30 Days Is The Wrong Length For A Subscription Biz

Some subscription companies are shooting themselves in the foot by following the archaic method of monthly billing. Monthly cycles are industry standard for subscription companies but it’s not necessarily the most efficient model for all.

A monthly cycle makes a lot of sense for things that you need or don’t really enjoy paying for like cable, rent, insurance, mobile phone, utilities… etc. This is especially true because many of these are continuous services that have a higher barrier to entry because of setup fees and security deposits. For instance, you likely wouldn’t be able to pause or skip a month of rent because you’re not going to use your apartment.

Subscription businesses need to realize they are not handcuffed to the monthly model.In fact, a monthly model can actually be detrimental to your business’ success. There are logistics companies that can ship as often as they need and there are great payment processing companies capable of sophisticated charge plans. I believe it is extremely important for these businesses to look at the appropriate length of time between charges and shipments in order for them to build sustainable long-term growth.

For many eCommerce based subscriptions there is usually an incentive for customers to sign up to get the first product so it is very important to look at when they actually require the second product.

Retention Science analyzes data for a handful of continuity plans such and we have found that the average customer lasts about three months with a subscription business. Our data science team used machine learning algorithms and predictive modeling to extend customer lifetime. We look at:

• How users are consuming specific products
• Use customer-buying behavior to innovate the length of time between charging customers
• Predict customers at risk of churn and re-engaging them to maximize customer lifetime value

Let’s say your business uses a monthly billing cycle, and has an average subscription length of 41 days – that is, most of your customers tend to churn after 41 days. This means that the average customer paid for the first shipment, received it, and liked it enough not to cancel. A month later, likely after receiving the second shipment, the customer cancels. A monthly billing cycle makes very little sense for this company.

The 41-day customer experience would have enough time to sign up, received the first shipment, and like the product enough to not cancel right away. Then 30 days later billed again and a few days after that they get their second shipment and a few days after that they cancel.

That business model is no good. Maybe after the second delivery the customer still needed additional product so they cancelled their continuity plan and went back to buying it at the store in the quality they needed. Honest Co. does a great job of offering the ability for member to make ad-hoc purchases in between their subscription shipments.

By looking at data you start to understand customers needed a new product every 20-days. Great. Your probably limited by the packaging quantity so it hard to send more or less without doubling the order. The solution is to ship and bill on 20-day increments. I strongly believe a much higher percentage of customers make it to the third billing cycle and so on.

Alternatively that individual could have way too much of your product after the second shipment and decide to quit. After careful analysis the company realized a cohort of customers take 52-days to consume the produce.

It a lot makes more sense for the company to bill and ship on 52-day increments to that customer segment. The longer increments would give those customers enough time to consume the entire product supply and want more.

The best solution to this problem I’ve seen so far is the option to skip a month. However, the price shoppers who check their credit card statements frequently still see the same cadence of every other month charges. If you’re able to off set that frequency they may not feel as obligated to consistently spend money with you and may choose to continue with the subscription longer.

By analyzing your customer data, you can determine which customers would respond best to more frequent or infrequent shipments and billing schedules. As customers churn, provide a tailored suggestion to adjust their shipments and billing instead of canceling completely.

If you’re managing a subscription business or looking to start one, it’s crucial to understand the right increment for shipping and billing to proactively reduce churn and increase the future profitability of the business. We believe looking at customer data to determine when a customer requires the second product is a great baseline to modify the monthly subscription model to better fit your businesses specific customer behavior.

Originally posted on the Retention Science Blog

Photo from: www.hcpl.net

James Hotson, Director of Sales at Retention Science

Twitter @JamesHotson