It’s understandable why media executives are focused on their total number of subscribers - it sounds good. However, what use is a subscriber if they barely generate any revenue or don’t cover the costs associated with their acquisition?
To address that scenario, organisations like the FT are focusing their attention on lifetime value and annual recurring revenue from subscribers. Some, like Netflix, are even going so far as to no longer report on total subscriber numbers.
In this blog post we explore the interrelationship of billing periods, pricing, churn and customer lifetime value - and share a major insight from our recent client projects - monthly subscriptions may be largely worthless for many organisations.
Step 1: Understand and map out your billing periods and pricing strategy
In recent years, subscription organisations have been prioritising volume over value - offering short-term, zero lock-in subscriptions and using aggressive discounts to attract new customers. These tactics are based on the assumption that the company will be able to retain these customers and move them up the pricing ladder over time.
Unfortunately, we regularly observe that these strategies are ineffective in revenue terms because they:
- Erode the initial value, if the incremental subscriptions don’t compensate for the cost of acquisition/decline in revenues due to discounting
- Incentivise the washing-machine effect and erode long-term value, if users can easily avoid the price step-up (by cancelling) and resubscribe at the always-on acquisition discount
To understand if this is an issue, we help clients to initially map their pricing and billing strategy - which you can see a real-life example of below:
Step 2: Evaluate the relationship between billing periods and churn rate
Churn rate—the percentage of subscribers who discontinue their subscriptions within a given time period—is a LTV adversary. High churn rates can significantly impact LTV, with the costs of acquiring a customer often outweighing the benefits of a customer that does not stay long enough to generate a return on investment.
After mapping out your pricing journeys across products and billing frequencies (as above), it’s important to measure subscribers’ churn rate at various renewal points throughout their subscription, particularly across the first year or two, in order to understand pain points and be able to size them.
In our example, it is clear that monthly subscribers have extremely low survival rates - only 24.2% of subscribers remain after one month and this number continues to reduce to 3.5% after 12 months. By comparison, 38.9% of annual subscribers remain after 12 months (although 100% remained “paying” between months 1-11).
Step 3: Calculate the Year 1 Subscriber Lifetime Value
The Subscribers’ Lifetime Value is calculated by combining the price due (which we get from the pricing journey map) with the proportion of subscribers that will pay for it (which comes from the above survival curves).
Doing this across all products and billing frequencies give us an idea of which products are more likely to generate revenue. By giving monthly subscriptions away at 1€ for the first month, the majority of readers will churn before the price step-up kicks in, therefore eroding value in the short and long term.
As expected, subscribers on a longer-tenure product (e.g. 6-12 months) are more likely to spend more money in the first year of a subscription (and after that). The gaps with short-term products is quite striking:
- A single annual subscription is worth 2x quarterly subscriptions (3-months)
- A single annual subscription is worth 7x monthly subscriptions
Step 4: Combine the volume of subscribers and expected lifetime value (per billing period) to evaluate the value of each type of subscription to your company
Although steps 1-3 evaluate the relative value of each type of subscriber, it doesn’t account for the volume of subscribers. For example, if 90% of subscribers are on monthly billing periods, their revenue contribution to the business is still very significant (despite a low average Subscriber LTV).
Therefore, it is important to overlay the volume of subscribers with their expected lifetime value to understand if certain types of subscribers are more valuable to the business than others. You can see this analysis below.
This analysis leads us to the conclusion set out in the title of this blog post - that monthly subscribers are practically worthless from a revenue perspective. Despite accounting for 21% of all subscribers, their revenue contribution within a 12 month period is just 4%.
Step 5: Use this analysis to inform your pricing and proposition strategy
There is no point conducting this type of analysis if you are not going to do anything with it. In this case, a clear recommendation to the client is either:
Encourage a larger proportion of potential subscribers to opt for the annual option, as opposed to the monthly (for example, via deeper discounting or more prominent promotion) given that they are 7x more valuable on average.
A/B test entirely removing the monthly subscription and analyse the impact on net-acquisitions, customer lifetime value and revenue.
How FT Strategies can help
We are very comfortable with conducting this type of analysis on behalf of clients - no matter how mature your subscription business is. That includes:
- Conducting pricing / proposition analysis
- Conjoint Analysis when (re)designing and pricing products
- Van Westendorp or Gabor-Granger when pricing existing products
- Evaluating promotions and billing periods
- Value proposition / product line-up redesign
If you’d like to discuss a project you have in mind or would like a chat, please do reach out to me directly - [email protected]
About the author
Emanuele is Head of Analytics at FT Strategies and has worked with clients in developing engagement metrics, building data architectures and conducting business analyses and insights. He previously spent seven years at Realised UNLIMITED, a boutique analytics consultancy.
