6 Secrets to Accurately Projecting Subscription Revenue

Its no secret that the Subscription business world is experiencing a meteoric uprising. Virtually every industry is manifesting its own flavor of the subscription

It’s no secret that the Subscription business world is experiencing a meteoric uprising. Virtually every industry is manifesting its own flavor of the subscription business model. The Darwinian wars of the streaming music and razor industries alone dominate headlines as elevated investor activity swirls around the attractive promise of the recurring revenue model. As a performance digital marketer specializing in the Subscription business space, I have seen first-hand the complexities of succeeding in standing up and nurturing a lucrative subscription business. One of the trickiest aspects of ensuring you are on solid footing with your subscription business is accurately forecasting revenue.

Here are six crucial things I’ve learned in my career to help you on your way:

1. Customer Lifetime Value (CLV) must be your cornerstone KPI

Customer Lifetime Value (CLV) is the starting point for all subscription revenue projections and will remain the single most important KPI of your subscription business for the long haul. If you aren’t quite sure what your CLV is, don’t be embarrassed – but figure it out as quickly as possible, and make it your business to become utterly in-tune with it moving forward. You may not have enough data yet if you’re a newer business, or you may need to go back and take a hard look at the data you have if you haven’t pinned this KPI down yet – but here is a basic calculation to help you get started.

CLV = Monthly profit contribution per customer X Average number of months that they remain a customer – the initial cost of customer acquisition

It is essential that if your business is a subscription model that you have the following concept clear: E-commerce and Subscription revenue projections must be modeled out entirely differently. In an E-commerce model, based on the single-transaction, you can project your revenue and “close your books” at the end of your fiscal year with the understanding that the revenue generated on Day One of your next fiscal year is yet to be won. In a Subscription model, you will close your books at the end of one fiscal year with guaranteed revenue already on your books for the following year. How much revenue, extending how far into the year (critical for accurate projections) depends on your CLV.

2. Get honest about your brand awareness

Humans (and the businesses they run) are, by nature, self-centered. This is not a negative – we need to be hyper-focused on our brand to survive. The downside of our inherent self-centeredness is a hard truth I’ve witnessed with the vast majority of my clients: none of us are qualified to accurately assess our level of brand recognition in the world. This matters for a subscription business as we model our revenue projections because real brand awareness in the big wide world will profoundly affect what paid media will cost you as you grow your subscription base. If your brand awareness is low, you’ll need to adequately and consciously plan for building upper-funnel activity to feed your acquisitions, and it can be very costly. As long as you understand this, you can accurately plan for an aggressive initial investment, and model out for your stakeholders the path to greater brand awareness and lower cost-per-acquisition over time. There are many ways to get to an honest understanding of your company’s brand awareness. My favorite is through word-of-mouth social listening (there are many platforms out there and a handful of agencies that provide expert query and analysis services). The bottom line is, put your ego aside and invest a little in getting an accurate picture.

3. You cannot forecast revenue without a complete paid media strategy plan

Without an expertly assembled paid media plan, with performance projections for new subscriber acquisition on a monthly basis, churn length factored in, and cost-per-acquisition projections over time, your forecast is nothing more than a stab in the dark. In order to effectively forecast Monthly Recurring Revenue (MRR), you need to have an appropriately designed paid media plan to meet the specific needs of your business. Paid media plans should be custom-fit and based on a variety of factors including brand awareness, paid search landscape in your category, audience identification, geo-targeting, and the list goes on. If you don’t have the right people in-house to lay this foundation – hire a capable multi-channel agency to put this together. Give them your budget and goals, and ask them to put together a mix of media activity that will get you as close to your goals as possible. Get a monthly break down of how many new subscriber acquisitions they project and the blended Cost Per Acquisition for their plan. You’ll use this, along with your organic traffic performance projections and churn length, to deliver an accurate revenue forecast over time.

4. If your Cost Per Acquisition (CPA) forecast isn’t trending down – something is wrong

Once you have your media plan projections scoped out, take a quick look at the CPA trend. If that number isn’t going down, it’s a red flag. No matter what your initial brand awareness level, you should be planning to gain efficiency in your paid media investment over time. Your media teams should be learning what works, what doesn’t, and fluidly re-allocating media budget to the top performers. Working this way gets you more for your marketing dollar, but look at it as a way to free up more of your original budget to level up your investment in areas of the funnel where you are weak. Low brand awareness? Consider investing your freed up dollars in a holistic display campaign. Problems converting on your site? Use your newly found budget to invest in a Conversion Rate Optimization program. Every bit of efficiency gained sweetens the pot of recurring revenue.

5. Failing to manage stakeholder expectations is a fatal mistake

Managing internal expectations around subscription revenue forecasting is as important as your results. Without buy-in for elevated investments at a longer rate of return (in exchange for compounded recurring streams of revenue), it doesn’t matter how well you do in your first year. Many of the executive leaders responsible for growing a subscription offering for their companies have strong E-commerce backgrounds, but not necessarily Subscription backgrounds. Chances are, your leadership will need to make a crucial adjustment in how they interpret your revenue forecasts vs. their traditional fiscal year and P&L assessments. Don’t tell them, show them. Your revenue forecast for this fiscal year’s marketing investment should extend beyond this fiscal year in a subscription model. So, if you’re charged with a 2017 revenue forecast, and your fiscal is the calendar year, extend your forecast as far beyond December 2017 as your subscriber churn data allows. If you have a four-month average churn length, show the existing revenue sitting in 2018 through April, when the bulk of your December-acquired subscribers are expected to drop off. Rather than presenting “this is the revenue that will be generated in 2017” you will show “this is the revenue that will be generated by your 2017 investment.”

6. Establishing a baseline isn’t sexy – but you have to do it.

In the course of running a subscription business, especially in the early days – you will hear the siren’s call of the retention strategy. People will ask “have you put together your retention plan?” Take a deep breath. You’ve set up your media plan, you’ve launched your program, and you’re watching your KPIs. As time goes on, you begin to see customers dropping off, revealing your churn rate. Churn will bother you. It should! Do yourself a favor. Resist the temptation to get distracted from the critical mission of establishing a baseline of performance for your subscription business by plunging headlong into the development of a fancy retention strategy. You need to pin down your Customer Lifetime Value, your Churn Rate, and get a general understanding of your strengths and weaknesses in order to develop an effective retention strategy. Doing it on the fly can be fun, but muddies your understanding of what really influences your subscribers to stay with you longer. If you simply cannot wait- do it right by hiring a skilled Conversion Rate Optimization (CRO) provider who can methodically test your ideas and help you make decisions based on facts, not ‘gut feelings’ or ‘opinions.’

Sounds good? Hang on. Without the right data in hand, none of this is possible. At a technical level, you have to be sure that you have set up a sound attribution model and correctly implemented tracking on your program from Day 1. You need the correct data flowing into your reporting in order to do the downstream analysis that you need to run a sophisticated subscription business that models projected revenue and dictates appropriate paid media investment. 

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