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The science of content subscriptions: Understanding lifetime customer value and price power

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Customer lifetime value, iPad, Paid content, Patrick Smith, Rupert Murdoch, Subscription business model, TheMediaBriefing Experts' Blog, UK, United States of America, B2B Media, Digital Media, Finance and Deals, Mobile, Newspapers


Money

The great media business model debate of our time can be simplified into three words: free versus paid.

Can free-to-air websites and apps be monetised through advertising or is paid content the way to go? Many publishers, from B2B niche publications to newspapers and digital native startups are tying customers into long-term subscription deals, which mean more flexibility and control compared to the potentially lucrative but volatile ad market.

But a word of warning: subscriptions are hard work. It might seem like good business for the FT to have 300,000 subscribers or music service Spotify winning 4.2 million paying customers.

Just ask The Daily, Rupert Murdoch's experimental iPad newspaper project which died a valiant death on the content battlefields this week. The key failings of that project were obvious: with 120 staff at launch, $500,000 (£310,000) in weekly costs and $30 million (£18 million) in development costs, it was never going to be sustainable with such low subs prices.

But more importantly, as Jeff Jarvis points out, each new subscriber didn't create profit overnight for The Daily - you only make profit once the cost of acquiring customers and keeping them has been paid off, which can take not just months but years, not including the effects of subscribers leaving, or "churn".  

"(Murdoch) forgot a key lesson of selling subscriptions, one he surely learned when he owned magazines: that it takes a lot of marketing expense to acquire customers. It costs money to charge money," he writes.

So with that in mind how do subscriptions work in practice?

The science of subs

Two things, among many, that subscription-based businesses should know are the average revenue per customer and the lifetime value of a customer.

Only through working these things out can you know whether you're on course for a profit. Scout Analytics, the US technology firm whose dashboard app shows customer behaviour and site performance, has provided a complex but effective way of figuring out not just lifetime value but the point at which subscriptions become profitable.

To put it a little more straight-forwardly, you only reach profit when you've deducted the cost of:

-- Acquiring the customer: That's primarily marketing, the fuel in any subscription model's engine

-- Keeping them happy: Good customer service and technology isn't free and needs investment

-- Getting them to renew: It's an old saying in subscriptions that you don't make money on new business, you make money on renewals -- the cost of generating a renewal is far less than the cost of initially acquiring them.

-- In essence: subscruptions are generating future revenue.

Here are some more take-home lessons from this scientific way of thinking about long-term subs:

Customer lifetime is crucial

The length of a subscription is by far the most important factor in determining the profitability of a sub. If you multiply your total subscription yield (the take-home money you make) by your retention rate (the percentage of people who renew), for each year over the lifetime of a subscription you get an idea of the marginal profit you're making.

It's worth spending more in marketing to acquire one subscriber than that sub will pay you in its first year.

Wield your price power wisely

Price is the one weapon you have to increase profit and this makes it unique. In the previous example, what would happen if we were bold and doubled the price increases from £10 to £20 a year?

You would get to profitability a year earlier and make £147 extra revenue over a seven-year subscription lifetime. If you managed to pull off that trick across, say for example, 2,000 subscribers, that would mean an extra £300,000 a year in revenue.

In small and large-scale models, even small price rises make a huge difference. Of course, that means you have to increase the perceived value of the entire subscription bundle, giving people for their money, when you increase prices. But it's worth it.

 

All this is relevant in the transition of newspapers and magazine from print, to screen, to mobile devices. So many of us published websites for free and now have to make up for lost time by building subscription services now.

For all the coverage and attention given to the technological changes in content consumption, getting this right is a much bigger challenge and one that must involve every department of media companies.

Image by TaxCredits.net via a Creative Commons licence

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