At the highest level, three major hallmarks of a strong subscription model are:
customer loyalty, and
the ability to harness a wealth of data for valuable subscriber insights
Predictable revenue and customer loyalty are key because, unlike traditional transactional billing models, subscription businesses frequently incur greater expense upfront to acquire subscribers. The payback on that acquisition cost happens over the subscriber’s lifetime.
The illustration above is a great way to visualize the importance of subscriber loyalty and recurring revenue in the economics of the subscription model.
To ensure payback on acquisition costs (and revenue growth after the payback is met), acquisition efforts must provide more than a high volume of new sign-ups—they must also attract loyal subscribers and predictable revenue.
This is where the wealth of subscriber data becomes crucial. Businesses must use a mixture of marketing, customer, and billing data points to evaluate which acquisition methods produce high-value subscriber and which prospects are not worth the investment of time and money.
In today’s post, we will focus on how to determine, using key metrics, the acquisition channels and campaigns that produce your most profitable subscribers.
First, let’s define some key terms:
An acquisition campaign, whether inbound or outbound, has a specific theme and focus. Specific campaigns must be tracked individually and have a defined start and end date.
An acquisition channel refers to the method by which you promote your product or services.
Subscription businesses must collect key marketing data points, such as acquisition cost or method. The value of tracking this information is to combine it with customer and billing data points in order to evaluate the performance of acquisition efforts. This helps you determine your best, most effective methods for acquiring profitable subscribers.
Using this data, here are a few metrics businesses should be evaluating to identify their most-profitable subscribers:
New sign-ups by marketing campaign
Definition: The total number of new customers acquired as a result of a defined marketing campaign.
Value: Assessing a marketing campaign’s immediate impact on customer acquisition. While new sign-ups don’t always equate to valuable subscribers, a high number of new sign-ups can bring in more potentially valuable subscribers.
New sign-ups by channel
Definition: The total number of new customers acquired through a specific channel.
Value: Understanding the channels that are performing the best for your business, either within a specific campaign or more generally over time. While the marketing campaign indicates the methods that might be working well to acquire customers, the channel more specifically hones in on where you are successfully reaching your customers.
Customer Acquisition Cost (CAC)
Definition: The total costs spent on acquiring a customer.
Value: Calculating the average CAC across all customers. When evaluated against LTV, this gives businesses a sense of their payback ratio. It’s also useful to evaluate the average CAC of all customers acquired via a specific marketing campaign or channel to understand which of these is most or least expensive relative to the payback.
Retention by marketing campaign or channel
Definition: The average customer lifetime (number of months from signup to churn) of customers acquired by a specific marketing campaign and/or channel
Value: Retention is one used to evaluate customer loyalty. If, for example, a business acquires a high number of new customers during a specific marketing campaign but each customer is only retained for one month, it’s much less likely the business will recoup the dollars spent on acquiring those customers.
LTV by marketing campaign or channel
Definition: The average lifetime value of customers acquired by a specific marketing campaign and/or channel. To calculate average lifetime value, a business must track its average revenue per subscriber and average churn rate.
Value: Ultimately, in order to understand where acquisition spend is effective in producing profitable subscribers, the total revenue from subscribers over their lifetime must surpass the total costs to acquire those subscribers.
How Recurly helps you identify your most profitable campaigns and channels
Recurly users can track the following on each account:
Customer Acquisition Cost (CAC)
Channel – chosen from a list of 13 preset values, such as paid search, direct traffic, referral, advertising, etc.
Sub-Channel – a free-form field used to provide additional details about the acquisition channel.
Campaign ID – the identifier for the campaign used to convert the customer
Users can then export this data in order to quickly assess the number of new customers acquired from each campaign and the average cost of acquisition for each campaign, and then compare these metrics to the retention and lifetime value of customers.
When it comes down to it, a subscription business cannot be successful without visibility into the relationship between acquisition costs and the payback on those costs over the subscriber lifetime. By harnessing key data points, you can leverage the most profitable campaigns and channels for meeting payback quickly.
In the next post, we will focus on another acquisition method: focusing on existing subscribers to increase new sign-ups.