The recurring-revenue business model is certainly not a new one. Newspapers, magazines, country clubs, cable television, and the infamous Columbia House Music Club (12 CDs for the price of 1!) have all used various forms of subscriptions to earn a steady, predictable revenue stream from their customer base. And the allure of this pricing structure is rather obvious. Companies can significantly reduce their total marketing expenditure if they don’t have to acquire, and then re-acquire the same customers to make the same purchase. Customers that are willing to commit to a particular brand or service gain the convenience of not having to repeat the purchase process as well as a perceived discount on their total cost of ownership.
One of the biggest challenges facing marketers of subscription-based businesses comes in valuing new customers. Unlike a retailer that typically measures marketing effectiveness by comparing their advertising or promotional cost to the revenue earned on an individual sale, a subscription business has to compare the customer-acquisition cost to an expected lifetime value of that customer. Will this new customer stay on for 1 month, 3 months, or longer before churning? This valuation becomes even more complicated for freemium sites or any company that uses a “lite” or trial version of their product to acquire new customers. These businesses must first determine what percentage of trialists will upgrade to the paid version, and then project an expected lifetime value of these subscribers.
Despite these challenges, the margins earned on these annuity revenue streams have led to a new boom in subscription businesses, particularly on the internet. According to Brian Lee, founder of ShoeDazzle, recurring-revenue retail businesses work best “when the product is a necessity or when it’s an absolute passion.” Consumers can now sign up to have anything from beauty products to gourmet snacks to curated boxes full of hip items to baby toys to razor blades delivered on a monthly basis.
The Search Agency has extensive experience developing search marketing strategies for a wide range of subscription businesses. With so many retailers, data aggregators, and service providers experimenting with recurring-revenue pricing systems, we recently published a new white paper on search marketing for subscription businesses detailing the various offshoots of this popular business model, the unique challenges marketers face in profitably acquiring new leads and customers, and seven paid search best practices.
Download your free copy and leave a comment with other examples of innovative subscription businesses you’ve come across… or the worst CD you ever received from Columbia House or BMG music club.