How To Figure Out Your Customer Lifetime Value

"Image courtesy of MR LIGHTMAN / FreeDigitalPhotos.net"

“Image courtesy of MR LIGHTMAN / FreeDigitalPhotos.net”

Your Customer Lifetime Value (CLTV) is an important metric. It can help you to determine how much money you can spend to acquire new customers and is useful to determine financial impact when you’ve changed prices.

How To Calculate The Customer Lifetime Value

There are many different ways to calculate the CLTV. Each method will produce slightly different results. One of the best practices is actually use all three methods and take the average from those as your ‘true CLTV’. However, this is not necessary and sometimes one calculation is all your business need.

To demonstrate the equations we will use the following figures:

  • Average Customer Spend / month = $100
  • Average Customer Lifespan = 12 months
  • Margin = 15%
  • Discount Rate = 10%
  • Retention Rate = 60%

The Simple Method

The simple method takes very little time to calculate, yet it is not the most accurate. The equation for this model is:

Average Customer Spend X Average Customer Lifespan = CLTV

In our example the value would be: 100 X 12 = $1,200.

This model fails to include costs for delivering the service. Therefore, you might overspend believing you have more funds available to acquire new customers.

However, if you have very few overheads, this might be all you need to calculate your customer’s lifetime value.

Custom Method

This is still a very simple method, but it allows you to include the costs for delivering your service. This is a perfect equation for those who offer a subscription for a physical product such as wine, specialist food or DVDs.

To calculate:

Average Customer Lifespan X (Average Customer Spend X Profit Margin)

So with our example figures:

12 X (100 X 0.15) = 12 X 15 = $180.

This figure is lower than the simple version but it is far more accurate and allows you to calculate a reasonable acquisition budget without having to worry about costs.

Traditional CLTV

This equation is the more accurate; however it is the most complex and should be used only if you want a precise valuation.

The new metrics used in this calculation are:

The Rate Of Discount = The interest rate used for calculating the present value of future cash flow. This number is usually between 8% and 15%. This value assumes prices aren’t going to increase in the immediate future.

Retention Rate = A calculation for a subscription business. It is simply the percentage of customers who remain with your service from month to month.

Average Gross Margin Per Customer Lifespan = This is how much profit each customer provides during their lifespan. To calculate this use your final figure from the simple method and then multiply it by the profit margin. For our example we have 1,200 X 0.15 = $180.

The CLTV equation:

Average Gross Margin Per Customer Lifespan X (Retention / (1 + Rate Of Discount – Retention))

In our example this would equate to:

$180 X (0.60 / (1+ 0.1 – 0.6) = 180 X 1.2 = $216.

You can then use all three figures to calculate an average Customer Lifetime Value, however you might prefer to use just one of these figures.

How To Use These Figures

Whichever method you use, you can now calculate the maximum spend to acquire new customers. For instance, if you use the traditional method you know you can spend up to $216 to acquire each new customer. Sticking to this value means each customer you have is allowing you to stay in profit over the long period.

Conclusion

Working out the CLTV for your business is an essential task. It can support you in your marketing budgets ensuring you aren’t spending too much. In addition, you can see the results of any price changes and note whether the price change had a positive effect on your business’ finances.

Do you need recurring billing and subscription management software? Contact one of our experts at info@fusebill.com, call or check out the Fusebill free trial.

How To Tell Your Customers That You’re Increasing Subscriber Fees

"Image courtesy of zirconicusso / FreeDigitalPhotos.net".

“Image courtesy of zirconicusso / FreeDigitalPhotos.net”.

Customers like signing up with subscription based businesses because they enjoy the consistent price. However, chances are at some point you will need to increase the price. The reasons for a price increase might include:

  • You want to earn more revenue.
  • Your costs have increased.
  • You want to reposition yourself and appeal to a different target audience.
  • Demand for your service is too high and you want to encourage fewer subscriptions.
  • You have increased your expertness or have a higher brand value.
  • You offer more services or products and wish to incorporate their costs into your pricing.

Whatever the reason, you have to inform your subscribers the reason why prices are increasing. Without the right strategy to inform your customers you could lose a significant percentage of your customers. Here are some tips to maximise your customer retention during a price increase.

Tip One: Terms And Conditions

Include in your terms and conditions a clause clearly stating you hold the right to increase the price. This way your clients cannot claim a price increase doesn’t apply to them.

It also allows you not to state a clear reason why you are increasing prices. However, not stating the reason is likely to cause several customers to leave.

Tip Two: Give Plenty Of Notice

Always give your customers plenty of notice of a price increase. This notice should be at least 2 months. This gives plenty of time for your clients to find the funds necessary for the price increase. It also supports the trust between you and your customer.

During this notice inform you customers exactly when the price will increase and how the increase will be collected.

One subscription based business which rarely gives notice of price increases are energy firms. Though they tend to announce some changes in the news, they rarely write to customers informing them of when the price increase will come into effect.

Tip Three: Don’t Give Too Much Notice

A big mistake on the other hand is to give too much notice. Some companies can give up to six months notice of a price increase. This is too much time and it is likely your customers would have forgotten about the increase by the time it comes in effect.

Tip Four: Give A Reason Why You Are Increasing The Price

Customers like to know exactly why you are increasing the price and how it will benefit them. This will increase the acceptance of your price increase amongst your customers. Ensure that this reason is passed onto your customer service team so customers can be told the same thing when they call to discuss the change.

Tip Five: Present The Price Increase Right

Present the price increase as a percentage. This has less impact in the minds of the customer, especially if the percentage is less than 5% or the price increase has a significant monetary value.

Tip Six: Repackage Product Bundles

If your service includes groups of products or services, re-organise them. Each new package should offer slightly more than it did before but be priced higher than its predecessor. This way you can increase the price while providing a better service to your customers. Something they will appreciate.

To support this, if you are offering a physical product and you have old stock left over, offer this at a discounted price until the stock has run out.

Conclusion

There are always going to be times when you need to increase the price of your subscription. By ensuring you have the right method to announce your price increase you can minimise the loss of customers and maintain strong customer relations.

Do you need recurring billing and subscription management software? Contact one of our experts at info@fusebill.com, call or check out the Fusebill free trial.

How To Turn Your One-Time Fee Business Into A Subscribe-Based Model

"Image courtesy of Stuart Miles / FreeDigitalPhotos.net"

“Image courtesy of Stuart Miles / FreeDigitalPhotos.net”

A subscription based business model has many advantages over a one-time fee model. It offers a stable income allowing you to pre-plan what resources you need on a monthly basis. A subscription based business can also offer your business a larger customer lifetime value while at the same time giving a perception of a lower cost for the product by your customers.

Subscription based businesses can afford to bring in fewer new customers per month and afford to dedicate more time to customer retention activities.

Changing your business from a one-time fee model to that of a subscription based model can seem difficult. However, Adobe has recently done this with their creative suite and while it has had some criticism, many pundits are seeing it as necessary for the company and consumer.

The main issue with this is how your business designs and implements the change. Here is our quick guide how you can switch.

1. Design Your Subscription Product

The first step you need to take is to design your product. If you run a software business this would be an easy decision. Other industries may have to be inventive but usually the subscriptions could allow customers access to resources, tools, guides, advice from your team, etc.

With your decision you should consider how much access to the product the consumer has. You might want to offer different access for different subscription levels. For example, if you have a digital art creator your lowest subscription model could offer 300 stock images to use, while a higher priced option offers 1,000.

If you want to start with one level of subscriber, remember to include some room for improvement later on. You may find customers want more features/access and would be willing to pay extra for it.

2. Choose Your Pricing Level and Billing Method

The price of your subscriptions is very important. You want to create a price point which gives you good revenue while being perceived by the consumer as a bargain. The monthly price should never be the same as a one-off fee, but instead that fee should be collected over the expected life-time of the customer.

For instance, if you sell a product now for $120 and you believe that the lifespan of the customer is 6 months you will want to charge at least $20 per month. You will also want to add a small margin, so the customers who are with your business less than you expected are still paying a significant amount towards that one-time fee valuation.

The next step is to decide how you will collect payments. The best option is to use a product, service or company which allows you to automatically collect membership fees. Many products available will automatically adjust your subscribers’ access should they upgrade, cancel or default on a payment. Ensure you check with your provider whether they offer this.

You’ll need to decide what to do with previous customers. Are you going to leave them with full access, offer them a discount or a subscription for free for a period of time? If they don’t take up your offer on the subscription will you remove access?

You could increase the uptake of the subscription with these clients by offering extra benefits in the subscription model than they currently have with the one-time fee product.

3. Communications And Testing

Create the website and all the online and offline systems to help run your subscription business. This can take minutes or days to implement depending on the software you are using. Bring in all the technical people you can to help ensure the system works flawlessly.

Then you need to create the marketing materials to announce the changes. Remember to sell the benefits of the change rather than the features. There are some generic benefits all subscription based customers can experience:

  • Lower initial and short term costs to gain access to product.
  • Better customer service and support.
  • Instant access to updates and fixes.

At the same time you want to identify a launch date and create a very specific marketing plan to create anticipation to your target audience through email, social media and other advertising channels.

4. Launch

On the launch day remove your one-time product and switch to the subscription based business. Don’t offer your clients any access to your old product to limit confusion.

Conclusion

Although it seems like a difficult proposition, changing from a one-time fee into a subscription based business is a simple and straight forward exercise. The benefits you gain from moving from one model to another can support the sustained growth of your business and offer your customers a great customer experience for a fraction of the cost per month.

Do you need recurring billing and subscription management software? Contact one of our experts at info@fusebill.com, call or check out the Fusebill free trial.

3 Security Questions Customers Will Ask About Your Monthly Service

"Image courtesy of cooldesign / FreeDigitalPhotos.net".

“Image courtesy of cooldesign / FreeDigitalPhotos.net”.

When customers are looking at your business they will be asking themselves several questions. Some of those questions will be about how your product can support them and whether the value you have placed on your product matches their perception.

One of the more complicated areas that will be scrutinized is the security of your business. Customers always want to know that you can provide a safe environment for their payments and details. Therefore there are a number of questions which they are likely to ask you and which you will need to answer.

Here are three of those security questions and how you can provide a solid answer to convince your customers they can trust your monthly services.

1. How Are Customer Details Stored and Used?

Privacy concerns are a major issue online. Many individuals have concerns that their details will be sold to third parties for extra marketing and sales. This can sometimes lead to customers receiving dozens of spam emails, unwanted mail and phone calls which are obviously unwelcome, so consumers avoid companies who do sell on their information. Customer data can be very valuable, which is why some businesses do this.

There are certainly instances where customers will be happy for you to provide their details to other parities. However, for the majority of the time small businesses should exercise caution and not sell on customer information.

There are two ways a business can effectively deal with this. The first is to include a checkbox asking permission to share consumer’s details. This creates a psychological contract between you and the consumer.

Another method is to clearly state that you do not share any customer data with third parties.

2. How Secure Is The Website From Hackers Wanting To Steal Information?

Hacking is a real security threat online. Major corporations and small businesses are constantly being attacked by rogue internet users in an attempt to disrupt a website’s operations and steal consumer information to sell on to other companies.

A big security leak is often bad news for a company and some businesses have been severely affected by hackers attacking their networks.

There are two ways in which your business can reassure customers on this issue. The first is to employ the best technology to protect your system. Tell your potential customers exactly what system you are using and how it is the best on the market to protect your network and their information.

The second is to regularly take down your site at a preplanned time to perform regular updates. Having constant reminders on this procedure and how it will affect your customers will reassure them you are taking the right precautions to protect their data.

3. Use A Good Third Party Billing Service

Nothing is more important to your customers than the security of their financial details. Consumers sometimes want to double check when they are being asked to pay a small business with no history directly.

Using a third party billing system is one of the best ways in which you can overcome this. A third party billing company is likely to be large, well known or at least have an established reputation which can be looked up easily.

Therefore advertising that all payments are taken through a third party might be a good way for your business to reassure your customers that their financial details are safe.

Conclusion

Demonstrating to your customers that you take their security seriously is a step towards developing a relationship built on trust. This type of relationship is strong and encourages your customers to be with you over the long term. This relationship sometimes requires you to reassure your customers with words – at other times it requires investment in technology.

Whatever the method, it is important you invest to attract customers to your brand.

Do you need recurring billing and subscription management software? Contact one of our experts at info@fusebill.com, call or check out the Fusebill free trial.

How To Use Comparative Selling To Sell Your Subscription Software

Image courtesy of Stuart Miles / FreeDigitalPhotos.net

Image courtesy of Stuart Miles / FreeDigitalPhotos.net

Before making a purchase, many decision makers like to have a firm grasp of what they are buying. Normally this can involve some kind of interaction with the product. With subscription software this can be difficult. A free trial may be a good way to attract customers, but it might not be the best way to convert those who take up your offer.

Therefore, other methods have to be utilised to encourage your target market to purchase a subscription. Another method is to compare your software. Comparative selling can happen on a subconscious and conscious level for the customer and there are several methods to exploit this effective selling tool.

1. Comparing Price To Everyday Purchases

Your pricing may be very reasonable, but without a tangible product for the customer to see, they may find it hard to value the offer. Comparing the product’s price to common purchases creates an impression of product value in the mind of the customer. A common comparison for a subscription is coffee.

Be careful in your choice and the frequency. Four cups of coffee a month is ideal because many people consume more than that.

2. Original Price Compared To Sale Price

To achieve great sales, stating an original price for a product and then offering a reduced price will entice visitors to convert. Often these new customers are ‘bargain hunters’ who want to find a good deal online. This works so effectively it even outperforms the rule of 9 – that is any price which ends with 9 has a higher conversion rate than that of a price point which is rounded up or down.

Therefore it is important to consider demonstrating a higher starting price and then showing a discounted price, preferably ending with a 9 for double effect.

3. Comparing To Useless Price Point

How you price different subscription plans will greatly affect your customer’s perceived value of your product. This in turn will change how they convince themselves of which plan to purchase. Research by Dan Ariely on the pricing strategy of The Economist shows this to great effect.

In the Economist’s subscription options they had three price points.

Subscription Offer One: A web only subscription at $59

Subscription Offer Two: A print only subscription at $125

Subscription Offer Three: A web and print subscription at $125.

Subscription offers two and three don’t make sense being the same but option three offers more. In the consumer’s mind, the second option becomes a ‘useless’ price point and they would be better off selecting offer three. In the study, option three had a high uptake even though there was a cheaper option available. This is because when faced with this type of scenario, consumers become value seekers rather than bargain hunters and will always seek the most value for their money.

This was further demonstrated in further research. The Economist tested what would happen if they took away option two. In this scenario consumers were more likely to purchase option one as they convinced themselves they didn’t need the upgrade.

Therefore having three options with the second option at the same price point as the most expensive option may increase your revenue.

4. Comparing Compared To Competitors

If you are in a highly competitive market you may be tempted to highlight your services or prices against that of your major rivals. This could work in theory, yet research has shown that at times, lower cost products do not always perform well against higher priced branded products.

This is because there is a consumer perception of value on the branded product. Instead you should concentrate on comparing your product’s features and benefits to that of your competitors. Consumers are more likely to buy a product which has favourable benefits rather than a favourable price.

Conclusion

There are several options when you want to use comparative marketing to convert your customers. The above four options are used regularly by many organisations to sell products and subscriptions. Consider what methods you can exploit in your sales process to increase conversions, income and profits of your subscription based business.

Do you need recurring billing and subscription management software? Contact one of our experts at info@fusebill.com, call or check out the Fusebill free trial.

Key Subscription Business Metrics To Monitor Each Month

"Image courtesy of jscreationzs / FreeDigitalPhotos.net"

“Image courtesy of jscreationzs / FreeDigitalPhotos.net”

To run the most effective operations in your business you need ensure you are monitoring your business’ metrics very carefully. Metrics are the indicators which demonstrate not only if there is a problem within your business, but where it is and how you might be able to solve it.

Here are some of the key metrics, what they mean and how you can improve the results:

1. Net Subscriber Change

This is where you are comparing the number of subscribers from the beginning of the month to the end. This metric is displayed as a percentage and can be positive or negative. It is worked out by dividing the number of subscribers at the end of month by the number at the start of the month and multiplying by 100.

You’ll always want this figure to be positive. A negative figure will state that your subscriber numbers are shrinking. If your figure is negative you have to look at several aspects of your business. Firstly is your promise before the customer’s signup matching the service you are offering? Not matching your promise can result in customers leaving quickly.

2. Customer Lifetime Value

One of the most important aspects of having a subscription business is to ensure your customer’s lifetime value is high. This allows you to offset the costs to bring in the customers and supply them with your product over a longer period, increasing the profit you make per month. To calculate this metric you need to take the average amount earned from the customers who have left during the month.

A low value can be a sign of a number of different problems including poor customer service, a mismatch of promise and delivery and your customers’ poor valuation of your product. Therefore addressing these issues is an essential task.

3. Customer Acquisition Cost

The main issue with a subscription business is that one month’s subscription does not usual cover what it costs to gain new customers. Knowing how much it costs to acquire the customer and their lifetime value, can help you determine if you are running an effective business.

A high customer acquisition cost specifically refers to your marketing tactics. Therefore you need to consider whether you are utilising the best avenues for your market. PPC and display advertisements cost a significant amount. You may not need to remove them from your marketing mix, but you should adjust them so that your audience is more targeted or the copy is more persuasive.

You should also consider your checkout process ensuring there are as few barriers to buying as possible and your landing pages are optimised. Consider running split testing to test different landing page designs and how effective they are at securing new customers and leads.

As another option you could consider increasing your marketing on other avenues such as blogging and social media, both of which help increase your search engine page rank and are inexpensive. Search engines can contribute up to 70% of your web traffic.

Having a good marketing mix which encourages good page rank can lower your customer acquisition cost.

4. Customer Conversion Time

Not all customers convert instantly upon learning about your brand. Sometimes it takes time for them to do further research or to look around the market for other options. They may subscribe to your mailing list which further down the line will support their conversion. The length of your conversion time is indicates how persuasive your marketing content is.

A long time from the first interaction to converting into a customer means you need to look at your brands’ messaging. Are you being persuasive enough, are you selling features rather than the benefits? These can make a significant difference and lower the time it takes for your audience to covert, the acquisition cost and increase lifetime value.

Conclusion

Getting the most from your marketing is all about understanding the statistics of your business. The above four are highly important if you want to maximise your customer acquisitions and their value. From there you can make adjustments to create a successful, high earning business.

Do you need recurring billing and subscription management software? Contact one of our experts at info@fusebill.com, call or check out the Fusebill free trial.