Influences on Month-Over-Month Retention for Subscription Businesses

As useful as historical data and probability models are in forecasting customer retention for subscription e-commerce businesses, there are many variables that can affect retention rates from one billing period to the next. With an immense amount of data, all of these variables could be factored into a single, highly-accurate retention distribution curve (i.e., probability model).

Practically speaking, these variables reinforce to the need to measure performance and plan your subscription business based upon a variety of KPIs (Key Performance Indicators) and forecasting practices. These variable influences also speak to the importance of using cohort retention models, which account for how the impact of various influences can differ from subscriber to subscriber, based upon how long a subscriber has been a customer.

Factors that can affect retention rates include:

Customer Quality

Not all customers are created equally. More specifically, not all customer cohorts are created equally. There are a lot of factors that affect the retention rates of a specific cohort. For example, retention among a subscription business’ first cohort could be relatively high, if that cohort is largely made up of “friends and family” of the business’ founding team.

Perhaps most importantly, marketing spend and targeting can affect the quality of customers that a subscription business acquires. By casting a wide net, you might bring in more first time customers. However, a very targeted campaign catered to your ideal customers will likely result in the acquisition of serious, qualified subscribers that are more likely to stick around.

Perceived Value

Particularly for curated box subscriptions, the perceived value of “what’s in the box” can change from month to month. If you’ve ever had a box subscription, you know that sometimes you get incredible awesome products you never knew you needed; other times you get a box of WFT. Subscription businesses that allow their customers to preview, pause, and/or skip boxes tend to retain customers longer.

Brand Differentiation

Let’s face it, most successful subscription companies have built their success on being the first to solve a problem that customers didn’t know they had. For example, Blue Apron blew customers away with the convenience and simplicity of their product offering. However, they’ve struggled to differentiate themselves against the likes of HelloFresh, Green Chef, Dinnerly, and similar offerings. As niche markets become saturated, competition increases and customer retention becomes harder over time.

Customer Experience

Customer experience is the pillar of subscription. Successful subscription businesses build beneficial relationships with their customers. Orders are shipped predictably and questions are answered quickly and efficiently. If a subscription business stumbles one month in terms of their customer service, they should expect that their mistakes will negatively impact retention the following month.

Seasonality

If you’re selling popsicles via subscription, ya gotta expect that retention will drop over the winter…

Perhaps less obvious, if you find an uptick in new subscriptions over the holidays, it’s likely that customers are purchasing subscriptions for friends and family as gifts. Many subscription services specifically offer a three, six, or twelve-month gift subscription. Once this initial subscription period ends, it’s very possible that the subscriber won’t renew if they didn’t choose to sign up for the subscription for themselves.

Outside economic influences

While hard to anticipate, the overall economic climate can affect monthly retention rates — especially for curated box subscriptions of more expensive, luxury goods. If potential customers are concerned about their job outlook or finances, they are less likely to spend money on non-essentials. On the flipside, if you’re offering a subscription that presents clear cost-saving opportunities, like discounted bath and body products, retention might be higher when customers are more focused on finding good deals.

Next Steps

Over the next few weeks, our team will be publishing additional blog posts on “the math” of forecasting subscriber retention, revenue, and profit. Stay tuned as we provide tools for measuring and forecasting subscription performance.

Learn more at: https://humancode.io.