Why Don’t More Companies Use The Subscription Model?

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

A subscription model is very useful when it comes to running a business. It provides benefits for both your brand and your customers while being very easy to set up and manage. Yet there are a number of businesses out there who are perfect for this model but have not converted. What are the reasons for this?

They Think Subscription Models Aren’t Applicable To their Industry?

There are many products and services which suit a subscription model, yet businesses are unaware of the opportunity. This often forces them to stick with “pay once, use forever” models. However, as can be seen by businesses like Dollar Shave Club, every industry can use a subscription model.

Businesses who want to convert need to sit down and think carefully about their product. If it is a simple product which is delivered with regularity there is the opportunity to create a subscription service. They just need to consider the frequency of delivery and how much they are going to charge your customers.

They Believe Customers Aren’t Going To Like A Subscription Service!

There are many times when businesses might be convinced that their customers aren’t going to like a subscription service. This is often the case when it comes down to certain types of software like operating systems or when the product is required to operate another device / service.

For instance, an operating system on a Mac or PC is necessary to run the device. Consumers might feel they are being cheated if the product they buy is not fully operational without further purchases. This move has been seen with the recent changes Adobe has implemented where users now have to pay a subscription.

However, this sentiment is normally gained because an old – ‘buy once, use forever’ model was implemented. There are some flaws with this model with software and similar products. For instance, many software providers only allow the installation on a set number of machines, normally about three. This means that if the user has more devices or replaces devices on a regular basis, they have to buy the product several times over or buy more licenses – an expensive endeavour.

If the business moved to a subscription basis, the user can be offered a more cost effective method of having access to the software while allowing the product on as many devices as they own. Businesses just need to explain this benefit.

In addition, the cost of buying a product outright can be expensive for the user. Having a subscription gives customers a more cost effective method of gaining access and allows more of the target audience access to the product.

Business Want The Higher Purchase Amount From A One Off Payment!

While businesses may earn more money per transaction when it comes to a ‘buy once, use forever’ model, evidence has shown the lifetime value of the customer is significantly less. Research demonstrates users tend to not unsubscribe from subscription services if the regular payment is low enough and there is good service being provided. Therefore, customers can be with the business for a significant amount of time which will provide more revenue than if the customer was made to buy the product outright. This allows the company to focus less on new customer acquisition to maintain a healthy cash flow and more on customer service, which is less costly.

Conclusion

A subscription based business is one of the most profitable models. The reasons why businesses think the model is not suitable are usually misconceptions. For most industries there are significant opportunities for a subscription business model.

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 Sell The Convenience Of Auto-Renewal

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

When you have a subscription business you need a method to collect the membership fees from your community. You could attempt to do this by sending out a manual invoice at the start of every billing period. This can be expensive and a waste of time that can be put to better use.

Instead, you could use an auto-renewal system to collect payments automatically from your customers. There are several benefits for your business when usin

g an auto-renewal payment scheme. For example:

  • It reduces the amount of administration you and your team have to do.
  • There is a higher retention of subscribers for your business.
  • You know exactly when payments are going to be made by your customers.
  • Reports can be auto-generated to inform you when payments have failed or been cancelled.

While these benefits are a good reason for your business to use an auto-renewal subscription model, your customers will need to be sold as to why they should auto-renew their subscriptions.

The Convenience For Your Customers

The major benefit for your customers is the convenience an auto-renewal subscription model offers. It takes time for your customers to receive, check and pay a manually issued invoice. Having the process automatically completed each period allows them not to be disrupted in their daily lives.

In addition, the process can have financial benefits. As you will not have to process the payments manually you might be able to offer a discount. Energy companies commonly sign up customers to an auto-renewal system by offering a small discount, often between 5 and 10%.

These benefits are especially good if your members are paying a standard flat fee for membership. It allows them to confidently know exactly when and how much the payment will be. This can support their financial planning and management.

Calming The Concerns

One of the major concerns customers may have is cancelling their subscription. It is likely that at some point some of your customer will want to leave the business. They may feel they have to go through significant processes to cancel their subscription including speaking to your customer service team or sending emails to your cancellation team. This may worry them.

In reality the process is much easier. A customer only needs to cancel the payment instructions which exist between them and you. This can be done through their online banking dashboard. This means the payments can be stopped immediately, instead of waiting for your administration team to process the cancellation.

At the same time your online system can be informed immediately and access restricted at the next ‘end of period’. Or if you send out physical products, your distribution team can be informed of the change and they can remove them from the mailing list.

Another benefit for the auto-renewal is your customers will never miss out on a product or period because they have forgotten to make the next payment. This can be particularly useful for physical products such as magazines.

Conclusion

Auto-renewal is one of the most popular methods for subscription businesses to sign up customers. While they have significant benefits for the business, customers are sometimes unaware of the advantages they can gain from signing up to an auto-renewal system. By selling the benefits such as never missing out, the ease of payment and cancellation should they want to leave your business you can increase the uptake of auto-renewals.

This allows you to save costs in manually sending and processing invoices. This can lead you to invest the funds elsewhere in the business or offer your customers a more competitive price.

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 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.