How To Capitalize On The Subscription Business Model

The business world has cycles, and if you stay in it long enough, you begin to recognize them. Some of these cycles are small. You'll see companies go back and forth onto the things that are popular, and you'll see mega cycles inside of consumers. What is it that they lean towards? What type of products are important to them? And it all changes step by step, but it returns back to itself. Not quite the same, but the lessons from the past are still just as valid.

Hey there, everybody.

Welcome to the Magnetic Marketing Podcast. In today's episode, we get to talk about how to capitalize on the subscription business model. Now, this has become quite a trend once again, and it's a trend that's not only being used by very large businesses, but now small businesses are using the exact same thing. There is a power in having a subscription based business. And if you've ever tried to sell your business in the past, you know that recurring revenue that is not tied to you showing up to work every day changes the game and how your business is valued. So in today's episode, Robert Scrobb is going to be interviewing Kathleen Greenler Sexton. Kathleen was the CEO and publisher of Subscription Insider, a publication that looks at broad world of subscriptions beyond just the info marketing world. We're going to talk about why you should look into subscriptions, why customers embrace subscriptions, when you should offer free content versus put it behind your subscription paywall, the differences between those who experience tons of success and those who struggle, and much, much more. This is an episode that is extremely relevant to today, and I can't wait to see how you apply it to your business. Let's go.

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Welcome to the Magnetic Marketing Podcast with your host, Dan Kennedy. We think we invented subscriptions. The monthly subscriptions took off, of course, in 2004 and have not looked back ever since. It's been a growing, thriving part of the information marketing industry. Hi, I'm Robert Scrobe, I'm president of the Information Marketing Association and author of the official Get Rich Guide to Information Marketing. Today we're taking a broader focus outside the Information Marketing Association to all subscription businesses. My guest today is Kathleen Greenler Sexton, who is the publisher for Subscription Insider. It's a publication that looks at the broad world of subscriptions.

And you know, if you—

The next time you think that the info marketing world is big on subscriptions, just take a look at Birchbox, Netflix, and some of the other providers, and you'll see that we're really only a small part of what is a growing industry. Kathleen has been in the internet marketing and internet world for many, many years. Was one of the first members of the team at AltaVista, which was at the time one of the top 5 most visited websites on the internet and has started, built, and sold many businesses over the years. So it's a great pleasure to have you, Kathleen. Thank you so much for being my guest today.

Well, thank you, Robert. I'm really excited to be here.

Well, so tell me why subscriptions? What's so important about this particular business model that it deserves its own publication and website dedicated to the model?

That is a great question. Subscriptions, well, as many of your members know and live day in and day out, subscription offers a recurring revenue. And the market, the greater market has woken up as well as technology has enabled people to employ a subscription model much more cost-effectively in the past. And people really understand that recurring revenue with a monthly and annual membership that, that's coming in is a very, very profitable business. So the market has woken up to this. The new term is We are living in a subscription economy. Or actually, I should say it's a subscription economy and we're living in it. Between our mobile apps, between online services, the subscription boxes, SaaS, OTT, there's quite a lot of businesses that are really leveraging subscriptions in new and unique ways. We've even covered some really unusual ones. Such as fundraising that people are testing, and they are being very successful with the model.

It is. I've seen the fundraising model a couple of times where rather than— it used to be that the whole upsell of the fundraising model was whether they got you to donate $25, $50, or $100. Or maybe they would be so bold as to let you choose between $100, $500, and $1,000 for your contribution. And now the option is after you select what your contribution level is, then the next question is, would you like to make that monthly? Which of course totally transforms the donation, average donation size. Because you don't really need even a very large percentage of those to opt to monthly to make a very big difference in the donation value. So I guess why— certainly for businesses it can be completely transformative from a business model having recurring revenue versus having to go create your revenue every single month. But why are customers embracing it? I mean this thing has been around for, for, you know, more centuries, as far as I can see, at least, at least a century it goes back with, you know, monthly offers and things that you could have sent to you. Why is it so unbelievably popular today versus, versus just a few years ago?

It's really been a shift with consumers with their phones and apps. They are used to paying for apps and access to apps on an ongoing basis. And so many more services are being offered on a subscription basis, whether it's subscription boxes delivering anything from underwear to food to, to who knows what, to your online services People are just used to doing that now for paying for that recurring service. Generally, it's a low price point per month, but that's, you know, there's really been a shift in the consumer mindset. And, you know, the other side of the coin, Robert, is there's so many more options out there. You know, way back when you had the Franklin Mint, you know, you had the various clubs, you had magazines, you had the B2B side of things, you know, forced trial newsletters where you'd have to, you know, you'd get a test of a newsletter. And it was very expensive for companies to really offer those types of subscriptions. And today, It really doesn't— especially for information and content, for SaaS, it really doesn't cost that much more on a per-customer basis to get that subscription infrastructure in place and get started. And as everybody in your audience I'm sure knows, the magic of the subscriptions, which is why everybody is now investing in launching subscription businesses, is that recurring revenue. And once you grow that MMR— MRR, I should say, which SaaS is the key metric for. They focus on MRR. That's what's really driving the enthusiasm. Consumers are used to, they're comfortable with it, and there are so many more options. It's just really exploded.

That's great. What I've seen too is in 2004, certainly when I started moving more because I was selling annual memberships for years, but then really that was kind of the pivot for me when I started promoting monthly instead, or in addition to. And back then there was significant numbers of customers who every week were complaining going, "I don't want to pay monthly for this. Is there an annual option?" At that time we didn't offer an annual. Monthly only. We've now learned that we can offer both, and the technology allows us to do that. But back at that time, there was a lot of resistance to paying monthly. Now today, that resistance really seems to have faded away. I mean, nobody really worries. I haven't had a single question or challenge about it. Now we have been doing some offers with both annual and monthly and found that somewhere in the neighborhood of 10% go ahead and opt to pay annually rather than monthly. But I haven't had this kind of visceral sort of angst around monthly payments in probably 5 to 7 years that we did in the early days. So it's like consumers have really turned around to welcoming this type type of opportunity versus shunning it. But one of the things I wanted to ask you about was, you know, one of the big buzzwords now is content marketing. And you, as well as a lot of our members, are offering information, tools, resources, you know, insights into the— you're offering insights into the subscription business. At the same time, there are all kinds of folks who are using a content marketing approach where they're talking about a lot of these subscription issues and things that are happening in business, and they're doing it for free in order to try to drive leads to their particular SaaS product or what have you. With all this content marketing out there, how do publishers— how do you see both within your own business and the other subscription businesses that you cover within Subscription Insider, how do you see them building the value in what they're offering in light of everything that's available for free today?

That is the key issue that many publishers are facing today. If you're a high-volume consumer information type of company, you know, news, it's going to be much easier for you to compete because there's going to be much less content marketing targeted towards what you're offering. But especially for business-to-business, you are going to be competing with content marketers who are going right after the the same people that you are trying to drive to your site. So it, Robert, it's the key challenge that all of us are facing with. And I would really encourage everybody in your association to really think about this critical issue because you're going to have cannibalization if you're not thinking about this strategically and not really keeping your eye on this. So for example, with Subscription Insider, We actually had a very radical change after I acquired the company. The company was initially launched with really great information, but it was all hidden behind a subscription wall. And as I analyzed— not I, but we, the team— we looked at the content we realized that some of that content should be in front of the paywall. We also had a blog that had news, and what we did, and if you go to this site today, you will see that we offer news and features which are in front of our paywall. All of our research, all of our case studies, all of our how-to types of reports, are behind the paywall. So we've really segmented our content, one for SEO and letting people get to know the brand and basically test our, taste our content. And then there's the behind the wall. So we've really segmented that content and thought very strategically about what we're offering. The other thing that we're doing is for some of our— there's a lot of great content out there, and there's no reason for people to be thinking about that some of that content may be a good, A, marketing opportunity, just in terms of a partnership, or B, bringing, you know, Some of your members offer a mixed revenue model doing some native advertising with some of those vendors who might have a voice in the market to bring them into your fold. So you have to think a little bit differently with all the competition that's out there and social media competing for your search results and driving people directly to your site. It's a big issue.

And how did you make the decision of what was going to be out for SEO and what was going to be behind the paywall?

We decided that the behind the paywall content, number one, that's our long-form content. So the content behind the paywall is, you know, 3,000 to 10,000 or more words depending on if it's the full report or just a very detailed how-to type of article. The snippets, which appear when you get that paywall, are longer. We don't do an excerpt. We write a snippet that really gives people an abstract, an idea of what's happening in the article. We include some good juicy SEO words and really try and entice people about what the article is without obviously being too salesy. So we've adjusted our preview strategy, and the content that's behind the paywall is is very in-depth. The content that's in front of the paywall are news articles, which we now publish every day, are anywhere between 700 to 900 words depending. And because Google likes longer content, so short articles don't do as well. And then the feature articles are always less than 2,000 words. They generally will come in at about 1,500 words. So these are shorter articles. They're lighter in terms of kind of the content that's being provided, but they still provide a lot of value, and they help us in terms of getting indexed and driving people to our site to discover and explore to explore our content. The other thing which we have done to increase our list and our lead gen is our open content, so that the news and the feature articles, that is completely open now for 2 weeks. And after that, we're requesting a free registration. When you register for free, you can get a free newsletter on a weekly basis. And what we're finding is that's helping us increase our engagement. So a lot of people will see an old article that they want to have access to, and so if they register, they have full access to the news archive and the feature archives. And they are now on our list, and they get our weekly news roundup, and we're able to really, let's say, take the next step in terms of engaging them. We know who they are, and ultimately the goal is obviously to move them to a paid subscriber.

And that's great. And what I've also found, and that I also saw within your content is that content marketing, they're generally only focused on providing information, training or what have you. Whereas as publishers, certainly as information marketers, we're particularly interested in helping them with some sort of problem or giving them a solution or helping them make a change. And what we can often find is that while the actual content is valuable, also giving them recognition, you know, giving the individuals that are making these changes, helping them, you know, with opportunities to contribute back to the group, and then connecting them together, making them part of a community, can be as valuable or even more valuable than the content itself in retention. And then you're also completely transcending outside of what is the purview of all that content marketing stuff. You cover a lot of subscription businesses and you're constantly researching and providing news of what different companies are doing. What do you see as the similarities that you've noticed among the subscription businesses with that explosive consistent growth versus those that kind of struggle to get traction?

Well, a subscription is like any product launch. You need to be focused on solving a market need. You need to execute really well as subscription businesses in particular are a lot of detail. And so kind of using those kind of two points as a backdrop, I see some companies that launch that are passions of the people who don't necessarily, they're not solving a market need and they're not really, you know, there's no market for their product. So I've seen that and that's always challenging.

That would be a problem.

It's hard to see. We had an event, I remember, in the spring and there was a company that I just adored them and I I really wasn't sure how well they were going to do, so I'm hoping they do a pivot soon because I really like the team. The second, the other is execution. In terms of executing on a subscription model, these days you can't phone it in. You have to to really produce great information if you're a publisher or a media company. You have to have a great product. You have to— you're solving a need, yes, but you need to be delivering a great product because there's so many good products out there. The market is so loud out there. And, you know, to the the point about content marketing, there's great information out there that really address a lot of, like, how do I learn about this, or what about that? So you really need to be delivering a great product, and that's not just the content or the software, presentation of it. And, and I see so many companies that are out there, particularly those who've grown up from, let's say, the newsletter world, or got onto a technology that's— that just hasn't kept up with, with the latest and greatest developments. They look a little dated. And the ability to launch new products on very cheaply on inexpensive membership platforms or CMS types of platforms like WordPress with membership plugins or subscription plugins or some of these all-in-one platforms that are not expensive but look really great, you need to make sure that your, your brand is being presented really, really well. So I see that. And there's nothing wrong with starting and scaling small and growing, but you need to make sure you're dressed for the party. And finally, where I see people, especially with kind of starting up, that they'll go great guns acquiring customers, but they don't truly understand about retention and about churn. That's the biggest mistake I see of companies who've got a lot of investment. They are, got a lot of buzz, and they bring all these customers in because that's, you know, that's where a lot of the marketing discussion is around, acquiring and converting. And there's such a specialty and expertise in terms of retaining your customers. It's engaging them. As you said, Robert, it's creating that community. And it's knowing details. As I'm sure your members know, onboarding, a good onboarding sequence can increase the retention of a subscriber by 20%. Understanding what to do with credit cards. Many companies right now are struggling with huge involuntary churn rates right now because of the new chip cards that have been issued, replacing 100% of the credit cards in the market today. And those, those companies who've just been kind of riding along and haven't really been thinking strategically about retention and payment or don't truly understand and understand the operational details of those are really struggling right now and trying to pivot right now really quickly with some of their internal, you know, team and skill sets and all that because it's a huge area that many new companies tend to overlook.

Mm-hmm.

Yeah, and one of the things that I first saw Subscription Insider was how tracking from the top the difference between the requested cancellations and the credit card failure cancellations. And having— a lot of times I'll see a normal— I'll see a churn rate. Somebody will know how many people may have dropped in a particular month But being able to track requested versus credit card and being able to manage them separately is brilliant because there's really, while the credit card failures happen, there's certainly the whole concept of this person is paying monthly, but yet when you call and you email and you follow up, they don't respond. Respond, there's not a reason. If my wife called and emailed and texted and I didn't respond, I'd have some problems. There's a relationship there. And if you don't do your part of the relationship— so what this is, is really, yeah, it's a logistical challenge of tracking it down, but it's also a sign that you don't have the relationship. That you're not fostering a relationship that you think you do, that perhaps you have more zombie members than you really know about. But with that, I know that you talk a lot about in Subscription Insider about credit card fails and things. What are some of the best practices that you've seen subscription companies use in order to really work on that credit card dropped members or dropped members due to credit card reasons number?

Uh-huh. The number one best practice we recommend is to make sure your companies are enrolled in an account updater service. Visa, MasterCard, Discover, Discover all have a service. It's called an account updater. American Express has its own. It's just coming out of beta. But the purpose of this service is to provide merchants with updated account holder info. So if their credit card has expired and there's a new expiry date, it will provide that information so that the subscription recurring revenue merchant can then submit the correct credit card information. And sometimes the credit card might be changed completely. If you're enrolled in an account updater service, then you would get that updated credit card if they have it. The up— the account updater service would also notify you if the account had been shut down and if the consumer or credit card holder has opted out of any updating types of services. So that is our number one best practice, and it's important to, let's say, understand how your business is charging when that charge happens on your site. You know, who are the vendors that you're using? What payment gateway? How are you— how is all that payment getting processed? And in that line of vendors that your company has, are they connected to the account updater service? Unfortunately, not all vendors connect up to these services. So actually, in Subscription Insider's case, as an example, when I acquired the company, we used an account— a very, very popular payment gateway that was not really subscription recurring revenue focused, and they therefore did not offer access to services like account updater. So one of the first things we did was switch our payment gateways to a vendor that supported recurring revenue with, you know, tools like account updater. So that's item number 1. Item number 2, Robert, is to really look at when your customer messaging. So are you able to— in the old days we called this stunning, and it's still a term that many, many in the industry do use. But what you want to do is you can perhaps in your user interface with email, absolutely, 30 to 60 days if you know a payment card is going to be expired, let them know and ask them to go in and update their credit card information. So that's the first communication that you want to get out. And then if they have expired, have a series of 3 emails as an example that say, hey, your credit card has expired, we can't process it. Please go in. And you can walk them through. And the last one would say, you know, gosh, John Smith, I'm sorry. Here's— we're going to have to, you know, close access to your membership, but we really would like to reactivate it as soon as possible. Here's how you do that. And you might want to support all of that with a phone call from your customer service team. So there's many ways, and I'll give you an example of where old-fashioned calling to your customers is going to be important. The payment— we covered an issue in June about Costco having a so-called divorce with American Express. At first blush, you'd be like, well, that's interesting. What does that have to do with my business-to-business company? Well, it turns out that the Costco credit card, they had such a high volume of American Express cards, it represented 10% of all issued American Express cards.

That's amazing.

Costco prevented those cards from participating in any account update data service, so those cards are all dead in the water. So if your members have some involuntary churn from an American Express card, they might want to get on the phone sooner than later to get the updated card. And that's a really great example of make sure you have this information and you're on top of it, and that way your retention rate. If you save that customer, you've boosted your retention rate for the month.

You've had the opportunity with Subscription Insider to cover a lot of acquisitions within the subscription world. What factors do you think have the greatest impact on the value of these subscription companies as they get acquired?

Well, it's solid steady revenue growth, and depending on the sector, profitability. There are some sectors that are crazy where profitability doesn't matter, but for most niche specialty organizations, it's showing steady year-over-year growth with your top line and your profitability. The subscription recurring revenue, it's a hot business model now, and that's fantastic. So it's a great time to be a recurring revenue company. Another, a number of companies also, I'm just thinking of, a company, Green Tech Media. They just a few weeks ago announced that they are being acquired. They have a very robust recurring revenue business. They also have events, and they also have advertising, but it's very specialized. They don't really focus on really a lot of displays, more more native type of advertising. So revenue diversification is important as well, but it really depends on your business. So depending on what your business is, your growth rate, and your revenue diversification, it could be events and advertising, but maybe your company has a lot of backend data and you diversify your revenue with a number of licensing types of deals. So diversification of revenue is always something that the M&A crowd likes to see.

That's fascinating. Well, because especially in particular within information marketing, subscriptions certainly are an important part, but with coaching programs, product sales, events. There's a whole lot of that. So that's really good news to hear. And you mentioned that they really look at the monthly recurring revenue and looking for growth from one year to the next. Do they worry about churn rate if the revenue is continuing to grow or if you're able to add more members than are quitting, are you still gold?

The smart ones will absolutely dive into, to terminate, 'cause they understand that. And I would say that the M&A market, given the explosion of the subscription economy, is much smarter to be able to look at that. So today versus 5 years ago, and especially 10 years ago, they know to look at, Okay, it's recurring revenue. How many people are you bringing in? What's the lifetime value? What's the average term length? And what is your churn? And why are people churning? You know, is it all credit card stuff? Well, if somebody's acquiring and they see that, that's something that might be fixable. If people joining for a month and they're churning voluntarily, that might indicate it's a potential product issue. So the smart ones are really looking at all these metrics and KPIs as an indicator of the core health of the business.

And so just goes to show that these are numbers you need to be collecting now and managing now.

Yes.

So that when you do have somebody that's having a conversation about acquiring you or you want to have— even if you don't plan on having that conversation today, having those numbers now for 3 years from now and being able to compare how those numbers are changing over time is going to be— it's going to make the difference about whether or not you're able to sell, whether you're able to get the valuation you want. And I think that what you were talking about, the only other would be cost of acquiring a customer and monitoring that over time is also something that I've seen that they're looking at in addition to the lifetime value. So with your perspective on the— go ahead.

Oh, I was just going to say the number one most popular article on the site especially as we get into the fall budget season. So I'm already bugging my members to start thinking about budgeting and planning for 2017. The number one tool we have is our financial model. And it might be that all of your members have internal models that they use, but it's very important to have a model so you can, A, estimate what you think you're going to do and compare your results against that, but also model based on acquisition channels. So I think I'm going to do these partnerships. I'm going to do pay-per-click. I'm going to do other types of programs and understanding how that impacts your cash flow. Which ones are the most profitable. You really need to make sure that you've got your fingers on the pulse of all of this. And especially as marketing professionals, we need to really, you know, you're going to be spending the most money in terms of acquiring these customers. So understanding how everything is driving profitability, that acquisition and what marketing channels are really driving the longest-term, most profitable customers are things you really need to get your arms around and to be able to measure and track over the long term.

Yeah, and so many of us are, you know, marketing nerds where we're more interested in, you know, the next marketing approach or creating the next headline or the next promotion or campaign that we often feel like we know what's going on in our business intuitively because we're talking to so many of our customers. And very often when— I've helped a lot of folks that don't have numbers, and then we get into their numbers and pull these reports for the first time in a lot of cases.. And what we see in the information is very counterintuitive. I had a client not that long ago that they thought their biggest— they were really going to completely redo their product. But then because they had so much churn, but what we figured out when we looked at the numbers was that they had a bunch of members who had been members for a really long time. That enjoyed the product, but then all their churn was coming in the first few months. So yeah, they had 200% churn rate, but it wasn't that they were— they had some loyal members. It was just that we needed a way to onboard the members that we were getting to help them become part of the community. It was kind of like, I don't know, if you walk in a room with a bunch of people you don't know, You kind of go, oh, I don't really belong here, and you leave the room. Well, that's what their members were doing, and we didn't, you know, he didn't realize that until we were able to look at the numbers and see how long people had stayed. So having those reports, having those numbers are key. So Kathy, thank you so much for being my guest today. Very informative discussion.

Well, thank you. It's really been a pleasure and fun too, so thanks.

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