience canceling and they don’t have to click 50 million boxes to cancel or you know, threaten a lawsuit to cancel…
Mark Stiving: Search for a phone number on-site and call somebody.
Kathy Sexton: Oh, Oh, Oh, I got to tell you a secret here. The thing I did not, so if you were going to ask me a question about what was the one thing I did not expect when I started this business, it would be getting calls from every other subscription company on the planet from their customers trying to cancel their product.
Mark Stiving: Wow!
Kathy Sexton: So we get calls daily. So that’s why I had to make sure this got turned off because I have a softphone in here and we get emails and we get phone calls from consumers who are trying to cancel. Think of the newspaper, think of magazines online, you name it. They are trying to cancel and they had it tough time canceling and they google it and we’ve maybe written an article about them. So suddenly we’re in the middle of the results when they’re trying to type in and we have our phone number because we do what we practice. And so we get those people calling and it’s crazy, I get to say it’s crazy. I mean just, I feel bad for so many of these people because they just want to cancel the product and they’re frustrated. Some of them are really, really mad. And when I see the customer service line and I see like somebody calling like five times, I know it’s just somebody that’s beyond belief, like frustrated cause they’ll call and we’re not the company. They’ll call, we’re not the company. They keep thinking if They got the wrong number. And so I’ll call and I’ll explain and oh my goodness, they’re just so frustrated. So make your products easy to cancel, make it a great experience and people will come back.
Mark Stiving: That actually sounds like a business opportunity if anybody wants to start a business on how to help people cancel subscriptions.
Kathy Sexton: Well actually it’s funny that you mentioned that Mark, because there are companies that are doing that and the credit card companies now, are starting to offer tools. So within PayPal, you can manage some subscriptions there. Some of the issuers are beginning to develop tools and then there are outside services where you can put in all your subscriptions and they will cancel them for you. So honestly with any business, you want to have that direct relationship with your customer. So if they have any issue, they come to you first and not to some third-party provider, the worst thing you want is just to have a cancellation. No reason why you’ve lost that business and no way to recover it.
Mark Stiving: Yup. Okay. I got to go back to something because when you were talking about one topic, I could just hear that everybody in the audience screaming at me. What are the rules? What are the rules? So the rules on I get your credit card on the free trial and I want to continue charging after the free trial’s over. Now it’s probably really complex and nuanced but give us a high level.
Kathy Sexton: So when somebody is designing your page, in general, you need to make sure that there’s a language that you’re going to be auto-renewing above and near where the I accept and I’m going to process this free trial. So that’s kind of point number one. And at our last.
Mark Stiving: So hang on, without being super specific about that. What you really just said was to be honest with the clients, be honest with the buyer.
Kathy Sexton: Absolutely, absolutely. And don’t hide it in gray font on a slightly darker gray background and assume that you’ve done that. Or if you’ve got a two-column type of page and all the language is over here in the order, information is over here. That’s not necessarily gonna get you into good graces because you want to make sure that people are really understanding it. And one just quick aside, we had Leslie Fair keynote at our last subscription show and she’s the lead attorney for the consumer protection Bureau of the FTC. And she delivered this drop-dead funny presentation and it was great. And talking about regulation and what we all need to do. And one of my favorite slides was like this old kind of English scroll. And what it said was, you know what the headline gives us the footnote cannot take away.
Mark Stiving: Ah, nice. Yes, yes, yes. So instead of saying, be honest, let me say that differently then make sure the buyer knows that they’re about to subscribe in perpetuity or until they cancel.
Kathy Sexton: Right. So you want to have a language that it’s very clear that they are going to be built every 30 days. If you’re billing them monthly, but it’s really 30 days, then you need to say it’s every 30 days or you’re billing them at the end of the month. Okay. Or the first of the month. So you need to be very, very clear about that and when they enter a free trial, you need to send communications to them to let them know that their free trial is ending and be very clear about that on day for this, you know, different things there but you need to communicate them so that they have an opportunity to cancel out. That’s regulated. Now best practices, you want to do that anyway because you don’t want to have people calling you up when they see their first charge and calling up the credit card company and then you start getting chargebacks and complaints and then you starting now to pay fees to the credit card companies because you’re a higher risk and you’re getting a lot of chargebacks. So you know the regulation is there. But honestly good business is making it easy, very understandable. And then people are going to want to do business with you.
Mark Stiving: Kathy, I can have these conversations all day. This is so much fun, but we got to wrap this up.
Kathy Sexton: Okay, I know, I know. I know.
Mark Stiving: What’s one piece of pricing advice you would give our listeners that you think could have a big impact on their business?
Kathy Sexton: The pricing advice. I would really want your listeners to talk to their customers deeply. Okay. And really understand their customers. So I want everybody that’s listening here to take one of their customers out to lunch. I know you were not expecting this answer, but what I want you to do is to understand the nuances that don’t come through a survey and they don’t understand through surveying and all the wonderful tools that we have. Get out there and do some qualitative interaction with your target customer and what’s going to come out of that Mark is an understanding of some value that you’re providing to that customer that you would never understand if you had just done a survey. And then through that you can understand better if your pricing is appropriate or maybe you could do an add on or do something different, but you really need to get into your gut. Really know that customer. Get on the phone if you can meet them in person, but do it. And then you can really understand how you’re serving that customer and where there might be some more opportunities, whether it’s raising prices or doing some add ons as I mentioned.
Mark Stiving: Okay, so that was an awesome, awesome answer and the only thing that was wrong with it was when you said, I wouldn’t have expected that. I teach this constantly. I have to go listen to our market. We have to understand how much value we’re delivering, how do they perceive the value of our products? If we’re not doing that, how are we ever going to figure this game out?
Kathy Sexton: I know.
Mark Stiving: Nice, awesome answer. Awesome. Kathy, thank you so much for your time today. If anybody wants to contact you, how can they do that?
Kathy Sexton: Well, you can head on right over to subscriptioninsider.com. You can reach me at email@example.com but everything’s over there and you can check us out.
Mark Stiving: Excellent. All right, episode 58 all done. Let’s see. My favorite part of today’s podcast had to be learning about the rules that I’m breaking for subscription trials. So we’ll go fix those pretty soon. What was your favorite part? Please let us know in the comments or wherever you downloaded and listened, and while you’re at it, would you please leave us a five-star review? They’re very valuable to us. Don’t forget to head on over to championsofvalue.com where we’ve got the free community that you can join and you can also now subscribe and get all of the contents there, all of the courses. You’ll see that as the insiders. If you have any questions or comments about the podcast today or about pricing, in general, feel free to email me, firstname.lastname@example.org.
Now, go make an impact!
Mark is a pricing expert who helps companies understand value, how to create it, communicate it and capture it. He has a PhD from U.C. Berkeley and an MBA from Santa Clara University, plus 25+ years pricing experience. As an educator, speaker and coach, Mark applies innovative, value-based pricing strategies to guide growth and increase profits for large and small companies.