As part of our “Best of Subscription Show” members-only series, we’ll look back at some of our most popular speakers and sessions and share key takeaways that show why this information remains relevant and how you can use it to grow your subscription business and inform your decision making. In this article, Mark Stiving, Ph.D., from Impact Pricing LLC shares his insight on the importance of growing customers, instead of focusing solely on retention and acquisition.
When it comes to growing a subscription business, acquisition and retention are usually the main focus for most companies. Yet, as Mark Stiving, Ph.D. from Impact Pricing LLC pointed out to attendees at Subscription Show 2021, growing a customer base is the key to growing a business long term.
To change one’s mindset from focusing exclusively on acquisition and retention, Stiving offers three models that can support subscription businesses. When utilized together, these models can help business owners place a higher priority on getting more value out of their current customers, thereby, increasing their bottom line.
Model #1: Win. Keep. Grow.
In traditional businesses, winning new customers is a pretty straightforward process. Invest more money into marketing and sales! In the subscription industry, however, the process differs. Subscription businesses still build products or offerings, and market and sell those offerings. But instead of winning big-paying customers, subscription businesses are winning much smaller revenue…at first.
“If we want to keep winning money, we have to keep winning customers,” says Stiving. “And not only do we want to keep winning customers, but we also want to grow our existing customers.”
Winning, keeping and growing customers all sound like the same goal — increased revenue. But they actually fall into different revenue buckets, according to Stiving. In addition to these three different types of revenue, there’s another important category that subscription businesses must track: customer success.
“Customer success is, ‘Are you actually using my product? Are you actually getting value out of my product?’” says Stiving.
This is a crucial difference between traditional businesses and subscriptions. Traditional businesses rely far less on repeat business than subscription businesses. For a subscriber to remain a paying customer, they must feel like they’re getting value from the product or service. Otherwise, they’ll experience subscription fatigue, end their subscription, and move on.
“We want to make sure our customers are actually using our product and getting value. And that means they’re much more likely to not churn. They’ll stay with us and have a longer customer lifetime value when we do this,” says Stiving.
So how does a subscription business grow?
Usually, subscription businesses start off by growing the exact same way as traditional businesses: win customers through sales and marketing. However, ensuring customer success must run alongside those efforts. A low retention rate makes it difficult to grow the company.
As the customer base grows, the focus then needs to shift to retaining all of the customers won. Then, once retention processes are in place, companies need to focus their efforts on how to get more revenue from the retained customers.
Stiving encourages businesses to ask themselves several questions:
When it comes to winning customers…
- How am I going to win new customers?
- What are the things I have to do to reduce my customer acquisition costs?
When it comes to keeping customers…
- How do I keep my customers?
- How do I keep them paying me money month after month?
When it comes to growing customers…
- How do I grow the revenue of a customer?
“All three of these are very different sets of tactics and strategies that we have to implement if we expect to grow our company,” says Stiving.
Model #2: Three Value Levers
Another framework that can be used by subscription businesses is value levers: market segment, packaging, and pricing metrics.
“These three value levers are decisions we have to make as a company to figure out how we’re delivering value to our marketplace and how we’re asking our customers to pay us for the value we’re delivering,” says Stiving.
Each of these levers is important to consider and can be challenging to do right. Market segmentation is all about discovering a specific set of customers and meeting their needs.
“The single best approach I’ve ever heard for market segmentation is, ‘What problems are you solving? Can you find a set of customers or individuals that have a common set of problems?’ And once you understand that common set of problems, you can create products for that market segment [that they] dearly love,” shares Stiving.
If the problem a market segment faces is understood, it becomes easy to develop effective marketing messages that truly resonate with that market segment. It doesn’t matter if the customers are in the same industry or in different industries. What matters is if the problem resonates with them, do they experience that problem, and are they willing to pay money to solve this problem.
This differs from price segmentation because within the market segmentation, there are different groups of people who are willing to pay a lot to solve their problems and others who want to pay very little. Price segmentation can and should happen within a market segment. But determining those groups of people should be based on the market, not on price alone.
“What you’re trying to do is find the right level at which you can truly resonate with your market and build products that they love,” says Stiving.
Starting with a niche segment and building a product that delights them is a great idea. From there, and after achieving some success, businesses can expand into other products and find other market segments. This can be done on their own or through data co-ops.
“The better you define your marketing segment, the better your products and marketing will be,” says Stiving.
Packaging segmentation behaves differently in the world of subscriptions than it does in traditional businesses.
“If we buy the expensive one, maybe we’re wasting money. If we buy the cheap one, maybe it’s not good enough. So we buy the one in the middle. That’s why we buy ‘good, better, best’ in products. In subscriptions it’s very different,” says Stiving.
In the subscription industry, subscription businesses aren’t tricking buyers into assessing the value of the product or service. Instead, “good, better, best” is used as a way to get someone involved with the subscription. And the more they use it, the more they love it, and eventually, they may upgrade themselves to the “better” package. As they continue to experience the subscription at the “better” level, eventually they may upgrade themselves to the “best” package. (Rundles are also a great way to get subscribers to upgrade themselves.)
“We create packaging so we can help buyers get into our product line and over time spend more and more money with us,” says Stiving.
One of the best ways to figure out a packaging strategy is to monitor the usage of products. This data provides insight on how to incentivize the upsell. Knowing who is using a product and how much or often can help business owners determine where those features or offerings need to be within their packaging strategy.
Packaging, of course, ties right into pricing metrics. A pricing metric is what a business charges for the subscription. Stiving differentiates that from a value metric because a value metric is how customers measure the value they get from a company.
“Ideally, our pricing metric and our customers’ value metric are very highly correlated,” says Stiving. “What we want is the more value our customers get, the more money they want to pay us.”
There are many options for pricing metrics. An obvious one for subscription businesses is per user, which according to the Key Bank Report, about 40% of businesses utilize. Of course, there are many different ways to do it.
“My recommendation is to brainstorm the heck out of these. Create a huge list and figure out what are all of the possible things you can charge for, don’t put value judgments on them. And then forget all about it and ask yourself, ‘How do my customers measure value?’” urges Stiving.
Considering how customers get value from various offerings will serve as a better guide on how to price those offerings. With that understanding, it becomes easier to discern from the list of pricing metrics which one is most highly correlated with the way customers are getting value.
According to Stiving, optimizing any one of these value levers will improve a company. But because they’re such powerful tools, they require a lot of internal coordination.
“If you revisit them, you have the possibility of delivering value in a way that makes more sense to your marketplace and makes them more willing to pay you money for your products,” says Stiving.
Model #3: Four Ways to Grow Customers
There are only two ways to grow a subscription business: win new customers and grow current customers.
Both are easier if current customers are retained. But how can companies grow customers? According to Stiving, nearly all subscription companies ignore this revenue bucket, despite it being a very powerful way to grow a company. Price Intelligently conducted an analysis of over 10,000 blog posts in the subscription industry. Seventy percent of those posts focused on acquisition; 20% focused on retention, and 10% focused on monetization. This is a great indication of the focus of most subscription businesses.
Growing customers often doesn’t feel important because it’s not as urgent as winning and keeping customers. Over time, however, companies develop a huge customer base and their priorities shift. A large customer base means acquisition isn’t quite as urgent as when the company first started. Retention then becomes the most important focus for many businesses.
But, with a larger customer base, growth of the customer base actually becomes more important, though it never becomes more urgent.
“What is urgent? Urgent is, ‘If I don’t pay attention to this, I lose my job. If we decide we’re not winning customers, we lose our jobs. If we get churn rates that are really high, we lose our jobs.’ But if we don’t grow revenue from our current customers, nobody knows,” says Stiving.
From a company perspective, urgency is rarely behind growing revenue from current customers. But to grow long-term, subscription businesses must shift their focus to growing their customers.
There are four ways to grow a customer: raise prices, upsell, cross-sell, and usage.
“What’s fascinating about the four ways to grow a customer is they’re tightly related to the value levers,” says Stiving.
Raising prices works if there’s a clearly defined market segment and a product that is delightful and addicting for that market segment. In this case, raising prices is easy because this market segment will continue to pay, even though the prices are increasing. This happens when a company understands its customers so well and solves their problems so well that the customer is more than happy to hand over their money for the solution. Think Apple.
Upsell is directly tied to packaging within the value lever system. If a “good, better, best” package is available and makes sense to the customers, they’ll be attracted into a business’s portfolio in the “good” category. As the customers learn more about the product and use it, the company has the ability to put programs and plans in place to get them to buy up into the better or best package. Think DirecTV.
Usage is directly tied to pricing metrics within the value lever system. A company could charge for x usage of any widget. As people use more and more of that widget, they pay more money to do so. And they’re happy to do it because that usage is directly tied to the value they’re getting from the widget. Think PayPal.
Cross-sell is the only one of these four strategies not directly tied to any of the three value levers. However, it is adjacent to packaging and market segments. If a company understands its market segments well, they’re able to create other products that are similar to its current products and solve different problems. And if a company understands its market segments well, usually it has established a great relationship with its customers, which means they’re now willing to buy more because they know that the company is going to support them in solving their problems. Think Nike.
In growing a business, Stiving sums things up this way: “Expansion has to be planned and it has to be made an important, urgent problem inside your company.”
Subscription businesses have a lot of opportunities to make changes within their organization that can have far-reaching impacts. The first of which is to change their mindset from a strictly acquisition and retention focus, to also placing urgency and priority on growing already existing customers. By using any one of the three frameworks discussed above, subscription businesses can increase the lifetime value of their customers and increase their bottom line.
Mark Stiving, Ph.D., offered three subscription frameworks to Subscription Show 2021 attendees to help them increase growth.
#1 Win. Keep. Grow. You have to make separate decisions and focus on each of those revenue buckets individually.
#2 Value Levers. There are three value levers — market segment, packaging and pricing metrics. You get to make decisions on each of these within the business which will determine how you create value and deliver it to your customers.
#3 Growing Customers. There are four ways to grow an existing customer and get the maximum value out of them: raise prices, upsell, usage, and cross-sell.