The Subscriptions Future: Customer Retention Forever (Part 1)

Recurring Revenues

Subscriptions are an integral part of our daily life as consumers. From newspapers to Netflix, subscriptions inform, educate and entertain. In a world of change, they are a constant. Our recurring payments create a predictable revenue stream for brands. While the idea of “recurring revenue” is what is now also powering the growth of SaaS (software as a service) in enterprises, our focus in this series will be the consumer side of subscriptions – the B2C and D2C world. In some industries like media and OTT, the subscription is the product. In others like ecommerce, subscriptions help businesses offer lower prices on products in return for the repeatability of membership fees. Subscriptions are now making a comeback in the digital world, and require a rethink of the brand-customer relationship. We will explore this new world of subscriptions, and also how brands can use martech to improve customer retention and drive exponential forever profitable growth.

Subscriptions are a welcome alternative for the one-off transactions. Singleton selling means that the brand needs to persuade the customer continuously for the next purchase. A subscription means that once the commitment is there, the customer is likely to stick for months and years, thus ensuring high lifetime value. This is also the reason why subscription companies with low churn can command premium valuations. B2B SaaS companies with net revenue retention of greater than 120% can trade at upward of 10X multiples on revenues. Similar is the case with B2C and D2C companies. Once churn is controlled to not more than a few percent each year, renewals combined with the new customer additions each year create a monotonically increasing revenue stream which is what investors love.

There are three key challenges that brands have to conquer to build high growth and profitable subscription businesses. First, keeping the cost of acquisition under control. This must be a fraction of the lifetime value. If a customer is likely to stay for 36 months, then spending 6 months of monthly revenue on acquisition is justified. But if most customers will churn in 12-18 months, then the spend on new acquisition may need to be much lower. Second, how to ensure retention to keep the churn rate low. A monthly subscription means that the customer is at most 30 days away from ending the relationship. This means the brand has to offer “daily delight” and become a utility in the life of the customer. Retention is also linked to usage – the more the customers use the product, the more likely they are to continue. Third, brands need to be able to drive referrals from their existing customers – this ensures new customer acquisition costs are lowered. This will only happen with happy customers. Therefore, the retention and referral elements in the customer journey need the creation of a deep relationship – which is where martech comes in. While the core product is of course the primary factor, opening a parallel communications channel with customers can also drive improved mental availability of the brand and ensure renewals.

As we will see, subscriptions are here to stay and on the rise. A subscriptions business has to be run differently from the one-off transactions business. In this series, we will dig deeper into the world of subscriptions and see how the coming martech era can make the business even better.

Thinks 334

Manish Sabharwal and Rajeev Mantri: “India’s startup ecosystem is radically breaking from its past in company valuations, unicorn numbers, funding round sizes, foreign interest, and growth. What’s going on? Historians suggest caution with origin stories — every theory just points to an earlier beginning. But we believe three acts of entrepreneurship from five years ago — Jio, UPI, and GST — have converged to accelerate our startup ecosystem. We also make the case that this triad of private, nonprofit, and government courage demonstrates the economic upsides of a better balance between the three sectors.”

Aunindyo Chakravarty: “This coming ‘boom’ will…be a bubble that will directly benefit the top 1-2% of households in India, and at best have a positive multiplier effect on the top 10%. As always, the remaining 90% will continue to barely keep their nose above water.”

Naushad Forbes on production-linked incentives (PLI) announced by the government: “The PLI scheme provides a subsidy, typically 4-6 per cent of sales, for firms in 13 sectors to make a list of “desirable” end products, components or assemblies. Various industry ministries publish lists of items to indigenise. Firms propose items they will manufacture in a green-field or brown-field facility with a specified minimum investment that varies by sector and the size of a firm. The scheme goes together with tariffs, fairly high ones, on the finished product and often on the components involved. …I still believe we would have been better off without the PLI scheme, with the Rs 2 trillion it will cost us taxpayers spent on building infrastructure and improving logistics to make all of India more competitive instead of benefiting a few firms.”

Thinks 333

Technology Review: “For decades, getting a computer to do something meant typing in a command, or at least clicking a button. Machines no longer need a keyboard or screen for humans to interact with. Anything can become a computer. Indeed, most household objects, from toothbrushes to light switches to doorbells, already come in a smart version. But as they proliferate, we are going to want to spend less time telling them what to do. They should be able to work out what we need without being told. This is the shift from number-­crunching to decision-making that [Intel’s Pradeep] Dubey sees as defining the new era of computing.”

FT on my favourite Mumbai bookshop Kitab Khana at Foundation: “When the motorcycles, shouting hawkers and stalls sizzling with frying snacks get too much, Kitab Khana – a spacious, wood-panelled bookshop in a colonial-era building in Mumbai’s southern Fort neighbourhood – makes for welcome respite from the heat and bustle. The store, named after the palace libraries kept for Mughal emperors (it means “a home for books”), stocks an intriguing variety of Indian and international authors, including collections in languages such as Hindi and Marathi, with staff on hand to provide guidance and cosy nooks in which to read. A programme of regular talks and readings and an in-house café round out the offering. The shop has made a recent comeback after a fire last year devastated its interior and destroyed tens of thousands of books.”

Shane Parish: “Spend the best hours of your day on the biggest opportunity, not the biggest problem.”

Martech’s Magicians: Microns, Micronbox and µniverse (Part 12)

Summary

Business is about customers, revenues, profits and growth. In recent times, as investors splurge money on B2C and D2C companies, it is easy to forget about the “profits” bit! But eventually, every enduring business grows on the back of profits, not an infinite supply of investor capital. Given that one of the largest costs for most businesses after staff salaries is cost of new customer acquisition, it becomes imperative to start thinking about customer retention, growth, cross-sell and referrals if a path to profitability has to be found.

This is where the ideas of Martech come into play. Martech is about existing customers and building deep relationships with them. In the pre-digital world, this was much harder. It was difficult to identify individual customers (that’s how loyalty programs got started), it was expensive to reach them individually (only option was physical mailers), and it was impossible to do any real-time offers or adjustments. The digital world has changed all this. Data at an individual level is plentiful, storage and computing are not constraints any longer, and the brand’s digital storefronts in the form of websites and apps offer real-time engagement and nudge platforms. Martech software is helping drive the shift from optimising acquisition to maximising customer lifetime value.

Martech 2.0 is upon us and with it comes a view beyond the immediacy of the transaction. Starting with the upstream elements of attention, engagement and habits, Martech 2.0 focuses on creating “hooked customers.” A multitude of innovations are driving Martech 2.0 and solving the ABCDE (attention, branding, churn, data and engagement) problems that plague the customer relationship: Messaging+, Ems, Velvet Rope Marketing, Full-stack and Atomic Rewards. Complemented by the progency and rebudgeting, Martech 2.0 lays the foundation for exponential forever profitable growth and the making of a “profipoly.” It is a strategic inflection point in marketing.

The basis for competition is changing. Marketplaces will create private labels out of categories that are successful. Brands will realise that they will need to create a bypass to marketplaces and build their own websites and apps to own the customer relationship. In a world devoid of third party cookies, first-party (and zero-party) data is the gold that brands must strive for. Sooner or later, every growing business will need its own direct relationship with customers. What marketers need to do is to focus on jobs customers want done and craft defining moments because many of the other levers of competition are going to be less effective in a world where every brand can sell anything to everyone via a ubiquitous and efficient logistics network.

In this world, the three metrics of hooked score, reacquisition ratio, and earned growth rate can be the guiding lights for marketers. Leading the way into this brave new world of Martech 2.0 will be the three magicians: microns, micronbox and muniverse.

Thinks 332

Michael Dell: “”I have this deep-seated belief that a lot of people don’t realize their full potential because they’re too afraid to fail and too afraid to make mistakes. There’s so many ups and downs and twists and turns. In the first couple of years of business [we] could have failed at least 10 times, with all sorts of things that were going on. But that’s reality, and that’s how I think great businesses are built.” [via cnet]

John Chamberlain: “Once capitalism is seen as a profit-and-loss system, with everyone at the mercy of the sovereign consumer’s whims as he balances one marginal desire against another, the incidence of anticapitalistic criticism must shift. The capitalist who can make money in a consumer-oriented system is the one who shrewdly anticipates the customer’s desires, and under such a dispensation profit – far from being “surplus value” – becomes the deserved reward for acumen.” [via CafeHayek]

Donald Boudreaux: “Deficit financing allows today’s citizens-taxpayers to push the costs of today’s government activities onto future generations. Deficit financing thus enables today’s citizens-taxpayers to live at the expense of others. And people able to live at the expense of others will live excessively expensively. Access to deficit financing loosens the limits on government growth. Therefore, a balanced-budget requirement would indeed limit the growth of government…When you buy a car with borrowed funds, you – the same individual who borrows the funds – are the individual responsible for repaying them. So you borrow and spend prudently. But with deficit financing by government, the individuals who borrow the funds (that is, today’s citizens-taxpayers and their political representatives) are not the same individuals who are responsible for repaying them. That responsibility falls on other people; it falls on future citizens-taxpayers, many of whom aren’t yet born. Therefore, access to deficit financing gives today’s citizens-taxpayers (and their political representatives) freedom to spend more lavishly than they would were they required to pay for all government projects out of current taxes.”

Martech’s Magicians: Microns, Micronbox and µniverse (Part 11)

Metrics

How can marketers measure success in the Martech 2.0 era? The Martech 1.0 had the Net Promoter Score (NPS). What are similar metrics for Martech 2.0? There are three metrics we can consider: hooked score, reacquisition ratio, and earned growth rate.

Hooked score: As we discussed earlier, one of the key objectives is to win the transaction upstream game. This means focusing on attention, engagement and habits. A simple way to measure this is to track all the actions that a customer does with the brand communications and properties. Add 1 point for every open and click done by customers over the past 30 days to arrive at the Hooked score. The higher the score, the greater the attention. This can then be correlated with transactions and the forward-looking customer lifetime value (CLV). The Hooked score is a simple metric and easy to track. The software for doing it already exists. Email opens and clicks are already tracked, SMS and push notifications clicks can be tracked via custom links. Code on the website and in the app can track the actions. What’s missing is the scoring. Brands can then even test if offering low or high atomic rewards changes user behaviour.

Reacquisition ratio: My belief is that a third of all acquisition is actually reacquisition. No brand that I have spoken to is actually tracking this. It is not difficult to track. For every new paid acquisition, a brand needs to simply look at its database and see if that email ID or mobile number was in the customer database. The reacquisition ratio is the number of reacquired churned customers to the total acquisitions being done. The higher the number, the greater the waste. Brands should then use reactivation techniques as an alternative to reacquisition via ad platforms.

Earned growth rate: This is an idea that combines the power of retention and referrals. It is mathematically represented as Net Revenue Retention + Earned New Customers (ENC) – 100. Reichheld, Darnell and Burns discuss this in a recent article in Harvard Business Review: “Once you have organized revenues by customer, you can determine your NRR. Simply tally this year’s revenues from customers who were with you last year, divide that amount by last year’s total revenues, and express that figure as a percentage. ENC is the percentage of spending from new customers you’ve earned through referrals (as opposed to bought through promotional channels).” They offer an example: “Company A’s revenues grew from $100 in 2020 to $130 during 2021, or 30%. In 2021 customers who were on the books in 2020 accounted for $85 of revenues. Some of them expanded their purchases by a total of $5, but that growth was more than offset by other customers who reduced purchases by a total of $20, resulting in an NRR of 85%. New customers accounted for $45 in revenues—$25 from earned new customers (referrals) and $20 from bought new customers. Adding the NRR (85%) and ENC (25%) and then subtracting 100% results in a 10% earned growth rate.”

Taken together, these three metrics are at the core of Martech 2.0 – they measure attention, retention, reactivation (or non-reacquisition), and referrals.

Thinks 331

Rita McGrath: “One of the great puzzles in business is why some entrepreneurs benefit tremendously from the unfolding of a strategic inflection point, while others who “saw” it equally clearly disappeared into the mists of forgotten business lore. One explanation is that introducing even prescient innovations into an unripe ecosystem is as much a recipe for disaster as failing to innovate in the face of a pending inflection point. Being ahead of one’s time is as miserable as being too late…A strategic inflection point consists of what Andy Grove called a 10X shift in the forces that affect a business. As he pointed out, such a change represents a technological transition in which an older regime is in the process of being replaced by a newer one. If a business is prepared to navigate such a transition, by retiring older technologies, embracing newer ones, and transitioning their activities, an inflection point can represent a valuable opportunity for growth. It can also presage a decline in business as older ways of doing things are replaced with new ones and revenues erode accordingly.”

Atanu Dey on CORE (a curriculum to learn about the economy): “We have to be taught and we have to learn how to think about our world, just like we have to be taught how to read, write, reason logically and do arithmetic. Unlike comprehending and speaking natural languages, we cannot instinctively read, write, reason or do arithmetic; we have to learn. Reading, writing and doing arithmetic is “unnatural.”… India is what it is (desperately poor) because the vast majority of Indians prefer socialism over capitalism. Indians are not systematically stupider or lazier than other more prosperous collectives; they are just systematically more ignorant. Poverty is not necessarily the result of moral failure; most often it is the outcome of a broad-based societal ignorance of basic truths and principles about human nature and society.”

Read: Never by Ken Follett

Martech’s Magicians: Microns, Micronbox and µniverse (Part 10)

Reimagine

Let us reimagine how our shopping experiences can change in the coming Martech 2.0 era.

Consider buying a book. Today, Amazon is the sole arbiter of what gets recommended to us and the reviews. But there is a world beyond Amazon. We don’t explore it because of the friction involved. Imagine being able to see the book on a shelf in a virtual library – so one can see other similarly themed books nearby. That is what one tends to see in a physical bookstore. When I am at Strand Book Store in New York City, I spend a lot of time going through shelf by shelf of books on a specific topic. (The Dewey Decimal System does a great job of allocating a unique number for each book which determines its place on the infinite shelf.) If I show interest, then for the next few days, a daily micron into my micronbox brings forth additional information – table of contents, reviews, author background, excerpts, and more, with each message a carrier of atomic rewards to nudge me towards the purchase.

Consider buying a phone. The post-purchase period is a void where the phone manufacturer is losing an opportunity to know me and engage me. Imagine offering me an incentive to register the phone and then opt-in to a 20-day micron series telling me the new features about the phone. The manufacturer would then also know the date of my purchase and could at a later point of time offer me an upgrade, thus building a longer relationship. Given that phones are also becoming windows to services, the manufacturer could get additional revenue once the relationship is activated.

Consider booking a movie ticket. The multiplex or the booking platform could drive excitement by sending me snippets about the movie. It could also create an interactive chat once I reach the multiplex with the food menu, remembering what I ordered the last time. After the movie, it could offer me incentives to rate the movie and share the experience on social media. It could also let me know what movies will be releasing the next weekend, and offer to book the same seats at a similar show time for one of those movies. By doing so, the multiplex is making me into a “subscriber” – driving repeat purchases in a frictionless manner.

Consider buying a dress. The µniverse would offer an AR view of me in that dress, and I could solicit feedback from close friends if I chose to. For Best customers, there could be a hassle-free returns policy. For ethnic wear, there could be a back story on the making of the dress. Post-purchase, suggestions of accessories could be sent to me.

These are just a few examples. The combination of microns, micronbox and µniverse open up a new world of brand-customer engagement possibilities. It is like the early days of the Internet – what could be created was only limited by our imagination. The digital world is our future, and we are all just getting started. Businesses which can wipe the slate clean and rethink customer experiences in the Martech 2.0 will end up with a significant competitive advantage in the future.

Thinks 330

Shane Parish: “There is nothing that gets in the way of success more than avoidance. We avoid hard conversations. We avoid certain people. We avoid hard decisions. We avoid evidence that contradicts what we think. We avoid starting a project until we’re certain of the outcome…Everything becomes harder until we stop avoiding what’s getting in the way. The longer you wait the higher the cost.”

James Buchanan: “Persons, whether they be scientists, moral philosophers or ordinary folk, can be roughly classified into two sets – those who are described as having a liberal predisposition and those who do not. And by a “liberal predisposition” I refer, specifically, to an attitude in which others are viewed as moral equals and thereby deserving of equal respect, consideration and, ultimately, equal treatment.” [via CafeHayek]

Read: The Judge’s List by John Grisham