How Startups Convert Customers With Subscription Pricing
The lure of subscription pricing is the guarantee of recurring revenue for your business. Once a customer flips the switch to turn on your subscription, it’s easy money:
- Easy to recognize your revenue.
- Easy to determine your margins and profits.
- Easy to enhance your product and extend that revenue out for months, even years.
While that’s true, converting a subscription customer isn’t as simple as flipping a switch. You can build a platform, launch with fanfare, offer all sorts of incentives and trials to attract potential customers — and watch as they disengage and lapse into limbo.
That’s the actual guarantee that comes with subscription pricing, and this will happen unless you cultivate a funnel that catches potential subscribers as soon as they learn about your product and follows them until their very last sign in.
I built my first subscription-model product in 1999. I’m currently in early-access on my latest, and I’ve launched a bunch more along the way.
While the customer dynamic has changed over the last 20 years, the conversion process has not. In fact, it’s actually gotten easier to convert and retain customers through the subscription funnel.
Here’s what I’ve learned.
Why subscription pricing works
Subscription pricing is a hot trend in just about every business in every industry. Pay-as-you-go is the new normal from software to retail to service.
In my mind, the major shift occurred when mobile phones started pricing unlimited usage per period instead of fixed or cost per minute. Once usage limits were removed, use cases exploded and the promise of a truly mobile computer was finally realized.
Makers of all stripes learned that lesson: From razors to video streaming to accounting software, pricing models have emerged that focus on time periods instead of units.
But contrary to popular belief, subscription pricing doesn’t work because of the lower price point that a monthly installment allows. It’s effective because a subscription reorients each customer’s mind from product function to value proposition.
I don’t care what kind of German engineering went into my razor blades, as long as I have working blades when I need them.
As an entrepreneur, you probably use at least one digital subscription service to build your own product and company, if not several. In fact, just to get to the MVP of my new project, I subscribed to AWS, MailChimp, Zapier and Bubble. I’m still on the free tier of a few more services for some lower-priority features. There’s a few more I quit or never tried.
Thus, you know that value prop plays a big part of whether the customer will pay and stay. So reinforcing your value proposition should play a big part in every level of your customer funnel.
The customer catch and tracking
A subscription pricing model without the ability to track the steps in the conversion funnel will result in all the headaches of subscription pricing without any of the benefits.
The headaches: Low conversion rates at high costs. Short-term subscribers that don’t get you to break-even. Misunderstanding of the value-prop that results in high levels of support and refunds.
The benefits: The knowledge to be able to adjust the messaging and customer flow at every step to acquire more valuable customers at lower costs. The ability to accelerate and scale when something works. And of course, the reduction or removal of all the headaches above.
I could write a series of posts on the customer conversion funnel, but to keep it simple, you need to have a constant awareness of the costs to acquire a prospect at each of the following levels, as well as the rate of conversion to the next level.
- First touch: This is usually your website, but it could be a storefront, mobile app, phone call, in-person, whatever. This is where you catch the prospect.
- Sample: The prospect has done something to show they have interest. This could be reading a content marketing post, joining an email list, watching a tutorial, even using chat or email to ask a question.
- Trial: The prospect accepts a free trial of your product. The probability of this customer converting goes up significantly at this point.
- First paid cycle: While this is technically a conversion, it’s not a windfall.
- Second paid cycle: A lot of models don’t break this out as its own gate, but it’s probably the most critical factor in determining success of the model.
You can use your web analytics and other data from your first touch and sample to determine if your advertising and other marketing channels are bringing in valuable customers or just trash. Tweak your messaging and channels to bring in less trash.
Value exposure in the trial
If you’re going to offer a free trial, you need to think long and hard about what value to expose, how to expose it, and getting to that value completely friction-free.
Let’s start from the end and work backwards. The method for converting a prospect to a free trial needs to be painless. There should be no commitment, a bare minimum of information required from the customer, and a brief explanation of the benefits and the limits.
The catch, however, is that if you don’t leave a hook for future conversion, they won’t convert. So what I do is incentivize usage by unlocking more value with that usage. In other words, I’m running two free trials, one if you use the product with the optimum-value use case, and a lesser one if you don’t.
How to prevent lapsed prospects
There are basically three ways to put limits on a trial, and each has a value issue that you need to overcome.
Time limit: Make sure the customer can see the path to their goal before the time runs out. This means the clock is ticking for you, not them.
Feature limit: This takes more thought and more work to offer, but it does a better job of getting the customer to that value path. Just make sure you leave them wanting more.
Volume limit: Setting volume limits has more to do with your costs than your prospect’s goals, so make sure you’re not cutting volume to the point where they can’t get any serious usage out of the trial.
You can also combine any or all of those.
There are two ways your prospects are going to lapse. One is if they forget about the product, the other is if they can’t find value within the trial period or by using the trial feature set. You need to have that light go off in the their mind showing how the trial can lead to the successful accomplishment of whatever your product offers as a goal.
When prospects do lapse, remember, they’re still a prospect, especially if you have a product that is in continuous improvement. Have a program to try to recapture them.
The first payment cycle is just another trial
Don’t fall for that first payment being the start of a lifetime relationship, because it’s actually just another trial — not a free trial, but certainly not the customer’s acceptance of the full blown cost of the product.
The first payment cycle is where I like to discount, because even if you offer a free trial, it takes time for the customer to onboard, understand, and find real-world usage out of the full-blown product experience. A discount gives them a soft ramp to get to full value, which is the thing that’s ultimately going to make your product successful.
That’s the major drawback with subscription pricing. You make it easy to get on board, but you also make it easy to leave.
The second payment cycle is a much better signal
In my mind, if you’re using metrics like Cost to Acquire the Customer (CAC) and customer Lifetime Value (LTV), no data is valid until the customer re-ups, or allows a second payment.
This is your strongest signal and the one where you can find the most promise for long term success. If you have a high rate of conversion from first to second payment, and I’m talking 80% and above, that is a direct and unassailable statement about the long-term value of your product, even if those numbers are small at the beginning.
In fact, I try not to make major decisions about feature set, positioning, or even messaging until I have second-cycle data. It should be the benchmark and foundation for every decision you make about what your product will ultimately be, and even determine if subscription pricing makes sense for you.
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This post originally appeared in TechCrunch: https://techcrunch.com/2021/01/04/how-to-convert-customers-with-subscription-pricing/