This on-demand interview recorded live on May 26th, 2022 features a discussion with FlexPay CEO Darryl Hicks, and best-selling author and subscription expert Robbie Kellman Baxter, as they explore these lifetime value keys and why they are so often overlooked.
You will learn three impactful ways to build and maintain higher subscription customer loyalty, which leads to increased retention, revenue growth, and profitability.
Learn How To:
- Keep subscriber relationships fresh, engaging and wanting more
- Identify false declines to avoid involuntary churn
- Fill operational holes that typically lead to lost subscribers
- Calculate the financial value of a recovered customer vs a single month’s recovered transaction
On-Demand Playback
Presentation Slides (PDF)
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About Our Experts
Darryl Hicks, CEO, Flexpay
Darryl has been active as a successful serial entrepreneur and technology expert for more than 20 years. A pioneer in Card Not Present sales, Darryl has extensive experience building and managing technologically complex online and offline Direct Marketing businesses. Darryl is the CEO, and Founder of FlexPay, a transaction processing gateway that leverages machine learning to reduce credit card declines, as well as performing transaction cost and risk arbitrage. FlexPay was born out of necessity to optimize the significant volume of credit card processing within his Marketing and e-commerce businesses.
Darryl has founded or co-founded several successful B2C and B2B businesses in the past, servicing millions of consumer customers across four continents, and successfully exiting from two larger companies (2006, 2011). He has also served on the boards of multiple early-stage companies, holds technology patents, and serves as an active advisor to many e-commerce and Direct Marketing entrepreneurs.
Robbie Kellman Baxter
Advisor to the world’s leading subscription-based companies. Keynote Speaker, Author of THE MEMBERSHIP ECONOMY and THE FOREVER TRANSACTION. Helping companies develop and optimize membership models and subscription pricing. Deep expertise in subscription-based and SaaS businesses, and the Membership Economy.
Kathy Greenler Sexton, CEO, Subscription Insider
Kathy Greenler Sexton is the CEO of Subscription Insider and a recognized expert in subscription business models, market strategy, brand development, and information products. Subscription Insider is an information company focused on delivering news and insight for growing profitable subscription businesses. Learn more at www.subscriptioninsider.com and www.subscriptionshow.com
Transcript
Kathy:
So welcome everybody, this is Three Keys to Increasing Subscriber Loyalty. Good Morning, Good Afternoon, and Good Evening because I know we have people from all over the world with us today. My name is Kathy Greenler Sexton, I’m from Subscription Insider, and I am so glad that you are with us today. Today we have a very special discussion with Darryl Hicks who is the CEO of FlexPay and Subscription Expert and Best-Selling Author Robbie Kellman Baxter.
We are talking subscriber loyalty and specifically the keys to growing customer and subscriber lifetime value. So, this program is hosted by Subscription Insider, and we are the go-to resource for leading and growing brands for insight to run and operate your businesses more profitably. We offer a number of different programs just like this one for subscription executives. We basically help you grow and retain and grow your business profitably.
So there’s a couple things I want to make sure everybody’s aware of. We have a number of members on the call today here and next week, I am hosting a member-only meetup, and I’m going to be doing a training session on Customer Service, the key and sometimes difficult things you need to plan for that your subscribers are going to be asking you. So that’s going to be a great member-only meetup where we’ll be talking and discussing and learning about some key customer service issues.
I want to talk about Subscription Show 2022. Mark your calendars. We will be up on stage talking subscriptions and everything subscriptions November 9 and 10 in New York City and virtually. Subscription Show is where leading brands come to understand the latest trends and strategies in recurring payment optimization, subscriber retention, subscriber acquisition, subscription product strategy, compliance, and much, much more.
We have some amazing speakers. We cannot wait to tell you about, and we’ll be doing that very, very soon I promise you, but for now, I just want to let keep an eye out for those announcements, and at the end of June in about 30 days, our super early bird tickets will be going up in price. So if you’re going to be attending virtually or joining us in New York, please keep that in mind.
Kathy:
So with that, Darryl Hicks. He is the CEO and founder of FlexPay and FlexPay is a transaction processing gateway that leverages machine learning to reduce credit card declines, that is so key and a key issue we’re probably going to be talking about today as well as performing transaction cost and risk arbitrage.
He is a successful serial entrepreneur and technology expert and his past B2B and B2C businesses that he founded or co-founded serve millions of customers across four continents. FlexPay was born out of necessity to optimize a significant volume of credit card processing within his marketing and ecommerce businesses. Said differently, Darryl brings his extensive hands on experience in running and optimizing recurring businesses to today’s discussion, plus the unique expertise of a business that is involved in supporting subscription businesses now. Welcome Darryl.
Darryl:
Thank you.
Kathy:
Robbie Kellman Baxter, welcome. Robbie, for those of you who don’t know her yet, she is a leading subscription expert and best-selling author of the membership economy and the forever transaction. She is also an advisor to the world’s leading subscription-based companies, helping them develop and optimize membership models and subscription-based pricing. Her deep expertise in subscription-based businesses is going to be amazing as we dive into our discussion today.
Kathy:
And because this is a discussion and I’m about to turn off these slides, I encourage each and every one of you to take advantage of your time here with Darryl and Robbie to ask your questions as we go along. If we can’t get to all of them, submit them anyway because we’ll follow up with you afterwards. So with that, I’m going to stop the share and let’s get talking. So Robbie and Darryl, the last couple of years have been really positive for subscription businesses because there’s been this bump both for product and service-based subscriptions.
Kathy:
The pandemic lockdown, it really accelerated adoption. I would think I’ve seen that with online transactions, card not present transactions and the adoption to subscriptions. So with that, there’s been some recent headwinds and I’d love for you to really set the stage as we begin this discussion of what headwinds we’re seeing really even in the past few days and weeks and Daryl, why don’t you kick it off? What are you seeing that we really need to be mindful of the headwinds from?
Darryl:
Yeah, I think there’s headwinds facing the merchants, the businesses and there’s headwinds facing customers, right? So on the business side, we all know inflation is a real thing. Go to the gas pump, go to the grocery store, it seems like nothing has been left untouched and that’s really compressing margins in ways that we haven’t seen in a really long time for businesses, and there’s a lot of difficult conversations that have to be had internally in businesses.
Darryl:
This free spending, money printing, crazy high valuations for businesses, record high funds that have been raised by private equity and growth equity, that seems to be coming to an end or at least slowing down significantly. There’s an argument that maybe that pendulum’s even swinging a little too far the other way, but definitely seeing a lot of pressure and conversations that have to be had internally now about, “Well, if we’re facing a new reality, where are we going to cut?”
Darryl:
And I think that’s something that Robbie and I are pretty passionate about, about where you should and where you absolutely shouldn’t be as a subscription business be cutting. But that’s one thing, obviously, supply chain disruptions. We see this for all kinds of clients that we have in FlexPay. There’s nothing more frustrating than having a killer campaign that’s firing on all cylinders.
Darryl:
Customers are super excited about it. They’re engaging. Your media is finally performing exactly the way you want it to, and now you don’t have enough product to ship to people. And so you’re still left scrambling having to pull back on media budgets at the last minute, dealing with customer service complaints, bad for the brand. So that’s been a real challenge. And a lot of this is just leading to, like I said, tough conversations that we have to have internally in our business about, “Are we going to raise prices? If we are going to cut, where are we going to cut? How do we approach this?”
Darryl:
And nobody’s been left untouched in this whole thing, it’s really broadly across the economy. And on the customer side, inflation’s obviously also hitting the consumers. We’ve seen a real flight to quality, right? Everyone’s talking about even for traveling that the bar is so much higher for what’s going to get you away from your family and onto a plane traveling out somewhere, but the bar is also higher now. Everyone’s revisiting all these discretionary things that I signed up for during the pandemic.
Darryl:
Do I really need them? So there’s this discussion internally about what’s necessary and what’s discretionary. The bar is going much higher on the quality, not just quality, I would say too about the level of engagement and the passion that people have for what it is that they’re subscribed to. And I think that that’s only going to continue through the rest of this year.
Darryl:
I think we’re just seeing the tip of the iceberg as far as families reviewing their credit card statements and looking at the decisions that they’ve made and deciding what it is that I want to keep and what is it that I can afford to lose. And that’s what I see from my seat. I don’t know if you get anything to jump in with on that Robbie or-
Robbie:
Yeah, well, first of all, totally agree with what you said. There’s challenges on both sides on the customer side and on the business side. We’re coming off a period of so much growth generally, but especially for subscription businesses. COVID made subscriptions much more popular because it was much harder to go into stores and go in person. So there was a greater tolerance and willingness to try different ways of achieving goals on the side of consumers. So they were willing to try subscriptions.
Robbie:
So what happened is a lot of people subscribe to things at an accelerated rate. So subscription businesses saw great growth, and I think there’s an assumption that growth was going to continue indefinitely, but in many cases, that growth was really just pulling forward of prospects. So instead of the prospect buying in 2023, they’re buying in 2021, for example, with Peloton or with entertainment subscriptions, people were staying at home more.
Robbie:
So they were more willing to buy three … Subscribe to three or four different subscriptions. And as we’re coming out of that phase, as you said, consumers are reconsidering that, and they’re slowing down on their purchases. At the same time with inflation and with a rapid decline in market valuations, entrepreneurs and executives are being asked to cut spend.
Robbie:
And so those two things together, slowing growth and declining budgets creates a lot of temptation to cut corners on member experience. And I think in this moment, we need to be strong and say, “The most important thing is to stay true to our forever promise to the subscribers that we have.” We may need to slow down on growth and acquisition, and we may need to focus more on different metrics, EBITDA profitability rather than top line growth numbers.
Robbie:
So in this time, I think step one is recognize the headwinds. Step two, prioritize where the cuts need to happen. And three, set expectations with peers, investors, and shareholders about what they can expect in the coming months and why you’re making the decisions you are.
Kathy:
So interesting because when we started talking about doing this discussion, the three keys hidden in plain sight to increasing customer loyalty, we were really thinking of it because we were thinking … We’re talking about this months ago. So it was much more of a best practice and the market dynamics have really changed such that everybody needs to be focused on loyalty because that’s driving your LTV and it’s driving the profitability of your business.
Kathy:
So it’s really a must have for all of us. So let’s dive into it knowing that these headwinds are just really important for all of us. They’re going to be hitting all of us, whether we want it or not. What are you seeing right now in acquisition and churn? How about if we start with the acquisition and how does that relate to the subscriber loyalty? Robbie, I’ll go to you first and give each of you a turn.
Robbie:
Yeah, so acquisition is getting harder and more expensive, especially in businesses that have enjoyed rapid growth. They may have found all the low-hanging fruit and finding that their costs are increasing and the quality of those that they’re acquiring is potentially deteriorating. So one of the things that’s really important to keep in mind when you’re focused on acquisition is it’s not just about acquiring the next new subscriber.
Robbie:
It’s about acquiring the best new subscriber, and that’s about customer lifetime value. So this is a time to really understand who your best subscribers are and optimize your acquisition for them. That will have in turn a great effect on your churn rate because you’re acquiring the subscribers that are most likely to stay. This is also a time when it comes to churn where you really want to dig in and make sure you’re not … I think about active churn and passive churn.
Robbie:
Active churn is when somebody says, “I don’t want to subscribe anymore.” Maybe it’s too expensive and I can’t afford it. Maybe I found a substitute. Maybe it’s not something that I need right now. Maybe I’m disappointed with how you’ve treated me or the experience I’ve gotten, but it’s an active decision. There’s also passive churn, and that’s when something happens with your payments system and your subscription is canceled, but not because you wanted to cancel it, but because let’s say, your credit card number changed or the bank flagged something. Now is a time to fix that because making sure that you minimize passive churn is I think, and I know you agree with me Darryl, probably the easiest way to increase profitability and also to increase engagement and retention.
Darryl:
Yeah, definitely. I love the reframing that you put Robbie too around the growth that you’ve had, that you’ve enjoyed may not be sustainable. Of course, there’s no one size fits all here, but for most businesses, the growth that we’ve been enjoying may not be sustainable off into the future. And what a great way to kind of look at it and say, “Well, the customers that we acquired right now may have just been the customers that we were supposed to be getting next year. We just happened to get them now instead.” Right?
Darryl:
And the reason why I think it’s important to have a bit of a reframe and a reset and expectations internally is that if we keep trying to chase after that thing that’s unsustainable, being addicted to the vanity metrics. And unfortunately for the publicly-treated companies, you can make the decisions internally, but is the market going to agree? Are they going to respond the same way? Maybe not, but you’ve got to … I’m a really strong believer that you’ve got to focus on your fundamentals and just build a really great business. Right?
Darryl:
What does that mean in the context of a subscription business? You got to be focused on the relationship. I’m a big fan. We were talking earlier before we started recording about Kevin Kelly and the concept of the thousand true fans. If you really understand who are the raving fans who absolutely love your product, you can’t ever be cutting or scrimping on those things that they absolutely love.
Darryl:
Why are they engaging with you in the first place? And it’s possible that there’s some noise and some chaff with some of the people that have come in and been signing up for these things. And if you’re just focused too much on trying to maintain that bigger number, I really feel like you can be potentially taking your eye off of the ball here. So yeah, focusing really on the core of why people really love this product.
Darryl:
Who are we and what do we really stand for? And then also, I think that it’s been tempting. It’s been easier for less good operators to operate their businesses in the past period that we’ve seen where there’s just so much capital available and you can cover over and hide weaknesses, operational inefficiencies in that market. Now we get to see who are the real savvy operators who’ve built a really solid business.
Darryl:
Everyone needs to be focused on optimizing their P&L all the way down through. So you alluded to that too Robbie like are you really dialed in and on top of your cracked to LTV ratios, right? There’s only two ways that you can control that, either you’re reducing your marketing, your cost of acquiring a customer probably not going to be possible in this market. If anything, marketing and acquisition costs are going to be going up to the cost of acquiring a new customer.
Darryl:
So then you really got to be focusing on your lifetime value, right? How can we be boosting that lifetime value so that we can still maintain those ratios and get them where we need to? And yeah, I do agree with you obviously. Selfishly, what we do here at FlexPay is focusing really on that passive churn and best of breed tools to get into the payment system and look at the structural problems and figure out how we can fix that. But even if it wasn’t my business, just with the experience that I have in subscriptions, I can tell you that is the lowest hanging fruit, right?
Darryl:
Why would you let something artificially come in and suspend a relationship with your customer when they’ve already said that they want it? Maybe in the past, we didn’t have to put as much focus on that, but I think now, it’s table stakes. Anyone who’s not focused on having those components of their business completely dialed in are really going to be suffering and struggling.
Robbie:
Yeah, and something that you said Darryl that I actually wrote about it on LinkedIn this week because it really resonated with me about when you’re thinking about your customer journey and you’re trying to optimize engagement and loyalty at every … I’m sure that every one of you that are on this call are thinking about optimizing every touchpoint for a great member experience and for loyalty and all of that. I think a lot of organizations really focus on that with regard to the service that’s being provided, when I’m delivering the value that I promise them.
Robbie:
Second place where some organizations are focused is on support. What do you do if something goes wrong and maybe even you have a customer success mindset which is we proactively try to ensure that no problems arise and that our customers are getting the value that they’re entitled to, the quality that they’re paying for, but then the third area which is how does it feel when you’re actually doing your trivia around the subscription when you’re paying and you’re communicating with the organization about which tier you want and what you need, thinking about that as part of the customer journey and saying, “What does that feel like? What does it feel like at the point of purchase? What does it feel like when something goes wrong?”
Robbie:
I think that’s an area that is underinvested in, and one that’s powerful for driving engagement which of course leads to retention which of course leads to the lifetime value of that customer.
Darryl:
Yeah, I love that framing. And this is something that you and I have talked about previously and we really see eye to eye on this Robbie. If you understand that as a subscription business, you’re not just … You are a transactional business, of course, but you’re not just a transactional business, you’re really in the relationship business. Once you understand that you’re in the relationship business and the three big drivers to that, the pillars underneath of that is that the product and service that you’re offering to them, the way you service and support them and the payments piece.
Darryl:
And I agree with you, we’ve underinvested or sometimes we just think about, “Well, there’s the product and there’s the service. There’s the product that we give to people, the goods and services, and there’s the way that we service them.” So many businesses out there in subscription that I see them just focused on those two, and they ignore, “Well, this is just the road, routine. I offload that to my technology people, or someone’s going to be responsible for the payments.”
Darryl:
I would argue that the way that you handle money in a relationship is probably one of the strongest indicators about how you really feel about that relationship. That’s going to really show how you feel about your customers and in turn, is going to affect how they feel about you. You have to have that whole payments piece dialed in and this runs really deep into the psychology and the drivers of who we are as a species, as human beings, right?
Darryl:
We all fundamentally want to be ex accepted by our tribe. We want to feel worthy of our tribe. We want to feel valued. And when you’ve entered into a relationship with someone and then all of a sudden something breaks and our ability to pay for it. And you say to them, “Oh, you must be a bad customer.” Or, “This is on you. You need to fix it.” It’s a deeply emotional thing. Sometimes we don’t even understand as human beings why we’re responding in such a visceral way to this.
Darryl:
We’ve all had that experience of I remember the first time when I was like 16 years old and I had my debit card and I went to go buy a hotdog, and I put my debit card, and for some reason they didn’t go through and I’m like, “No, wait a minute. I know there’s enough money in my account, and my friends are laughing and they’re looking at me.” And it’s I felt really embarrassed, and then I felt kind of angry and then I’m angry at that vendor.
Darryl:
And I’m not even understanding why all these feelings are happening inside of me, but here’s a real opportunity as a merchant, as a company to make sure that you understand. Okay, you need to really protect this relationship that you have with these people. And the way that you deal with that, you’ve artificially created a moment of truth in the relationship. And there’s a structural problem that exists inside of the Visa MasterCard ecosystem right now, especially.
Darryl:
And if you understand that there’s a really high likelihood that it’s not actually your customer’s fault and that you want to … and then you can find a better way to deal with this, well then that informs so many other really positive things that can come off into the future, but that third leg. The way we handle payments and the way we communicate about it, I think really, really important.
Kathy:
So through recap a little bit here just to make sure we’re summarizing some things for everybody on the call. I would say one of the things I just heard which is a key to increasing subscriber loyalty hidden in plain sight is number one looking at how you’re acquiring customers and tying that cost of acquiring customers appropriately to the lifetime value. And that can mean very tactically that if you’ve got a source of new customers that has a really, really long lifetime value, well then, double down on that, invest in that.
Kathy:
If you have something that’s has a very short lifetime value, don’t over invest, that one thing will increase your profitability. Then you move on to, I think the second thing that I heard which was focusing on voluntary churn and understanding the reasons people are canceling. Darryl, can you talk a little bit more about on the positive like the voluntary churn why people are canceling and what people should be looking at in their businesses to maybe minimize that?
Darryl:
Yeah, for sure. This is something, again, I’m really passionate about. I think coming back to why people really signed up for this subscription really being dialed in at a cultural level within your organization of understanding like, “This is our secret sauce. This is the real value that people are getting. At least our raving fans. Our thousand true fans.” The value that they’re getting in it, then make sure that you continue to double down on that and really focus everything you can around that and find ways to create unexpected customer delight.
Darryl:
A couple great examples that I’ve seen recently that we were talking about is one was Peloton where they were running this really great contest where you had to hit I think it was 18,000 and everyone’s competing with one another and people did it just for the badge, for the social badge, but then completely unexpected, Peloton goes out and everybody who achieved this accomplishment got some free swag.
Darryl:
They were sent clothes, workout clothes and stuff like that, and then kind of unexpected the Peloton. It turns into a movement with a hashtag with people sharing with everyone else on social media. The fact that they all got this unexpected prize. So again, the most passionate, the most dedicated, who’s actually signing up to this challenge and then winning the challenge? The people that are the most engaged with the Peloton brand.
Darryl:
And then Peloton found a way to go around and say, “Okay, we’re going to reengage with these people. This is our core. This is the core of our business, the most valuable people. We’re going to invest into them and make them even more raving fans.” It’s the grassroots groundswell movement as opposed to just chasing after the vanity metrics which have been easier to do in the past or another great example of Bully Box, right? Chew toys for dogs and stuff like that.
Darryl:
There was actually someone on my team who has a dog and they got some chew toys and they were a little bit disappointed with the quality, they sent some feedback over to them. Didn’t really expect anything for it. Just said there’s been a problem with something that we received. An overwhelming response from the service and support team, sending them a whole bunch of new toys, unsolicited saying, “Look, whatever we can do to make this up to you, your dog’s going to love these ones or those ones.”
Darryl:
And then how do they feel in that moment? They’re like, “Oh wow, I’ve really been heard. I’ve been appreciated, and they really value me, and they’re sending me all these free things.” Do you think that’s going to help them with creating loyalty? So again, it’s hard to justify when budgets are being constrained saying, “Oh, we’re just going to spend money on all these things.”
Darryl:
But if you’re really dialed in, if you find ways within your business to identify the people that are most engaged, most passionate about that core value, your real true raving fans and find a way to invest in them, I think that that really kind of protects you and helps you to be … It puts insurance in a wrapper, in a shield around your business, going through these stormy seas. It’s a way to batten down the hatches on the boat as you’re going through these stormy seas.
Kathy:
Great advice. Robbie, what do you think? How do we discover these passionate fans or perhaps even those who might be at risk at bailing out of the ship?
Robbie:
Yeah, so I love the moments of surprise and delight, they’re very PR worthy, they’re very likely to go viral, and if you have those moments where you can surprise and delight your best customers, wonderful, but I feel like that’s often art more than science. You try different things, sometimes it works, sometimes it doesn’t.
Robbie:
I think another approach to driving engagement and retention, and I saw the question about, what are the best ways for anticipating and retaining subscription renewals from Todd? What I would say is you need to know what behavior looks like in a customer that’s about to cancel and how that’s different than the behavior from a customer who’s going deeper or is going to stay with you. So what I would encourage people to do is really understand the customer journey.
Robbie:
What does it look like when they’re getting the value they’re entitled to? Are they logging in two or three times a week? Are they calling you? Sometimes, I had one client where the sign of their most engaged customers was that they were calling customer support a lot. And the reason was they wanted to use it a software product. They wanted to use every feature really well. And so, “I tried this and it didn’t work, and I’m wondering if you know a way to work around or if you’re going to fix that.”
Robbie:
Was actually a sign that they were highly engaged and likely to stay, and the indicator that someone was likely to leave was when you sent them a customer satisfaction query, they said, “Everything’s fine.” Which really meant I want to get off the phone with you or I don’t really want to answer all the additional questions. So if you want to drive retention, one of the things to do is to understand what the behavior is of somebody who’s likely to stay versus somebody who’s likely to leave and then create an intervention for the ones that are likely to leave.
Robbie:
What is it that’s going to drive them back? The other thing that relates to this is that the most important time to be doing this, many organizations when they think about retention, they go 30 days out from renewal or three days out from renewal. That’s when I’m going to start sending lots and lots of messages reminding them to renew, but what you really want to do is at the moment of acquisition, that’s where you want to onboard them in such a way that they establish habits with your product offering.
Robbie:
That’s the most powerful lever you have for driving retention besides picking the right customers in the first place, but onboarding them in such a way that they’re going to have habits that give them the value they’re entitled to because if they’re getting the value they’re entitled to, they’re much less likely to leave.
Kathy:
Great, great advice. So that is some really good thinking for what I think is a second key which is really understanding your voluntary churn and really staying on top of that. I’d like to talk a little bit about this involuntary churn, and there’s actually some questions that have come in. One which I believe is from Trish. Darryl, you mentioned structural problems with Visa and MasterCard, and I know, we’ve been covering in our editorial, all these regulations from MasterCard about if you’re a recurring merchant, you need to do certain things. What do we need to understand there?
Darryl:
Yeah, it’s great. Our understanding of the problems inside of the payment ecosystem came from a lot of what Robbie was talking about. I’m a big fan of Peter Drucker, what gets measured gets managed. You have to be curious before I talk about the structural problems, just one thing that Robbie you were making me think of. We were really passionate about dispositioning everything in customer service, and then using that data to go back.
Darryl:
When you start to bucket up different events in customer service, and you start to get that data, then you can understand a little bit better what’s going on with your customers and come up with better strategies for dealing with the voluntary churn. And again, there’s been a real underinvestment into that recently where it’s been all free for all grow at all costs kind of thing. Now we need to really focus on making sure that we’re optimized and yeah, the involuntary turn.
Darryl:
I think there’s tons of opportunities to optimize this, but you don’t know how to optimize it until you understand what’s really going on. What the problem is. I remember I had thousands of transactions a day that we were processing and it would take 10% randomly selected and send them to a certain bank, 10% randomly selected and send them to a different bank. And I noticed over time because we were watching the numbers closely that on some days, we’d get as much as a 3% higher approval rate writing through one bank versus the other.
Darryl:
How does this even make sense? Or we noticed on some things there’s a really large issue, or I’m not going to name names because this is being recorded, but there was a really large issue where in the US that when we were processing transactions at 2:00 a.m., we would see double the decline rate as when we were processing on that same issue at 2:00 p.m. Now that doesn’t mean it was 100% decline at 2:00 a.m., but there was a massive increase in failed payments depending when we were processing.
Darryl:
And again, the engineering team was telling me, “Oh, well, we’re going to process all of our batch transactions on subscriptions at times when the servers are not under stress and low and that’s usually in the middle of the night.” And I’m like, “Guys, do you understand what’s actually happening here?” Or we would notice that once it happened to us that by accident, one of our merchant banks put us in the wrong MCC and we saw this huge negative impact on our processing on this one account.
Darryl:
And I’m like, “What in the world is going on?” Oh. So once you understand these three anecdotes, these examples that I gave routing through different merchant accounts, different times of day, different MCC, you understand that there’s something going on here where a decline is not necessarily really a decline. It turns out 83% of all the failed payments inside of card not present in subscription are actually false declines. That’s the bank’s term, false declines.
Darryl:
What’s really happening here is that the banks are trying to keep fraud out of the ecosystem. To protect their own P&L, but also just to be good actors in the ecosystem, they’re heavily regulated OFAC and AML compliance, and every single bank is required by law to have a system that scrubs transactions, especially that are card not present. And ever since we had those little chips, the EMV put on our cards, all fraud pretty much has shifted to online and subscriptions.
Darryl:
All of the tools that the issuers are using are really focused on that cohort of business. And they’re throwing out a bunch of transactions that they shouldn’t be. And what’s further frustrating is that these are old antiquated rails. There’s been no real meaningful upgrade to the Visa, MasterCard infrastructure since 1987. And when a transaction is processed and a bank makes a decision on whether they’re going to approve or decline because it is the issuer that decides, “Am I going to approve or decline?”
Darryl:
It’s not Visa, MasterCard, it’s not your merchant bank, it’s not your gateway. It’s the issuer, right? They don’t get to see email address. They don’t get to see shipping address. They don’t get to see IP address. They don’t get to see device ID fingerprint. They’re missing all these pieces of data that are directly relevant to the fraud profile of the transaction, and yet they’re being asked to make a decision on what to do. Plus they have these antiquated legacy solutions.
Darryl:
Plus they end up outsourcing a lot of it because banks are not technology companies. All these things combined together result in a massive amount of friction inside of the ecosystem. And there’s things that we can do to fix that, that’s why you see this emerging category of Payment Authorization Management, PAM for short. I think we’re going to see a lot more focus on payment authorization management and the current climate that we have right now, but the reason why that category exists and emerged is because of all these structural problems inside of the payment ecosystem.
Darryl:
So once you understand that there’s a problem there and that most of the declines that you’re having, the passive churn, the involuntary churn, the failed payments, it’s not actually your customer’s fault and that there’s something that you can do about it. Well, that’s the first key to actually being able to solve it. So find the right tool, find the right approach. I think we’ll talk about that maybe a little bit more about what is the right approach?
Darryl:
Well, say for example if there’s a structural problem in the payment ecosystem, why would you put it on your customer? Why would you email them or text them or call them and say, “Hey, your payment failed. You need to do something about this.” Wouldn’t it be better if you found a way to fix the problem inside of the payment rails and never notify them in the first place and just fix it for them? Could that be a better brand experience? A better investment into a high quality relationship with your customer?
Darryl:
I think so. That’s why, again, I built FlexPay for myself as a merchant doing subscriptions like, “Okay, I just need to fix as much as I can.” And it’ll never be 100%, but can I grow the amount of correction? Can I grow the amount of repair in transactions without ever bothering my customer? And then if I do bother my customer, how do I go about doing that in a way that shows that it really value the relationship in a high integrity manner with a lot of empathy and kindness so that I’m continuing to invest into the brand?
Kathy:
I love that. I’m curious if you are … I want everybody to type in Yes. If you are tracking involuntary churn and voluntary churn separately, I want to see a yes. Okay? And of those yeses, if you have, yes, okay. We got some people tracking it separately. All right, we’re seeing that. And if you have a yes, are you tracking anything in addition to the involuntary?
Kathy:
Is it you just have the involuntary churn and then there’s other information or no other information? So we’re just curious. So when I ask this question, not a lot of people are tracking churn separately and they are really two separate things in your business. If you’re learning one thing today, it is that, and it’s two very, very different strategies. So Robbie, there’s a question that came in about onboarding and its relationship to retention. Do you know of any good examples for people to think about or best practices that you could share?
Robbie:
So when you’re onboarding somebody, you want to do three things. The first thing that you want to do is get them the thing that they came in for. So if I sign up for the NBA, an organization I’ve done a lot of work with for their league pass in the third quarter of a tied game, that is not the time to ask them 27 questions about what teams they like and what their hobbies are and what kind of TV they have.
Robbie:
You want to give them the game because that’s what brought them there. So first thing is give them what they came for. When you sign up for Pandora, you put in one band you like, one song you like, and they start giving you a radio station. So first thing is give them the value they came for. Second thing that you do is reinforce the wisdom of their decision, right? Remind them why they did it and what it’s going to do for them. Let’s tie it back to the forever promise.
Robbie:
Now you’re always going to have something fun to do. Now you’re going to get fresh, healthy produce delivered to your home every week from local farmers. And then the last thing is guide them for how they can get the most value for what they’re paying. So it’s not about, and I have this happen so often where the part of the onboarding is welcome. We’d like you to spend more money with us, right?
Robbie:
Thank you for the $5 a month subscription, we have a $10 a month subscription. How about that? Maybe that’s not exactly the right time. Maybe start by saying, “For $5, look at all these things you get. Make sure you get all the value by setting up your relationship in this way.” You want to establish their habits in that moment. So couple of fun examples. The other thing that I think is important in onboarding is sometimes you want to put a little friction into it.
Robbie:
You want to say, “This is not going to be easy. Set expectations, but it’s going to be worth it.” So for example, with weight loss, one of the first things that most weight loss organizations do is they ask you to track what you’re doing. They give you, and sometimes they give you artificial rewards until the natural rewards kick in. So maybe you get badges. That’s what Peloton does, right? I don’t do Peloton for the badges, but the badges are a fun way to motivate me to adopt the habits that are going to result in the real outcomes I want which is health and fitness.
Robbie:
So consider in your onboarding using that tactic as well, and like I said, maybe even create friction. Let them know this might be hard, but here’s what the best people do to get the results that they want. To set expectations for how they should engage to get the outcomes that they want.
Kathy:
Really, really good points. I’m curious with onboarding, a lot of times, people when they convert to become a subscriber, your example Robbie, it was like, “I want to get that game, right?” But the reason why they stay a subscriber might be very, very different.
Robbie:
Yes.
Kathy:
How do you suggest companies really understand that and leverage if there’s a difference on what they need to do?
Robbie:
Yeah, so it’s a really good point, and it’s a very challenging technique because on the one hand, you want to give them the value right away. I came to Disney because I want to watch Hamilton. I don’t want you to tell me about the princess movies. I don’t want you to tell me about what you have on National Geographic or Marvel or any of those other resources that you have, I just want to watch my show, but there’s lots of ways, you could put a little messaging in the corner to say, “Hey, did you know we also have princess movies?”
Robbie:
As Rob said, you can also send an email to them letting them know what’s available. You can make recommendations about what to watch next. You can automatically roll them into the next thing. You can have other elements. You just want to think about the timing. I would say there’s a half-life on enthusiasm. So the moment when your new subscriber is most likely to customize, to give you information about what they like, to play around with the offering is right after they get it.
Robbie:
So you do want to let them know what’s available to them in those moments, but you want to make sure that you balance it, that you don’t put artificial gateways between them and what it is that they came for, especially if it’s time sensitive.
Kathy:
Great, great suggestions. I have another question that came in on free trials, but Darryl, do you have anything to add before I ask the next question?
Darryl:
No, Robbie crushed that. I agree with everything she said there.
Kathy:
Yeah, she did. As usual. So the question is about free trials and we’ve been talking about voluntary churn and involuntary churn are free trials really a good idea these days, and how should we be thinking about them? When are they appropriate and when should we be just running away?
Darryl:
Yeah. Well obviously, it’s hard to say there’s a one size fits all. It really depends on the product, the service, the hard cost that you have in it. For digital, it’s usually a lot easier to give some free trial and you see it quite common in digital offerings.
Robbie:
Yeah, no variable cost.
Darryl:
Yeah, exactly. But a little bit of variable cost in the customer service and things like that. But really, the whole idea behind a free trial is that it’s going to help you cast a much wider net. I’m always focused on how many customers I have at the end of that. So if I run a campaign with no free trial and I get this many customers at the end of 30 days, 60 days, 90 days, and then I run a free trial, how many customers I end up at like 30, 60, and 90?
Darryl:
And what’s the cost on acquiring those customers? Generally speaking for digital products, we ended up coming out ahead. You have a ton of noise, a ton of churn and froth. I think that as you cast a wider net, if you’re able to be really, really precise in your communications and the value that you’re providing to people, you can start to move the needle forward and convert more and more of those free trials into paying customers. Generally speaking, we did better off with the free trials than we did just on straight paid for digital products.
Darryl:
And I think some of that was because we were so dialed in on narrowing the cohorts of who we were even offering the free trial to in the first place and the way that we would engage with them, and the value of the underlying product and the price points. It’s complicated, it’s nuanced. There’s a lot of inputs into this. I’m loathed to say, “Oh, free trial is always going to be better.” But in some cases, especially for digital products, it did end up being the winner, but understand, you’re automatically going to be casting a much wider net.
Darryl:
You’re going to end up with people in there that are just tire kickers that don’t really want it and maybe that’s okay. As long as you’re focused on the vanity metric of how many people you get up front, but the actual revenue that you’re driving post 90 days in, right?
Robbie:
Yeah, there’s a cost to a free trial, it’s not free. As you pointed out even when you think the variable costs are zero, it’s distracting. What I would say for a free trial for everybody who’s running a subscription business. If you’ve never considered it, you should consider it, but just because you consider it does not mean it’s the right choice. At the same time, as you’re thinking about free trial, you should also be thinking about two other things.
Robbie:
One of them is freemium where freemium is hamburger forever and free trial is a taste of filet mignon. It’s a taste of the best thing you have to offer. So they know what it tastes like, and they know what it tastes like, and they believe that your promises are true. I say this is the best thing you’ll ever taste. You say, “I don’t believe you Robbie. I say have a bite.” You say, “Oh, you’re right. You’re telling me the truth.”
Robbie:
Now there are some problems with free trial. If you’re not trying to build understanding or credibility, if those aren’t the things that are preventing people from signing up with you, if the reason that you don’t have more subscribers isn’t because they either don’t understand your offer or don’t believe it’s as good as you said, there is no reason to offer a free trial. My sister used to work in a frozen yogurt store and people would come in all the time to taste the vanilla.
Robbie:
And she was like, “You know what? You know what vanilla tastes like.” They would come in. They’d finish their hotdog next door, they’d come into the frozen yogurt store, they’d enjoy the giant really generous taste, and that would be their dessert, and they would leave. So in that case, is free trial a good idea? Darryl says, “Maybe it’s okay to have that noise and to have the tire kickers and the free ice cream enjoyers.” But really, you want to make sure that the free trial is going to remove the friction that you’re experiencing.
Robbie:
Freemium is ongoing, right? It’s hamburger forever, and what that’s good for is either if you’re trying to change a behavior on an ongoing basis, and the customer doesn’t believe they’re going to change the behavior, and you’re like, “You know what? If you do it for a while, you realize with newspapers going digital, you don’t think you need it, but you keep banging up against that paywall of 10 articles.” And finally, you’re like, “Okay, fine. I am reading at least 10 articles a month. I probably should subscribe.”
Robbie:
That’s a good reason for freemium. Another good reason for freemium is if some of the free members are bringing in paying members. So if there is some kind of a viral component. I sign up for SurveyMonkey for my book club. Kathy is in my book club. I never pay, but I send it to Kathy. Kathy’s a market researcher. She says, “This is a great tool for my company.” She buys the enterprise license.
Robbie:
She subscribes at a very high rate. I’m the marketing channel, so great to keep paying me, letting me do it for free, and I’m bringing in customers like Kathy subscribers like Kathy. The last reason to do it is if the customers themselves are the product. So in that case, if there’s some a networked effect, each new free subscriber creates more value for the paying subscribers. Think LinkedIn, that’s another good reason for freemium, and then the last thing that I’ve been seeing that I find really interesting is a hybrid of these two where when you sign up for freemium, when you sign up for the free offering for the first period, the first week, the first month, whatever, you get the premium solution.
Robbie:
So you get the premium solution for the first week and then it converts into the freemium version. So you get the best they have to offer. You get SurveyMonkey for a few weeks, and then you get hamburger, and at that point, the reason that that’s really good is because you’ve tasted the deliciousness. And so you go back to hamburger and you’re like, “I want that. I want the thing I got first.”
Robbie:
It’s like when you go for a test drive, they always take you for the test drive in the tricked out car with the leather interior and the video and all the fun features. And then you say, “No, I don’t really need any of that stuff.” And you get into the strip down car and you’re like, “Well, this isn’t very nice. I like the one I just drove.” And before it, you’re back to upgrading. So those are some thoughts on free trial, freemium, and then this hybrid free trial that converts into freemium.
Darryl:
One thing I wanted to jump in on that is that the analogy of the yogurt store, absolutely love that, and I hear all this focus of people. It’s like, “Ah, I’m getting all these people coming in and taking free yogurt.” I would sift through the noise and say, “Did I sell more yogurt at the end of the day?” So focus on the core number. What’s the real objective we’re trying to hear? That’s what I’m saying.
Darryl:
How much revenue did I make per unit? My cost of acquisition versus revenue that I’ve driven tacked to LTV, and what’s that look like 90 days out? And 90 days is important because it might start to look good in the early stages, but on the lifetime of it. And so, “Okay, yeah. I might have a bunch of tire kickers.” But if at the end of the day, sold more yogurt by offering the free trials even though I had all these tire kickers and they gave a bunch of yogurt away for free, I’m still saying that’s a win. I saw a couple questions in there about customer satisfaction, and if you only had one person in there, can we jump in those Kathy? Is that okay?
Kathy:
I was just about to ask Anastasia’s question because I just love, love this question. If you could only have one person in your organization to build customer loyalty, who would you recommend this person? What would you recommend this person do? And I’m going to actually amend this is how do they work within the organization? Are they connected to the CEO? Are they in embedded? Because customer loyalty touches so, so many things Darryl.
Darryl:
Yeah, I’m going to try to go real quick on this because I want to hear what Robbie has to say and I know we’re going to be up on time before we know it. So obviously, there’s the big focus on Net Promoter Score, right? And getting those surveys sent out to people. I’m on the fence with NPS. I think that it is valuable. It’s useful as a metric. But beyond that, I’m really looking, I want whoever’s in charge of loyalty as much as possible to actually be talking to customers.
Darryl:
I’m also tracking things like if I have a website for members, how frequently are they logging into it? And then I’m starting to slice and dice the people that are logging in by any kind of dimensions that I can looking for a signal in the noise broken down by demographics, by ZIP Code, by the channel through which we acquired them, how long they’ve been with me. And you start to get insights out of all that kind of stuff too.
Darryl:
Again, dispositioning in customer service, the feedback and the buckets that we’re putting people into based on what we’re hearing in customer service. So then this person is looking at that data. They’re responsible to go create the dispositions of the customer service, talk to the people in customer service and get feedback from them. Talk to customers wherever possible. Are you measuring the logins of the websites and the usage of the product and stuff like that?
Darryl:
And I’m a big fan of collecting that data and then bringing insights back to the management team whether that’s in a monthly management meeting, but it needs to be presented out to the broader groups so that everyone’s aware of what’s going on with our customers. And we’re not just looking at one thing like Net Promoter Score and saying, “This is the end all be all. The number looks good, and we’re fine.” We move on.
Darryl:
I really want to get down into the weeds and all these different touch points wherever I can, start to bucket up and slice and dice the data and then try to present some meaningful insights to business so that we can have a conversation around it. That’s me. I’ll turn it to you Robbie.
Robbie:
Yeah, so I think Darryl, you’re really talking about I think two different roles. One of them is that customer success role. Somebody who’s out talking to the customers, not just when they have a problem, but also to find out what’s working well. And the other one is having somebody who’s really good at making sure that you’re collecting the right data and then analyzing the data and making it digestible.
Robbie:
So many organizations, I just want to get on my set box for one second about data scientists. You don’t need a data scientist to analyze your data. You can use a spreadsheet, you can use your phone and call people and make tallies on a piece of paper, but you do need to be tracking and analyzing what is actually happening. The role that I would go to Anastasia for driving engagement and loyalty would actually be the product person.
Robbie:
I think having a great product manager who’s very focused on engagement metrics, that is a great way to drive ongoing engagement which of course results in loyalty. People say in the world of subscription, marketing happens in the product. Day zero the first time you sign up, the marketing happens through the traditional channels, through an ad, through an email, whatever got you to sign up, the store in the first place, but after that moment of transaction, the customer needs to be marketed every period, every month, every year, and that happens inside the product.
Robbie:
So you need a product manager who’s really thinking about engagement, who really understands what the behavior is of somebody who retains versus the behavior of somebody who cancels and that they’re continually improving the offering. A really big part, Darryl talked about the importance of relationship in a subscription business, and one of the most important things in driving a relationship is I trust you, the vendor, to continue to improve your offering, to deliver on your promise.
Robbie:
Your promise is entertainment. Your promise is delicious, new healthy foods that I haven’t tried. Your promise is health and how you provide health on day one versus how you provide health if you think about Peloton in day 900 is going to be really different. You’ve got to keep improving, and that is the job of the product manager.
Darryl:
Yeah, you really triggered something for me there Robbie that the product that is such a critical role, that’s the one thing that you need that one person who’s in charge of the product. And what they’re doing is they’re looking for friction. They’re looking for friction in those three stools. You want a seamless, frictionless experience on the product in its delivery.
Darryl:
You want seamless, frictionless on the service side, and you want seamless frictionless on the payment side. And they’re responsible for making sure all three of those have the least amount of friction and are surprising and delighting and just being a great positive experience. All three of them.
Kathy:
I think we could probably talk an hour on just this one topic. It’s a good one. It is a good one, and it’s a great one to end our hour together here. I know we’re just hitting the end here. I would like to ask one more question of you guys and anybody who has any questions that have come up, just put them in the chat and we will follow up with them. So just don’t be shy.
Kathy:
So we’re going into 2023. We’ve just talked about ways to increase customer loyalty in different ways. As we go into 2023, we see these headwinds back to these headwinds. Where do we think, where do you think we’re going to get the most traction? What’s the one thing you would advise people to really double down on to help with subscriber loyalty?
Robbie:
So I would say focus on subscriber loyalty. There’s a time for growth where you’re saying what Darryl was talking about with free trial. Just let a whole bunch of stuff come in and see what sticks. For a lot of organizations, this is not that time. You don’t have discretionary budget, valuations are down.
Robbie:
This might be a time to really focus on extending lifetime customer value and to know where it is that you’re focusing and be really clear on communicating that. I think one of the problems is, and I don’t mean to pick on leadership or shareholders, but those two groups will often say, “Is now a time for acquisition and growth, or is now a time for engagement and profitability?” And they’ll say yes, it’s a time for everything. We want it all.
Robbie:
And I think your job running a subscription business is to be really clear about what is possible and where you’re focusing and what number they should be looking at to evaluate success. And if you don’t have discretionary resources to apply to acquisition, or the cost of acquisition is going up while lifetime customer value is staying the same or going down, you only have so many levers. So really focus on what you’re going to do.
Robbie:
And in my opinion, and I think Darryl will agree with me, trust is key. And if you cut corners on engagement. If you don’t deliver what you promised, if you only put candy in half the bag and call it the same size bag and price it at the same point and hope that they don’t notice, they will notice and they will take off their blinders. They were able to put on blinders, not because they’re stupid, but because they trusted that you were going to treat them fairly, and when they see that you didn’t treat them fairly in one place, it completely removes that element of trust that results in the recurring revenue.
Darryl:
Yeah, and I would say my answer to heading in to 2023 in a way is what I’ve been saying about subscription for a really long time, and it’s just been drowned out with all the noise of the froth of fast growth at all costs. And that is that in subscription, acquisition is the first inning of the game. Retention wins the game, right? And that’s why I love that most of this conversation has been around the retention strategies and how to boost lifetime value, right?
Darryl:
Focusing on those three legs of the stool. I think now more than ever there has to be a focus on the quality of the experience, really identifying who are the raving fans inside of your business, and making sure that you continue to really take care of them and a focus on optimization. What do you do when you’re on a ship and you’re on stormy seas? You batten down the hatches, right? The things that maybe you didn’t have to worry about like some ropes that are kind of loose on the front of the boat that it was okay when you were just like it’s smooth sailing and it’s sunshine and favorable winds, that’s not going to fly in the stormy seas.
Darryl:
You have to really make sure that every little piece is completely buttoned down. So a focus on operational efficiencies, but not cutting corners. I couldn’t agree more of what Robbie is saying. You’ve really got to make sure that the value of what it is that you’re providing and understanding who’s the raving fan and what it is they really want and getting that value to them, and then focusing on all the operational efficiencies on those three stools that we talked about, making sure that’s as frictionless and completely dialed in as possible, and almost maniacal focus on the unit economics to make sure that we are running as efficiently and as tight a ship as possible, and then we’re going to come through this because guess what? Boom, and bus cycles they’ve been around since the beginning of time.
Darryl:
They’re going to continue to be around, we’re all going to get through whatever it is whether we hit a technical recession later this year or not, I don’t know, but for sure, we’re in a period of increased uncertainty. And so now is the time to really focus on those operational efficiencies and taking care of the people that are most passionate about what we’re offering in our subscription. It is a relationship.
Kathy:
Well said, well said, thank you, Darryl. Thank you Robbie. Really great discussion today. Let’s do it again sometime. I think really love, love talking about this. I’d like to thank everybody who’s joining us here today for your time. As I said, keep asking those questions. If you have any other questions after we close the session today, you can certainly reach out to us at customer service, and we can certainly forward any direct questions onto Darryl or Robbie. So once again, thank you very, very much. And until next time, take care.
