Two-year subscriptions: what interests, benefits, and risks?

Short answer:

As a customer, assuming I plan to stay subscribed for two years, I can take advantage of a discount. But I'm committed for a long period.

As a merchant, I sell a more expensive subscription, I increase my immediate booking. In addition, as I lock a client for two years, I take out insurance on my number of subscribers for next year. Caution ??: if my price isn't calculated correctly, I risk losing money??.

Long answer:

The principle of a long-term subscription is that, in exchange for customer's commitment, the merchant gives a discount. This represents the cost of loyalty, or alternatively, its benefit.

For the customer, the question is whether the discount is worth the cost of paying for two years of subscription immediately along with a 2-year commitment.

For the merchant, the question is whether the discount represents a financial risk.

For both sides, it's necessary to know how to calculate the correct price of the subscription over 2 years. In this article, we'll see the merchant side and we'll switch side in the next article.

1. How to calculate a 2 year price?

To calculate a 2-year subscription price, you must calculate a CLV as explained in one of my previous articles.

I publish a monthly magazine which is sold as a subscription for 1 or 2 years, and paid in one installment:

• Every year I have 1000 subscribers,
• I sell my 1-year subscription for € 60,
• I retain 75% of my subscribers.

Now I can calculate the CLV of my subscribers over 2 years.

In table #1 above, each of my 1000 subscribers pay € 60 for the first year. I keep 75% of them for the second year ; they will pay € 60 again. In total, the Customer Lifetime Value (CLV) of my 1000 subscribers is € 105k.

To know the price of my 2-year subscription, I do the calculation based on the booking I will generate over 2 years with the 1-year subscriptions. To earn € 105k with 1000 subscribers, my 2-year subscription must be € 105.

2yr Price = 1yr Price x (1+ RR%)

2. The price of loyalty: Benefit & Risk

After calculation, we know the break-even point: it's the price for which the CLV is the same for both options.

The worse my retention rate, the lower the price of the 2-year product will be.

I have in mind that if I sell below this break-even point, then:

• I lose money since, naturally, subscribers would renew enough to generate higher booking over 2 years.
• I provide false information regarding my ability to retain clients, and my financial performance.

Not convinced about poor communication?

3. Reverse Engineering on a 2-year subscription price.

Table #1 detailed the principle of the calculation. Using the same values, here is a simplified version:

1-year subscription, 1st year: all subscribers (100%) pay € 60.

1-year subscription, 2nd year: those who remain subscribed (75%) pay € 60, or € 45.

The total over 2 years amounts to € 105.

As I know the prices for first year, for renewal, and for 2-year subscription, I can easily deduce the Retention Rate.

Let's take a real life example from Panda Antivirus website (as of May 2024).

For the purposes of demonstration, let's consider:

• these are the usual prices of Panda Antivirus. (This is not a price test.)
• the price of the 2-year subscription is optimal. (The 2-year price is CLV neutral when compared to 1-yr price.)

The options offered are:

• 1 year: € 59.49, and renewal at € 118.99
• 2 year: € 118.49

I just need to place these three numbers (circled in yellow) in my table.

This time, I start from the 2-year product price to deduct the booking generated by the renewal, and therefore deduce the retention rate.

Here, the break-even point for a 2-year CLV implies a Retention Rate (RR%) of 50%. We can conclude that either:

• the RR% is 50% or below which is rather low. Therefore, either the product isn't popular, or we didn't acquire qualified customers.

Or

• the RR% is above 50%. Therefore, prices are set without carrying out a CLV calculation, and the company loses money??.

Key Takeaways

1. Customer Lifetime Value: to set prices for multi-year versions I must do a CLV calculation.
2. A 2-year product with an excessive discount means either the retention rate is poor or we don't know how to calculate a CLV. In both cases, we project a bad image of our business.
3. The only 2 good reasons for selling 2-yr subscriptions are : I need immediate booking increase, and/or I need a guarantee on the number of subscribers next year.

#Subscription #RetentionMarketing #RetentionRate #CLV #MultiYearSubscription