4 Ways to Test the Strength of Your Subscription Model

Caitie Gonzalez
Caitie Gonzalez
September 17th, 2019
Estimated read time: 5 minutes, 48 seconds

Subscription-based businesses are awesome! All you have to do is get a customer to buy once, and then you get recurring revenue without even thinking about it.

It’s that simple, right? Wrong!

While the recurring revenue part is true and awesome, retaining customers and creating a sustainable subscription-based business model can be super tricky.

Not only do you have to develop a service that people want to renew regularly, but you have to make sure the renewal process goes off without a hitch and continues to fulfill their needs. Because if you make one wrong move, you lose a customer for life.

Before you get too scared, we’re going to help you determine if your subscription model is working and how to troubleshoot if there are any problems. Here are the key metrics you need to pay attention to.

1. Freemium Customer Conversion Rate

It’s hard to resist free stuff. That’s why the freemium model is so hot right now. When there’s no risk for new users, you’re sure to get a lot of new customers. But you can’t sustain a business on non-paying customers. Here are a few ways to help nudge your freemium customers into premium customers:

-Don’t give away the cow
You don’t want to make your free offer so good that people won’t want to pay for the premium plan. It’s all about creating the right package that brings in new customers while motivating them to move to the next tier.

-Understand your freemium customers
Track how your freemium customers use your product. How often do they use it? What features do they use the most? How many daily-active and monthly-active users do you have? All these factors will help you understand your free customers and identify your most valuable features.

-Create an easy transition
Make the jump from freemium to premium as simple as possible. Remove any pain points, create clear messaging, and be clear about payments and fees.

So, the big question is, “What’s a good free-to-paid customer conversion rate?” According to TechCrunch, “Most freemium companies have customer conversion rates of between 1 percent and 10 percent (with the average around 2 percent to 4 percent).”

2. Price-Page Conversion Rate

To determine if your pricing model is hurting or helping your subscription business, look at your price-page conversion rate. If the conversion rate is too low, the problem is either one of two things:

  • You’re not at the right price point. While we already touched on how to navigate the freemium model, you may find that offering a free plan may actually deter your audience. For example, the CEO of a Fortune 500 company probably won’t jump into bed with a service that advertises a free plan. In some cases, a free price-point may devalue your services. Try testing different price points for each of your packages to determine what gets the best response. Remember: if your price points are too low, users will think you don’t value your product. If your price points are too high, users will think you’re ripping them off.
  • Your pricing structure is too complicated. The easy solution to this is to just clearly communicate the differences between tiers. That means having a nice little graphic on your pricing page that shows the different tiers along with their corresponding features. If you’re having a hard time fitting everything into a graphic that makes sense, you probably need to simplify your packages. With more complicated products and services, you may need to include definitions or explanations to make sure your customers understand what the features mean.

3. Retention Rate

First of all, let’s talk about how to determine retention rate for a subscription service. For example, if you want to know your retention rate for January, you would only look at customers you already have on January 1st. Then you would look at how many of those customers are still around on January 31st.

And yes, you have to ignore new subscribers who signed up on January 2nd. If you don’t, your results will be skewed.

Now for the big question, “What should my retention rate be?” According to Rodrigo Fuentes, former CEO of Dejamor, a retention rate of less than 80% is “not good.” A retention rate of 80%-90% is a “good start.” And a retention rate of 90% or more means you’re “onto something.”2

With that in mind, retention rates vary among subscription-based companies all the time. Anything from the type of service you offer to the time of year can change your results. So, play it by ear. But 80% retention is definitely a good starting point.

Another thing to remember is that your retention rate has a huge impact on Customer Lifetime Value (LTV).

For our newbies out there, Customer Lifetime Value is exactly what is sounds like: an estimate of the average revenue generated by one customer throughout their lifespan as a customer.

When you increase your retention rate, your LTV will increase, which will inevitably increase the long-term profitability of your company. And who doesn’t want that?

4. Churn Rate

Retention rate and churn rate are essentially two sides of the same coin. While retention rate focuses on the number of customers you keep, churn rate keeps track of the number of customers you lose.

For the official definition, churn rate is “the annual percentage rate at which customers stop subscribing to a service.”

When we talk about churn rate, we are usually referring to voluntary church, which is when a customer actively cancels their subscription. Often, the best way to reduce voluntary churn rate is to alter your product/service, test different price points, etc.

But there’s also involuntary churn, which is when you lose customers because of payment failures. The best way to reduce involuntary churn is to have dunning management tools in place.

For those of us who are new to the subscription game, dunning management refers to the ability to manage credit card payment declines in the case of recurring billing.

So, with dunning management, you can save customers that you would otherwise lose because a customer’s credit limit was reached or their credit card expired. And the best part is that dunning management tools automate the entire dunning process.

Now, back to the numbers. While you would ideally have a 0% churn rate, logic would tell us that a good churn rate would be 100% minus the optimal retention rate. So, your churn rate should be no more than 20%, and hopefully under 10%.

Subscription business models are not for the faint of heart. There are a lot of moving parts that need to work together for the machine to run smoothly. But there are also a lot of tools available to ensure you hit your stride and keep your metrics in the sweet spot. For more information about subscription management and billing tools for software and SaaS, check out FastSpring’s Full-Service SaaS Ecommerce Platform.

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