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Sometimes, the best way to tackle big problems is to break them into smaller pieces.
For businesses, this applies to a pricing strategy that can be used to increase acquisition rates, boost growth and generate greater loyalty. What’s more, it helps to create a more stable and predictable revenue stream.
Demand has been growing for what is now termed ‘the subscription economy’. It is estimated that 90% of UK consumers have signed up for some form of subscription service. According to research firm Euromonitor, subscription pricing ‘sits perfectly with goods that are constantly used, and also ones where the consumer does not feel the need to shop around’.
Once the most popular way to pay for monthly magazines, subscription-based payments for goods and services is in use in many other sectors such as media (Netflix & Amazon Prime), personalised beauty products (Birchbox) and food deliveries (Gousto and Graze).
The Business to Business (B2B) world is no stranger to this type of payment either, with companies like Slack or Xero using this model.
A return to old ways
The popularity of recurring payments can be traced back to the 1950s. Due to the high purchase cost of TVs and radios, many people paid a monthly rental fee instead. As products became more affordable, this payment method slipped out of fashion. However, things have come full circle with retailers such as Martin Dawes, charging as little as £3 per week to rent a flatscreen TV.
When it comes to making purchases, other businesses are tapping into the growing trend towards convenience. Now, time-poor consumers and companies have products delivered to their door, rather than having to visit retail stores or business premises.
When retail giant Ikea launched a rental scheme for beds, sofas, and furniture, it confirmed that subscription pricing really had achieved mainstream consumer acceptance. This way of paying taps into the growing consumer mindset of not actually owning ‘stuff’.
What is the lifetime value of your customer?
At the heart of any subscription model is how much each customer is worth to you. A useful measure is the Customer Lifetime Value (LTV) which is the total revenue a business can reasonably expect from a single customer.
It is calculated by summing up what a customer will pay you throughout their relationship with you. If you estimate that a typical customer stays with you for three years, and pays you £9.99 each month, then the customer LTV is £9.99 x 12 months x 3 years = £356.40.
If you know the cost of acquisition for a customer, you can compare this to the LTV, and then work out how long it will take to break even and move into profitability. Understanding these two measures should sharpen your focus on delivering outstanding service, as the early days of any subscription relationship are unlikely to be profitable.
Can I move to subscription-based pricing?
Most businesses can apply subscription pricing if they look creatively at what they are offering to the market. Subscription models work well for companies that provide access to exclusive content such as workout videos or those that offer repeat use, such as a weekly ironing service.
For any business that wants to move away from one-off purchase costs to a subscription-based pricing model, there are some key questions to answer: what part of your product or service can you convert into a subscription service, what benefits does it bring to your customers, and how much and how often will you charge the customer?
It’s vital that customers feel they receive value from their subscription (rather than feeling locked in). Free updates, lifetime support, and extensive usage can be helpful features to include.
Building a subscription culture
To make a subscription payment model successful requires you to run a genuine customer-focused business. This makes it as easy as possible to become a customer, such as offering convenient online signup, through to providing fantastic service and support at every touchpoint from acquisition to post-sale.
There are lots of different consumer preferences when it comes to making payments. Businesses need to offer the most popular payment options, which provides customers with maximum choice, convenience, and flexibility.
The most popular subscription payment channel is Direct Debit. It is efficient, low cost and well suited to ‘set up and forget’ small regular payments. It offers greater certainty over receiving your funds when compared to continuous card payment authority. There are tools available that can help make setting up and collecting Direct Debit quite straightforward.
You also need a firm handle on the metrics and trends affecting subscriptions. For example, Chart Mogul connects with major subscription billing providers, so you can track and analyse your data, and have instant visibility over monthly recurring revenue, churn rate, customer LTV and more.
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