Subscription businesses are more resilient than more traditional, one-time purchase models.

This benefit is just one more in a long list of reasons that make subscriptions the hottest pricing structure of the past 5 years. Organizations like subscription revenue because of the predictable, more profitable, cash flow, the direct-to-customer relationship, and the greater potential for building a digital community under the brand umbrella.

The fact that subscription businesses enjoy 5-7x market valuations relative to traditional businesses is a particularly big driver of SaaS and Anything-as-a-Service (XaaS) models, as well as consumer subscription.

In a subscription world, it’s not enough to have a great one-time sale product. You have to build products that justify an ongoing/long-term relationship with the customer. The headline benefit that drives the initial transaction is just the starting line.

Subscriptions in Times of Change

Subscriptions work especially well in times of change. As people’s habits change, they open up to new ways of achieving their goals and solving their problems. This creates potential for new subscribers–it also may create potential for new transactional customers.

What’s more interesting is what happens on the cancellation side of the equation. If the subscriptions are still being used, subscribers continue subscribing. Churn mostly come from those subscribers who weren’t getting the value they were paying for already, and thus see that subscription as an easy thing to cut.

Even these “underusers” of subscriptions can be retained, often through a downgrade to a lighter subscription tier, or even through the use of the “pause feature” that is increasingly common. Such features are increasingly critical to maintaining trust, even during difficult times.

New Feature Priorities: Onboarding & Engagement

Additionally, it’s critical that the onboarding process for new members is designed to build habits that will result in retention.

We all know that retention is critical for lifetime customer value. It’s not enough to attract new customers, you want to keep them and deepen the relationships over time. This means that product folks need to think about features beyond those headline features which drive acquisition.

Onboarding is a concept that is especially important for any subscription process. If you sell an app for a one-time fee, all you need to do is convince someone to make the purchase. If that person doesn’t use the product after purchase, it doesn’t impact revenue. In contrast, in subscription, retention is key. And people decide if they’re going to keep using your products in the seconds, minutes or days after buying it, so it’s valuable to be strategic and deliberate about how you design the onboarding experience. You want to provide immediate value, but you also want to reinforce the wisdom of the buyer’s decision and guide them to establish behaviors that will result in maximum value for what they’re paying for.

You want to optimize for ongoing engagement. Engagement is a leading indicator of churn and has three components:

1. Frequency: How often does the subscriber use your product?
2. Recency: When was the last time the subscriber used your product?
3. Depth/breadth: When your subscribers use your product, how long do they stay and which/how many features do they use?

A Unique Moment for New Behaviors

Right now, we are in a unique moment with a lot of uncertainty. When habits are interrupted, the friction to trial is lower in many cases. This is true for new subscribers, but it’s also true for existing customers who have become set in their ways and perhaps have resisted new features and ways of getting value–now’s a time to make it easy for them to engage.

There’s a story about Ernest Hemingway betting his pals he could write a story in just 6 words (For sale. Baby shoes, never worn). The sonnet form has resulted in great poetry, even with (or because of) the rules about lines, stanzas, and rhyming structure. We have ample evidence that constraints drive creativity.

Now is a time for innovation in organizations. Use your constraints to leapfrog forward.

Take a step back and remember the promise you have with your subscribers. What problems are you helping them solve? What goals are you helping them achieve? If you were starting today, with the world as it is, what features and benefits could you develop that would best serve these needs? The why is constant, but the how may change substantially.

Metrics to Measure Success

Organizations with subscription revenue generally already understand Annual Recurring Revenue and Monthly Recurring Revenue (ARR, MRR) and Churn. But there are additional metrics that are more useful for product teams to evaluate the effectiveness of their decisions.

Product managers are generally judged based on how effectively they can monetize the features they build. And so the temptation is to focus on headline features that drive acquisition and features that immediately lower internal costs for the company. But organizations need to pay attention to lifetime customer value and not just initial acquisition. Some customers are way more valuable than others, and product managers need to optimize to attract, engage, and retain those most valuable customers.

Newspapers are getting more sophisticated about which articles drive readership (clicks) and which actually drive subscription (transaction). They’re also getting more focused on what kind of behavior indicates that someone is likely to stay for a while. All of these data points contribute to greater focus on lifetime customer value (LCV). Features that are valued by “best customers” should be recognized as well.

Jonathan Hsu has written about a quantitative approach to product market fit, which tracks lifetime customer value, puts customers into cohorts based on value to the organization, and looks more carefully at the type of revenue by customer, also known as unit economics–At an individual customer level, how much of the revenue comes from expansion or contraction of the relationship, from new vs. active vs. returning customers, and how much is recurring? Understanding which product features correlate to these different kinds of revenue is a more nuanced way of looking at product market fit.

Member-centric vs Product-centric vs Sales-centric Cultures

The single biggest thing an organization can do to impact the power of their recurring revenue business models is to focus on building the right culture.

This may be out of the control of the product team, but even just recognizing and naming the kind of culture you have can be helpful.

In my work with organizations that are trying to build forever transactions with their customers, I see three primary types of culture:

1. Sales-centric. This is quarterly capitalism, where leadership focuses primarily on short-term revenue.
2. Product-centric. These are organizations that take tremendous pride in their widgets–whether those widgets are movies, meals, news articles, or apps. Often these cultures have highly skilled and paid product teams.
3. Member-centric. These organizations are focused on aligning their products on services on a particular group of customers and prioritizing long-term relationships over any particular product or process.

Sales-centric organizations do well in the short term, but may not enjoy consistent growth and success because they’ll sacrifice product quality or customer trust to hit a quarterly goal. Product organizations often deal with a “hits-based” lumpy revenue stream, and also sometimes face a challenge of building something “because we can” vs “because customers need/want it.”

A member-centric organization has a clearer north star, which is helping the member to solve their long-term problem or achieve their long-term goal. They are not limited by packaging (we deliver value in printed newspapers, live conferences, digital apps) and instead use multiple products to deliver on the value in the best way for the customer.

The other advantage of a member-centric organization is that it removes functional hierarchy from the organization, giving all teams the same shared metrics. I worked with a video content company that called me in for a retention (support) problem. When we met, I invited leaders from across the organization. It turns out that their streaming infrastructure had been unreliable (tech team), the onboarding of new customers was confusing (product team) and the free trial offer featured a hot new exclusive move which drove people to sign up, watch the event, and then cancel. Not really a support issue at all–everyone contributes to the customer engagement and retention!

Conclusion

Too many organizations slap a subscription price on a product that isn’t optimized for a forever transaction. Subscription pricing is a tactic, a pricing decision. It’s not a strategy by itself. The product needs to be engaging, and drive new recurring habits. To justify recurring revenue and maximize MRR and lifetime customer value, organizations need to start with the product design.