Podcast

Learn from Fast Growing 7-8 Figure Online Retailers and eCommerce Experts

EPISODE 14 50 mins

Subscription eCommerce Model; Key Metrics for Rapid Growth

Posted on 24th April 2015 , by Kunle Campbell


About the guests

Craig Vodnik

Kunle Campbell

Co-Founder of cleverbridge - a global ecommerce and subscription provider for over 300 enterprise clients.
Craig’s is an internet tech veteran - his expertise dates back to 1995 when he was part of the team that launched the Chicago Tribune Newspaper’s website.
He has worked in ecommerce, advertising and the financial services industry. And has a degree in Nuclear Engineering!



Craig Vodnikis is the co-founder of CleverBridge, a global ecommerce subscription service provider serving over 300 large corporations.

With his internet expertise dating back to 1995, Craig gives an insight into how subscription commerce has evolved online in the last 10 years and how this business model will still benefit ecommerce companies in the coming years.

With customer retention being at the centre of subscription commerce, Craig talks about providing maximum value to customers and which metrics are the most important, as well as giving advice for start-ups thinking about starting a subscription based business.

Key Takeaways

03.11                  About CleverBridge

06.43                  The evolution of subscription commerce

13.25                  Ideal products for a subscription business model

18.27                  Subscription models based on price, convenience or value

26.31                  The concept of discovery in subscription commerce

31.42                  Subscription versus one-off payments

33.51                  Important metrics to keep track of

40.32                  The “freemium” model 

Most Important Subscription Commerce metrics

  1. Churn rate

    • Churn rate should not be beyond single digit percentage
    • Balance conversion rate with customer lifetime value
    • Calculate on an annual basis
    • Show customers the value of the product
  2. Customer Lifetime Value

    • Assume churn rate when initially calculating CLV
    • Show customers the value of the product
    • Be honest and transparent with customers
    • Balance customer lifetime value with conversion rate

 

In the digital world, we see a lot more focus on value. The convenience isn’t really an issue, people are able to get the product.

In our business, people are primarily moving to monthly because they’re providing enough value on a monthly basis.

If your churn rate starts to get beyond the single digit percentage point range, you’re running into a real problem with your business.

Freemium models are great because they can’t be disrupted as easily as a normal business where you have to pay for the product upfront.

Provide as much value as you can and your customers are hopefully going to see it and will keep paying for your product.


Transcript

Kunle: Are you considering leering in subscription ecommerce into your existing ecommerce business? Or starting up a subscription ecommerce business? If your answer is yes to both or either questions, then listen in to this episode. We’ll be talking about the ideal products for subscription commerce, key metrics for your subscription ecommerce, like customer lifetime value, return rate and cost per acquisition and why subscription ecommerce is such a hot topic right now in ecommerce. So stay tuned.
Welcome to the 2x ecommerce podcast show where we interview founders of fast growing seven and eight figure ecommerce businesses and ecommerce experts. They’ll tell their stories, share how they 2x their businesses and inspire you to take action in your own online retail business today. And now here he is, the man in the mix, Kunle Campbell.
Hi 2Xers, welcome to the 2X ecommerce podcast show. I’m your host, Kunle Campbell and this is the podcast where I interview ecommerce entrepreneurs and online marketing experts who will help uncover your questions and help you, guide you with tactics, and perhaps strategies to grow your online stores. If you’re looking to double metrics such as average order value, conversions, repeat customers, traffic, and ultimately sales, you are in the right place.
On today’s show, I have with me Craig Vodnik. He’s the co-founder of CleverBridge, a global ecommerce and subscription prodvider that powers over 300 large corporations worldwide. Craig’s an internet tech veteran with his expertise dating back to 1995 where he was part of the team at the Chicago Tribune newspaper that launched their website. He’s worked in ecommerce, advertising and the financial services industry and he’s got a degree in nuclear engineering, so he’s a very clever chap. He’s going to be talking to us about subscription ecommerce and how it’s gone mainstream and why its predictability in recurring revenue stream makes it such a desirable model. Without further ado, I’d like to welcome Craig to the show. Craig, hi there.
Craig: Hi Kunle. Great to talk to you today.
Kunle: Fantastic. Could you take a minute or two to tell us more about yourself?
Craig: Sure. I think you hit on the main points which are that I’ve been doing internet technology for quite a while, about the last 20 years. I love what I do on a daily basis, working on the internet, helping businesses generate revenue and, although I have a degree in nuclear engineering, it does not necessarily mean I’m an intelligent chap in any way, shape or form. So let’s get that out there right now.
Kunle: I like it. Being modest as usual. I’m quite excited to talk about subscription ecommerce just because of the phenomenal growth over the last 5 years to gen 3 ecommerce businesses in general. Before we go into questions, could you tell our listeners about CleverBridge? When it was founded, and the kind of things that you do?
Craig: It’s really interesting because as you talk about ecommerce and subscription being generation 3, we’ve seen it go from generation 1 to, today, generation 3. CleverBridge was started in 2005, but the roots of it begin in the late 90s where some of my partners started working for a company called Element5 and we all came from the ecommerce industry of the late 90s, so we went through the whole .com bust. I started working for this company called Element5 in about 2002. That company was based in Cologne, Gemany, where my partners are and that’s how I got to know them. The company was sold in 2004 and that company was also very much an ecommerce focused company for the software space. So we saw the change of buying habits and user habits, going to a store to buy software, they were then doing it online and as the bandwidth sped up, they were downloading the software directly and we saw that whole change. What happened was when we started CleverBridge in 2005, we said “we can do this better”. We’ve got ideas on how to improve ecommerce, particularly focusing on mid-tier to enterprise level companies. We bootstrapped the company from the beginning, put our own money in, we started with 7 people from Element5 that left and started CleverBridge together and within 2 years, we were already profitable. Today we have 300 people across 3 different continents, 180 in Cologne, Germany, 100 in Chicago and 10 in Tokyo. What we’re seeing now, in the last couple of years, is a change that is similar to what we saw back in the early 2000s where companies went from the perspective and mentality of US Dollar, English language, credit card for ecommerce to much more of a global perspective and wanting payment methods, wanting currencies, understanding that it matters to cater to the local customer, as opposed to having a one-size-fits-all approach. What’s happening nowadays in the subscription commerce world is that people are saying it’s no longer important to just have a product that you release on a regular basis and then have to convince people to pay for it. You now have this distribution mechanism of a cloud product where you can distribute your product through the cloud and it makes sense. In return, you’re getting a recurring, reliable revenue stream and that is the subscription commerce model.
Kunle: From what I’ve picked up, which is pretty exciting, the growth and the fact that when you started you were bootstrapped from 7 to close to 300 or over 200?
Craig: Close to 300.
Kunle: It’s a phenomenal story, but what I’m gathering here is you are a subscription business for largely SaaS, Software as a Service companies. Is that correct?
Craig: Yes.
Kunle: What I’ve noticed is the concept of subscription on SaaS businesses has sort of replicated itself clicked into ecommerce over the last 5-6 years. In essence, this conversation really is getting down to those fundamentals and seeing how those fundamentals can be applied to ecommerce going forward.
So, going into subscription commerce is nothing new. We’ve had milk delivery and magazine subscriptions. How has it evolved from its beginnings to the digital world with SaaS companies as well as ecommerce?
Craig: It’s a great question Kunle. The platform had to be available, people were looking for value in their products and what we saw in the late to mid-2000s is a lot of companies would say “my business is doing well, however there’s this new way to delivery my software product through the cloud”. Salesforce.com was really the leader in this for a long time and I think that that’s where a lot of people got the idea that “you know what, maybe I should be delivering my product through the cloud, it’s reliable enough, consumers want it, they trust that the product can be delivered that way” and so it became “maybe I should deliver my product through the cloud because I can then charge customers on a monthly basis”. It was more, I would say, opportunistic and taking advantage of what was happening in the computing world and the internet, from that perspective for why companies are really gravitating towards the subscription model now and why you hear so much about subscription commerce. What happened in, let’s say, the last 3-4 years is as people realised that subscription commerce was so important and very valuable because you’re getting a reliable revenue stream in, they then said “let’s take this concept and try to apply it to the retail space”. That’s when you saw things like Mystery Tackle Box and Birchbox and Dollar Shave Club, these kinds of companies coming on and saying “you know what, I want to take that concept of subscription commerce and i.e. reliable revenue stream, and apply it to my business to try to create a new business that will disrupt the existing intrinsic players”.
Kunle: That’s very interesting. So broadband really triggered this in the early 2000s, the proliferation of high speed internet. Software in general could then be delivered on the internet reliably and securely and why not create this as a service? And that had sort of been taken into retail. That’s quite interesting. What are your thoughts on the current state of subscription ecommerce, the marketplace in general now? Is there still opportunity in subscription ecommerce or do you think we’re hitting saturation point?
Craig: Everyone’s talking about it and they have been for a little bit of time now. I remember about 4 years ago, we had an event where we did a panel discussion about moving your business to the cloud, or from a downloaded product to a cloud hosted product, which embedded in that product was subscription commerce and that was really early. A lot of people were still like “Why would I want to do that? I don’t believe that it’s really sort of there and the platform is not ready for it yet”. Nowadays, everybody’s talking about it so it’s got a lot of buzz and what we’re seeing is that, especially over the last few years, certain businesses have been completely disrupted by the subscription commerce model, which is that a product can be delivered in a subscription way through the cloud as opposed to a download product. But there are “everybody’s talking about it” and ”everybody’s trying to find a solution“ where they can implement the subscription commerce model but it does not apply to all businesses. I think that the Dollar Shave Club is a good example where that might work, where instead of paying 15-20 Dollars for a pack of razors, you’re able to pay $1 a month or $3 a month in order to get a similar quality razor delivered to you through the mail. There’s the convenience aspect, but it’s also a lower price. But in a lot of cases, that subscription commerce model does not make a lot of sense.
I’ll give you another example where I believe that there’s a creative aspect here where if the business already has their product, they can be creative to implement a subscription commerce model without necessarily having to change their product. The example I thought of was heating and air conditioning, the mechanical equipment that you have in your house. For the last 50 years, you’ve got these guys running around and they come out and they fix the problem when it arises. So if your heat goes out, you call the service man, the service man comes to your door, they fix the problem, they go away, you don’t necessarily have any relationship with them until the next time you have a problem. And over the last 5-10 years, I’ve noticed that the mechanical equipment companies are now calling me on a regular basis saying “Hey, how about you sign up for this service contract? It’s a 3 year contract, it gives you the ability to have regular maintenance on your product and you get a discount for doing it, so I’m trying to incent you to do it Mr Customer”. But in return, what that company is really getting is reliable revenue coming in and they’re not changing the original product, they’re simply adding in a different angle to it.
Kunle: Almost like a retainer contract.
Craig: Yes, in a way, a retainer.
Kunle: Do you pay for parts or is it just purely on the service?
Craig: That’s just the service component. They guarantee that they will come out and look at your equipment twice a year, but then of course, if they find a problem, you’re going to pay for the parts anyway. So they’re locking you in as a customer to be using them for the next few years and then you’re still going to pay whatever price they have for that part if you have a problem.
Kunle: I love the predictability from that perspective. Coming back to ecommerce, what kinds of products would make ideal candidates for subscription ecommerce?
Craig: What we’re seen is that companies that have a product where they’re providing a service on a recurring basis, or a regular, continual basis, those are the ones that have the best chance of successfully getting their customers to pay them in a subscription commerce model. I’ll give you an example. In the software space, you have antivirus and anti-malware products. Those companies are protecting your computer on a daily basis, an hourly basis, so those products are doing a job on a regular basis and updates are provided to that software every single day. That’s a situation where the company providing that product has been for a while saying “You know what, we’re providing a service on a regular basis, rather than the customer only paying when we provide a new version of the product, since we’re providing that service of the new virus and malware definitions on a daily basis, the customer should be paying us on a subscription model”. That’s one that’s worked. So companies are providing a service on a regular basis, you should be able to charge in a subscription model. I think that the maintenance aspect, like we talked about with mechanical, that also applies in software, particularly on the enterprise where companies like VMware, I’ll take this as an example, it’s a client of ours, they sell millions and billions of Dollars a year of virtualisation software, but they also have maintenance contracts that come with that. So, as CleverBridge, if we were buying the VMware software, we’re not experts on their product, so we want the ability to call and get support on an “as needed” basis going forward, so that’s why you sign up for a maintenance contract with VMware. In that scenario, the product itself, the VMware virtualisation product, is not a subscription, but the maintenance component is. That’s another example where you’re signing up for a subscription or you should be and can be signing up for a subscription for maintenance rather than, let’s say, 10 years ago where companies would say “How about buy this maintenance, it’s for one year and here’s the price”, and then what happens is the next year you’ve got to go back to them and try to get them to sign up again for it. So signing up for a subscription maintenance basically implies you’re signing up on a recurring basis until you cancel. That’s a much better way to go.
Kunle: I see this applied for ecommerce retailers that sell appliances such as washing machines, fridges… At the moment the warranty expires, since they have that relationship with their customers, they could potentially offer subscriptions for maintenance for those devices which they’ve purchased. Same with retailers of computers. It’s certainly a very interesting area for potential revenue.
Craig: One other thing that I would say, Kunle, is that if you think about your existing business, you may not have a subscription commerce play, but if you essentially think about disrupting about yourself, you may have a subscription commerce play that’s much bigger than what you’re doing. I’ll give you an example. 10 years ago, it was popular for people to buy FTP software. People would buy FTP software because it was so difficult to transfer files back and forth between two people that wanted to do it. You would buy a client, you have the client on your computer and then you would post it to a server. The other person that wanted to receive it would have to have some FTP software where they could log into the server to download it. Now, or let’s say 5 years ago, all these companies lie YouSendIt, SendSpace, they all came up and they started allowing people to send these simple links back and forth so that you could just upload a file , you don’t have to know any passwords. You just upload it, a link is sent to the recipient, they click the link, it gets downloaded to their computer. The need for an FTP client basically went away. Not completely, but for the most part, the consumer aspect of this went away completely and was disrupted by these new companies. If those FTP client companies that focused on consumer clients had said “You know what, because the technology is better, we’re now going to think about how we can disrupt ourselves, or how somebody else might disrupt us. We should be trying to implement these solutions ourselves before somebody else does. Don’t protect your cash cow if there’s a risk of being disrupted. You may as well do it to yourself before somebody else does it to you.
Kunle: Absolutely, and there is always a risk with disruption. I love it when you said “disrupt yourself”, because that concept has been said over and over again but people don’t really realise it and subscription could offer that exit, that new avenue for disruption. Good stuff. Should the motivation and the value proposition of subscription ecommerce retailers be based on price and convenience only? When you’re thinking of starting up a subscription ecommerce business, should you really think about price and convenience only? What do you think about value or bringing a different experience or expertise? Because I’m seeing two types of subscription commerce models starting to emerge. On one end of the spectrum is really price and convenience and the other end is more expert. I’m thinking about Graze.com in the UK or HealthyBox.com. What they do, pretty much, is they create healthy snacks and provide it and surprise and delight their customers on a regular basis, and customers basically trust their expertise, and it’s different to the rest of the market. What do you think about convenience and price versus value on the other end of the spectrum? Should we do for one or the other or do you think there’s space for both types of subscription going forward?
Craig: Especially from a retail perspective, convenience is a big part of it. You’re basically saying “Hey, sign up for this thing so that you can receive it automatically to your door”. Maybe sometimes, by the way, it’s also cheaper. I think that that works because you’re dealing with physical products, things that have to get moved around, and there’s that convenience aspect. You don’t have to go to the store. In the digital world, we see a lot more focus on value. The convenience isn’t really an issue, people are able to get the product. There is a convenience aspect to a certain extent, but it’s more in the delivery mechanism of a download product versus a cloud product. What companies in the digital space are doing is they’re saying “I’m going to take advantage of the fact that the distribution is easier, I’m moving from download to a cloud delivery model”. They’re taking advantage of that to implement a subscription model or subscription commerce at that time.
An example of this is Adobe. Adobe went ahead and made a major transformation of their business. You buy the product based on the version that’s released. Again, Adobe was having to convince people to buy the latest version every year. Now they’ve moved to the subscription commerce model, where they basically say “The value of our product is so great that you’re going to pay for it on a monthly basis and we’re going to continue updating it, but you’re subscribing to our product”, which is actually delivered as a service and that’s more important than having to price point discussion, or convenience. And there is an aspect of convenience there, though, which is that you no longer have to deal with the installation of the product, updates of the product on your computer, it’s all done through the cloud, behind the scenes. So in the digital world, there’s some inherent benefit and there is a component of the value that is convenience but that’s not what’s striving people’s decisions.
Kunle: So I guess you reduce supplier fatigue if there’s value constantly driven in your subscription model?
Craig: Yeah. It’s easier for people to just stay subscribed. Once they get onto something, once they start using that product, it’s very easy to keep using it. So this gets into some of the metrics of what’s the right price point and how do you look at that. Because Adobe went from 1500-1700 Dollars for their suite down to 40-50 Dollars, maybe $100 per month. What’s the break-even point that a customer has to be with them before they’re actually losing money by switching to a subscription model?
Kunle: I think that would be like 12-15 months. The nice thing about it, though, is they had a proof of concept from their initial downloadable software and it was probably representative of people who would buy the upgraded version of the software. So they had a rough ballpark figure on numbers before they moved on. Perhaps it was 60% of people who actually moved to the next version, so we could turn this into a subscription business. And I think that in retail, retailers who are quite used to selling on a regular basis, I interviewed SockShop.co.uk, they sell socks, they’re the biggest online retailers of socks in the UK, and just last week, I was on a US site and I saw sock subscriptions. They had two options. One was the boring option where it’s like a fixed style of socks on a regular basis, I think it’s every month or every two months. And the other is surprise and delight, where they give you all sorts of colourful socks to have the coolest sock collection in the block. So they’re obviously trying to target a very young demographic, and it worked, I hope it works. So I guess retailers should start thinking about if your products actually qualify for something that actually can be gotten on a regular basis, then perhaps now might be the time to test your market or to test a subscription model. Amazon do it. I’ve noticed a subscription button in the grocery section and, I think just last week, Amazon released a dash button for consumables, so apparently when you run out of washing up liquid, you can press a button and they send it through to you. It’s reducing friction I guess.
Craig: One point I would make on this, and it’s more on the retail side, a company shouldn’t just look at their product and say “My product is wrong, I need to change my product in order to do subscription commerce”. A good example of this, where they are basically layering on subscription commerce on top of their existing product or thinking about it in a creative new way is REI. They are sporting goods, outdoor gear company here in the US and I remember going in there a few years ago, and when you went and bought something at the checkout, they said “Do you want to become a member of the REI club?”, I thought “Ok, what is this? Why do I want to become a member?” . For $20, I think it was $20 a year but maybe it was just one time, I was able to get discounts on an annual basis, they would send me offers all the time, I would be part of special promotions that happen in the store, I would get invited to things. So that $20 subscription made me feel special for one thing, but then I was also able to save money if I shopped in any regular fashion with REI, so it could drive foot traffic back into the store by simply leering on a subscription commerce product on top of the normal product that they offer.
Kunle: Funny thing you mentioned joining a club. Language is quite important, especially client facing language, consumer language. There’s a brand here called Naked Wines, I was meant to interview the founder of Naked Wines, they are actually in the US now, and they create a wine club where people subscribe to getting cases of wine on a regular basis with them and it is a club. Actually, they don’t even refer to it as “club”, they refer to their members as “angel investors” surprisingly. The value proposition is really the fact that the wines they get help small vineyards. They are not sourcing from the bigger ones and they go into really niche growings, money actually helps grow businesses in the new world, from South Africa, New Zealand and South America. It tends to work, they are really fast growing. They’re an eight figure business. How important should retailers take the concept of discovery in subscription commerce? By this, I mean where they don’t exactly know what’s coming in on a regular basis but they trust your judgement. An example would be Graze.com, you know you’re going to get healthy food coming to your door every week or every month, but you leave it to them to curate. How important is it if people are considering moving into subscription commerce?
Craig: I think discovery is a great way of starting and seeing if there’s demand for a particular service or products like that. There are numerous companies. I know a company here in Chicago called Trunk Club that was recently sold to Bloomingdale’s for $300 Million. I don’t know if it was specifically subscription, I think it was a private buyer for men’s clothing, and they would, essentially, every month send you new shirts, they would hand pick them and do all that. So Bloomingdale spent a lot of money on that. That to me, sounds like discovery. I think there are new businesses like that popping up, I think it’s in vogue right now. You also could think about discovery from the perspective of the meal side. I know, again, in the US and particularly in Chicago, there’s quite a bit of this where there are companies popping up saying “Hey, we’re going to send you 2 meals a week or 3 meals a week, subscribe to this service and we’ll provide you those healthy options”. It’s actually quite popular right now. So I think the discovery aspect has legs, much like the daily deals did from 6-7 years ago where maybe people thought it wouldn’t last, it’s lasted. Maybe it’s not as sexy as it used to be, but it’s lasted and I think that discovery will also continue to last.
Kunle: From a bootstrap standpoint or from a funded standpoint?
Craig: I think both. It depends on the business. If you get the right entrepreneur and you have the right product, you’re going to be successful. So whether it’s discovery or not, it should be successful.
Kunle: Very interesting. How would you describe the effect created by having a brand in front of a customer on a repeat basis and not a one off from a subscription? So, they expect to see your product on a monthly basis. Does it have a halo effect in a way? Is that an advantage in subscription ecommerce?
Craig: Well, let’s put it this way, I would say it’s probably a double edge sword because, on the one hand, if you’re getting a product from somebody every month, that’s great, you see the brand. When you look at your credit card statement and you see the price, you might not be so happy. And then what happens if the product itself misses the mark for some reason or the quality deteriorates? All of a sudden, you’re front and centre every single month and it becomes very easy then to cancel. So, yes, I’m painting a darker picture just to illustrate the point that it’s a double edge sword, but in reality, I think if you were to weigh these, the value/benefit is much greater than the risk by being in front of a customer every month.
Kunle: I guess it’s a question of value. The value’s there and it works, but as you said, if it starts to depreciate, then it’s a question of value again.
Craig: And interestingly enough, I would say if the value is there and if you have a lot of value, you’re actually able to increase your price. You’re going to be looking at your data to go “If my churn rate is so low, I’m probably under-pricing my product”.
Kunle: Ok, we’re going to talk about churn rate later. Connecting back to the last question, what’s your thoughts on monthly payments versus one-off payments with a 10-20% discount? What are you seeing from your business?
Craig: In our business, people are primarily moving to monthly because they’re providing enough value on a monthly basis and they are providing their product through the cloud, the customer is using it every week, if not every day, therefore a monthly billing model makes a lot of sense. The only time that it doesn’t make a lot of sense is when you’re really charging such a small amount that the cost of charging that amount and managing those customers and all the billing issues that come around it is not worth it. I would say if that number is generally under $10 a month, it’s probably better to move to a quarterly or an annual plan. If you look at Dropbox, I know that they have a $99 plan. I think that there are some companies that are trying the $9.99 or even $4.99 a month, but your costs get eaten up. The costs eat up quite a bit of that profit, so it’s the price point.
Kunle: I just tend to pay a year down services like Dropbox or Evernote because the bookkeeping isn’t worth it in terms of time, trying to track those expenses.
Craig: The downside though of doing it that way is as, if I’m Dropbox, yes I’ve got the money upfront, I gave you a discount, however I’m not in your consciousness from a billing perspective every single month and so, a year from now, you might have a higher churn rate because people are like “Oh yeah, I forgot, I have to pay for this and it’s $99, do I really need this?”. So again, it’s a balance. There’s no one right answer, but it’s a balance.
Kunle: And relative to circumstances really. Ok, let’s talk about the most important metrics to constantly measure for subscription business and then we can connect that to retail. If you were in the driving seat of an ecommerce business, what metrics would you be looking at to drive your business?
Craig: The two most important metrics to me are churn, which is the percentage of people that cancel your product on an annual basis and also customer lifetime value. Because when you start to look at how valuable that customer is to you over the course of their lifetime, you start to really have an appreciation for what it is that you’re doing as a business and how and why you’re spending money to acquire new customers. Because what we’ve seen with some companies is that they don’t really appreciate the difference or let’s say the competing aspects of customer lifetime value and conversion rate in the cart. They basically say “I’m looking for the highest conversion rate possible in the cart”. This is a very “one-time billing” mentality. What happens is you may be spending a lot of money to acquire customers, to get them to actually open their wallet for you, when in reality, maybe the ROI spent, on AdWords for example, is $1.50 for every $1 you’re spending. So you get that $1.50, but the real net is $0.50. It turns out that those particular customers that you acquired and had a much higher conversion rate in the cart because of it turn out to have a lot more questions, they don’t use the product as much and basically, they churn out very quickly. So if your churn rate starts to get beyond the single digit percentage point range, you’re running into a real problem with your business or it at least shows you that you’ve got things that you should be doing in order for your business to be as efficient as possible. And so that’s where you start to get into lifetime value. If you’re saying the lifetime value of my customers is the most important thing, which it should be in my opinion in a subscription commerce model, then you want to basically have those customers paying you for as long as possible. If you’re signing up a bunch of people that are cancelling after 1 or 2 months or after the first year, that’s defeating the purpose because you’re most likely spending a lot more money to acquire those bad customers than you’re getting in the long run. So as a business you can be much more efficient by not spending that money and acquiring bad customers.
Kunle: Very good answer. I have a question about CLV. For a start-up company, because there’s no visibility or history or any figures to look back on, how do you calculate CLV?
Craig: Well obviously you’re going to estimate it.
Kunle: Based on what time period? 12 months? Is it relevant to circumstances?
Craig: It depends on the price point of your product, it depends on the cost of that customer, not only the cost of acquisition but what are you providing as a service. If you’re providing a very low margin product, you need a much longer period of time to make up all of the customer acquisition costs. For example, if you’re selling razors and your cost is $2 for the product and you’re selling it for $4, then if it costs you $30 to acquire a customer, you have to have that customer on average for 15 months just to make back the acquisition part before you get into the profit. So it really does depend. That didn’t even include churn rate. You should assume some churn rate. There are lots of good websites out there, to give some numbers, it really depends on the price point of the product, how much your cost is and some other factors, but as a general rule, you should be looking at a very low, single digit percentage of churn, if possible on an annual basis, because otherwise, especially as you scale, you lose so many customers on a monthly or annual basis that you can’t acquire new ones fast enough to fill in and you plateau.
Kunle: It creeps into growth basically. Churn eats into growth and then you have to go much higher than growth by acquiring new customers and that’s depending on the customer lifetime value. It’s a circle. Very interesting. Traditionally, a lot of our listeners are etailers or related to some online retail business and the holy grail, apart from traffic, is what are initial conversion rates. How important is the initial conversion rate in subscription ecommerce?
Craig: Like we talked about earlier, it’s important of course. In isolation, it’s very important, but from a holistic perspective, it’s only part of the story. Like I mentioned earlier, you want to have a high conversion rate, or as good a conversion rate as possible and you need to balance that with the lifetime value of your customers so that you can start to calculate and look at the numbers to make sure that you’re optimising your business. It’s hard to say, in a very specific case, what that conversion rate should be but, again, I would go back to if you have a high conversion rate and those customers that you’re getting to convert, because you’re giving them discounts, you’re not getting the customers that really want your product, you’re not showing them the right value for your product, they’re going to churn out quickly and you’ll have a much lower fist rebilling event, which basically means you have a high churn rate and that’s not going to be good for your business.
Kunle: Ok, so CLV really ties into having that long term relationship which can only be fuelled by value in general. Fantastic. I think my questions about subscription ecommerce are pretty much there. I have a question in regards to who are your favourite subscription ecommerce businesses, you’re really seeing that are really interesting in not just their offering, but in their growth?
Craig: From my perspective, what I really like are freemium models. This, again, gets a little bit more digital but I love the concept of freemium models because if you think about that business in general, you’re essentially giving away something for free and there should be some value with it, but then as soon as you’re able to convince people that you’re able to give more value if they give you money. A couple of examples I would give are LinkedIn and Tripit. With Tripit, if people aren’t familiar with Tripit, it allows you to store all of your travel, arrangements and you get access to them through an app on your phone so you don’t have to write this stiff down, you never forget where you’re supposed to be, you can always keep track of it. You can use it for free, but then I think it’s $50 a month paid version where you can share this information with your friends and with your co-workers or your family members so they know you don’t have to send them “I’m arriving on this flight, time and number, can you pick me up?”, they have access to that information, they can pull it if they need to. LinkedIn offers a lot of additional value that can be paid for in a subscription model whether it’s in-mails to people you don’t know, whether it’s seeing who’s looking at your profile, being able to connect with other people that are beyond your initial connections. So freemium models in general I think are great because they can’t be disrupted as easily as a normal business where, in order to use the product, you have to pay for it upfront. I see that as being the big breakthrough in the last 5 years.
Kunle: LinkedIn is the only social media platform that actually has payment options in addition to their core free service I believe, with the exception of I think Path, I’m not quite sure. But I think it’s the only main social media that has that ability to pay for an extra premium feature. What about in online retail in the States or the UK, is there any one subscription business that you think are really doing it well and that our listeners should check out?
Craig: That’s a good question. I mentioned earlier Trunk Club, here in Chicago that got bought by Bloomingdale’s. I was really surprised and impressed by what they did. I’d heard of them, I’ve never used the product, but frankly because they got bought and they got bought for so much, I was thinking maybe I should be looking at this company because it’s sort of targeted at me, somebody who doesn’t want to shop necessarily for myself, I need some help identifying what’s fashionable so that would be one I would say.
Kunle: Now back to CleverBridge, you have established enterprise clients. Which of them are doing subscription digital commerce really well?
Craig: I think that’s a good question. From my perspective, we handle both B2C clients as well as B2B. On the B2C side, I would talk about one of our clients Malwarebytes and what I really think that they’re doing well is this is a company that have great word of mouth. They have customers that are huge advocates for them, and they switched from a “buy it once, use it a lifetime” and they moved to a subscription model. They did a lot of great things upfront to let their customers know “Hey, we’re not abandoning you, this isn’t just a money grab, we’re providing lots of service and we need to be paid for providing lots of value”. They did a lot of giveaways when they did the conversion, they were very upfront and transparent with their customers and they’ve just done a great job with messaging, with being human as part of the company model and so they have very high conversion rates because of it. They have very low refund rates, they have low chargebacks, they have low cancellation rates because they were really upfront and they are very transparent with their customers. So that’s a very important part, I think if companies want to increase the lifetime value, this is a good lesson that you should really think about being as transparent as possible. And again, provide as much value as you can and your customers are hopefully going to see it and they are going to keep paying for your product.
Then on the B2B side, I mentioned VMware earlier, they’re a client of ours, they worked through the channel, they sell a lot of their products through channel partners and what happens is that, I talked about maintenance renewals earlier where customers would sign up for a maintenance renewal for one year, and it’s a pretty expensive price point in the four digit range, or even more, five digit range, and basically what happened is every year they had to go back to these customers to get them to pay again. What VMware did as a major project within the company was they said “We need to get a better handle on this and we need to create some more reliable revenue” so that it’s not so much a very one-off high touch model with every customer in order to get them to pay again so they created a self-service option and they did a lot of backend work. And basically what happened is they’ve seen a very measurable increase in their revenue from the entire package of maintenance renewals, not necessarily only through online, but also through their offline because of some of the enhancements that they provided as part of the project. So they did a really good job in the subscription model here of doing it in a B2B world, which can be more tricky.
Kunle: It seems to be a recurrent theme across the examples you gave, the additional value and then communicating that value and being human generally to your customers.
Craig: Yeah. With sites like G2Crowd and the other ones where you can go in and get online reviews of business products, it’s so easy as a buyer to find out what’s going on behind the scenes. 5, 10, 15 years ago, you were very reliant upon your friends and just your friends generally. This was actually something else that I wanted to mention too. If companies are thinking about doing subscription commerce, one really good source of finding independent information would be to go to industry analysts like ICD or Forrester and Gartner. They have a high level of understanding of the different options and they can guide people very quickly to the best options so that companies are getting a trustworthy partner, a trustworthy opinion by cutting through some of the marketing noise that happens out there in the market.
Kunle: Sounds good. We’ll call this a wrap. It’s been a pleasure having you on the show, Craig, and thank you for sharing your insights on subscription commerce.
Craig: Thank you very much Kunle. It’s actually been a lot of fun for me as well. I hope to so it again.
Kunle: Thanks.

About the host:

Kunle Campbell

An ecommerce advisor to ambitious, agile online retailers and funded ecommerce startups seeking exponentially sales growth through scalable customer acquisition, retention, conversion optimisation, product/market fit optimisation and customer referrals.

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