Two Areas Where Subscription Businesses Lose Revenue

Building a subscription business is often not an easy task. It’s not just throwing up a paywall and then sitting back to count your dollars as they come flowing in. It can be a highly complex business. Compared to advertising, subscriptions are a whole other beast.

In 2020, I interviewed Bloomberg Media’s Julia Beizer, who was responsible for building the subscription business. And she said this crucial part:

We’re not launching a paywall. We’re launching a subscription business. A paywall is a toll booth. Please pay us some money. Great. Can you transact? Amazing. Transaction done. A subscription business means, can you actively continue to recruit and attract new members every month, acquire them. Can you retain the ones you have? Do you have the right email programs set up and push notification set up to make sure subscribers are getting value out of their subscription? We have spent a lot of time and effort in building out what I would call a 360 degree marketing apparatus in support of these efforts.”

All of that takes a lot of time and effort. Being able to simultaneously acquire new subscribers (the fun part) and retain current subscribers (the necessary part) is complicated. It’s why subscription businesses are often called a “leaky bucket.” You’ll never really plug all the holes, which means growth is adding new subscribers and replacing old ones.

What I want to focus on is the retention side of things. There are many things media companies can do to ensure they are maximizing revenue for their subscription business. However, there are two that are a lower lift and still pretty impactful.

Pricing strategy

How you decide to price your subscription will significantly impact your revenue. Obviously, if you charge too little, you’ll leave a lot of revenue on the table. This is why one of the best things Substack ever did was force the cheapest subscription to be $5. People underestimate how much they should charge for their subscriptions. But you can also charge too much where people don’t sign up.

The goal is to maximize revenue, not the number of subscribers you have. Therefore, you have to channel your inner Goldilocks here. If the subscription is too cheap, you’ll miss out on revenue; if it’s too expensive, you’ll miss out on revenue, too. So it has to be just right.

But what is just right?

That depends on your publication. For consumer media companies, it’ll be one price. For b2b, it’ll be a different price point. You’ll want to test that out and see what works with your particular audience. For example, if you have a cohort of the audience paying $5 a month, increase it to $10 for the next cohort. Conversions may have gone down, but did revenue increase?

But there’s more to the pricing strategy conversation than how much to charge. You also want to discuss when to charge. The standard strategy is to charge monthly. The problem with that is when you charge monthly, you’re basically giving subscribers 12 opportunities in a year to churn. And this can have a big impact on revenue.

According to Piano, “for monthly subscribers, churn rates are nearly three times higher in month one than month three, perhaps because certain subscribers don’t see the long-term value of the offering.” It breaks down like this:

• 18.3% first-month churn rate
• 11.1% second-month churn rate
• 7.1% third-month churn rate

An annual plan, though, requires you only to renew someone once a year versus 12 times. That’s a big difference. So, what is that worth to you? Is the certainty of revenue worth giving a discount? I give $40 off a full-price subscription at AMO—$60/quarter or $200 a year.

Speaking of quarterly, that’s another way to think about pricing. Some people don’t want to commit for a whole year, but can you get people to commit to a partial year? Any opportunity you have to reduce the number of times the user has to decide whether they want to stay subscribed, the better.

So, how much you charge and how often you charge factors into how much revenue you can make in an acquisition and retention sense.

Passive churn

There are two categories of churn. The first is active, which we are trying to combat a bit with our pricing strategy discussion. This is where someone chooses to unsubscribe. The second category is passive churn, where a user didn’t choose to unsubscribe.

There’s one major way this happens: payments fail. There are many ways this can happen, but the big one is that something about the credit card on file has changed. That typically happens one of three ways:

• Address change
• Expired
• You’re an idiot and lost your wallet on the back seat of your car but couldn’t find it because you’re blind, and therefore canceled everything and then found it a couple of days later (yes, that’s me)

All three scenarios would result in the credit card on file failing when your system goes to charge the customer. And unless you tell the reader something has changed, you’re out a subscriber whether they liked you or not.

Here are a couple of ways to fix that.

First, add PayPal as a payment option. PayPal has my credit card and my bank account attached to it. Therefore, if my credit card were to fail, PayPal would charge my bank account directly. In late 2019, Piano sent me a research report, and one part talked about how PayPal helped its clients. Piano found that PayPal retained annual subscribers nearly twice as well as standard credit cards and Apple Pay. Having multiple payment options built into the tool helps a lot.

Second, communicate more with your subscribers during the renewal run-up, a strategy called dunning. And in these emails, you should tell your subscribers that there’s nothing they need to do to renew unless their credit card information has changed. This might prompt them to have an aha moment and go and update their info.

Then, when the payment does fail, immediately send them an email and alert them to this problem. The goal here is to communicate every step of the way.

Will it work? Not entirely. But the goal can never be filling all the holes in the bucket. Instead, dunning is meant to help fill as many as possible. The fewer there are, the more opportunity for your subscriber acquisition to grow the business.

If we bring it all back to the beginning, acquisition and retention are the two broad parts of a successful subscription business. Reducing the number of times someone is charged and fighting passive churn are two strategies to retain more subscribers. That’s the name of the game.

Thanks for reading today’s newsletter. If you have thoughts, hit reply or join the AMO Slack. I hope you have a wonderful weekend!