As we saw in part one of this series titled "8 Reasons Subscribers Are Better Than Customers", recurring revenue boosts the value of you business. Today we look at how subscribers increase the Life Time Value (LTV) of your customers.
In a traditional business, the customer buys your product or service once and it is up to you to try and convince them to buy again in the future. In a subscription business, you have what I call "Automatic Customers" who agree to purchase from you into the future as long as you keep providing your service or product. Through the research for my new book, I've discovered there are nine different subscription models, which can be leveraged by anyone from a dance studio owner to a cabinetmaker to a chocolate retailer.
The $29 Sale vs. the $4,524 Sale
Arguably the most obvious benefit of the subscription model is that it increases the LTV of a customer. When you sell a customer a subscription, that one sale can create a long-term relationship thanks to the magic of recurring revenue.
Let's look at an example of a typical flower store. Like many traditional businesses, the average flower store starts each month with no revenue, so they constantly have to find ways to stimulate demand. They pay for expensive retail space so they can grab your attention the day before your wedding anniversary. They buy advertising around key holidays like Mother's Day and Valentine's Day so you'll buy your flowers from them and not from the guy down the street. If they guess wrong on how many customers they will win on a given holiday, their inventory rots within a week.
Compare that model to H.Bloom, a flower company whose founders, Bryan Burkhart and Sonu Panda, say they want to become the "NetFlix of flowers."
H.Bloom provides fresh-cut flowers to businesses like hotels, restaurants, and spas. Unlike traditional flower stores that have to stimulate new demand each month, it sells subscriptions to a weekly, biweekly, or monthly fresh flower delivery. Because H.Bloom doesn't need to be physically in front of potential customers, instead of paying $150 per square foot for prime retail space in Manhattan, it pays less than $30 per square foot for space on the third floor of a 100-year-old building in an industrial area of the city.
The traditional flower store sells a one-off bouquet to a customer they may never see again, but at H.Bloom, a hotel can sign up for a weekly delivery of the basic $29 bouquet. If H.Bloom keeps the subscriber happy for three years (its monthly churn rate is less than 2%), that one $29 sale will end up creating a customer that is worth $4,524 ($29 x 156 weeks).
Give the LTV of a subscriber compared to a traditional customer, you can see why so many companies are moving to the subscription model. Even Microsoft, the granddaddy of software companies is slowly morphing into a subscription business. These days, most of us are buying a subscription to Office 365 for $100 a year rather than buying the program outright. Rather than having to convince us to upgrade to a new version of the software for added features -historically a major challenge for Microsoft--Microsoft can count on subscribers to re-up their license every year increasing the average LTV of an Office user.
Making a sale is always fun, but selling a subscription comes with the added benefit of knowing you've won a customer who will automatically pay you many months (hopefully years or decades) into the future.
This article is adapted from the new book The Automatic Customer by John Warrillow. The book is published by Portfolio, an imprint of Penguin Random House, and is available wherever books are sold. Copyright John Warrillow, 2015.