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Subscription Companies: How To Become A Retention Machine

Over the past five years, there has been an exponential increase in the popularity of the subscription economy. There are over 2,000 subscription box services on the market today in virtually every field: meal-kits, vitamins, skincare, cleaning supplies, clothing, and even toilet paper. But they all do not share the same success...

One of the biggest factors in the success of a subscription model business is how well they maximize Customer Lifetime Value (CLV). In order to maximize CLV, you need to know what variables it’s most sensitive to. Let’s take a look (don’t worry, we won’t be doing any complex calculus here...).

The below equation is the basic way to calculate Customer Lifetime Value. “m” are your margins, “i” is your discount rate (don’t worry about that one), “AC” is your customer acquisition costs, and “r” is your retention rate.

A lot of research has gone into how to maximize CLV and it all boils down to this:


Check out the study below that shows the impact on a company’s value by creating a 1% improvement in any of the variables we just mentioned. The study concludes that increasing retention rates by just 1% can result in almost a 5% increase in firm value (not just revenue - actual company value!). If you’re a subscription model company, your retention rate is almost 5x more important than your margins and almost 50x more important than your customer acquisition costs!

OK, so you need to increase your retention rate. How do you do it?

If you’re in the subscription business, you’re in the customer experience business. Strong customer relationships are at the core of the subscription business model. It all starts with building a customer support strategy specifically for subscription-model companies. At Horatio, we’ve helped numerous subscription-model companies build a customer experience organization specifically designed to increase retention rates.

Here are a few tips:

1. Pick a customer experience software that treats customers like people, not tickets

Subscription model customers expect you to know them - their likes, dislikes, orders, and previous issues. CX software like Kustomer, Gorgias, and Front do more than just help you manage emails. They arm your customer support team with key details like preferences, order histories, subscription changes, and CLV to give customers a personalized experience every time. They help you build a customer experience that reminds customers why they stay subscribed.

2. Always be available...and respond fast

Subscription customers reach out to customer support teams much more often than one-time purchasers. Whether it is to update a subscription, change frequencies, or substitute products, subscription model companies have the benefit of talking to their customers A LOT. And each experience shapes the opinion of your customers. If you are not available or don’t respond quickly, customers just cancel. Maybe you could have “saved” them by just updating their frequencies because they got too many products at once. But, because you were late to respond, they already canceled. Many subscription companies are starting to offer 24/7 support and have dramatically increased the size of their support teams to mitigate this churn risk.

3. Over-communicate with customers

Subscription companies owe their customers a package every month. And because of that, customers expect that package to be there every month. But as well all know, $h*t happens - especially when you’re a startup. Whether it’s manufacturing delays, shipping issues, or product defects, you need to over-communicate with your customers and tell them (i) when they can expect their next order, and (ii) what you are going to do to show you actually are sorry for the issue. Building a robust customer support team that is ready to proactively reach out to affected customers is vital to keeping retention rates high.

4. Give away free stuff (unexpectedly)

You already know that subscription model customers reach out much more often than one-time customers. Retaining customers is all about keeping customers happy, and nothing makes customers happier than free stuff. When a customer reaches out with an issue, you want to make sure that the issue is resolved, and that the customer still wants the next box of goods. Incentivize them by telling them about a “free gift” that’s coming with their next order to keep them engaged and subscribed! Everyone loves unexpected gifts…

So how do you build a great subscription model business? You build a great customer experience business. At Horatio, that’s exactly what we help you do.

About Horatio:

Based in New York City, with teams in the Dominican Republic, Horatio is a leading provider of white-glove customer experience and omni-channel support outsourcing services. At Horatio, we like to say “do what you do best, and hire Horatio to do the rest.” Horatio partners with high-growth and innovative companies to develop their customer support strategy and provides a handpicked team to execute it. Horatio’s number one focus is on providing high-touch, brand-focused customer support. Our team is equipped with state-of-the-art technologies and expertise to ensure a great customer experience every time.

To learn more about Horatio, please email info@hirehoratio.com or visit www.hirehoratio.com

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