How to increase customer lifetime value through subscriptions

Insights Article

Subscription services are a great way to get your favourite goods delivered straight to your door whenever you want them. From beauty products to biscuits, razors to recipes, there’s a subscription service for pretty much anything you can think of!

Data from Royal Mail predicts that the subscription box market will be worth £1.8 billion by 2025 – over a 200% increase from 2017 figures (£583 million).

Brits are a nation of power subscribers, with the average person spending £620 a year on subscription services, with a huge 80% of household subscribed to at least one service. Music & film streaming services account for 46% of subscriptions, followed by meal delivery boxes (16%), technology (14%) and beauty & grooming (12%).

In this article, we will discuss the benefits of using a subscription box and the impact it can have on your customer lifetime value. We will also explore methods for improving your customer lifetime value

Benefits of subscription services to eCommerce businesses

Regular eCommerce models face huge seasonal and monthly fluctuations. Subscription services can provide predictable revenue and smooth out the seasonality of your offering. This allows you to predict your business’s revenue stream accurately and reliably, whilst getting a clear idea of how much profit to expect. Of course, customers may decide to cancel a subscription, but financial forecasting is much easier when comparing subscriptions with one-time purchases.

A subscription model also allows your brand to build deeper customer relationships with your fan base. It opens up opportunities to engage with customers on a regular basis, allowing you to build rich relationships with customers. From this, you can provide personalised content to each subscriber including tailored messaging, ads, and bespoke recommendations. This helps to foster loyalty and engagement amongst the community you create.

This method further offers increased return on customer acquisition costs. The repeat business is implied at the time of purchase, meaning that if subscribers are kept happy, this model harnesses a consistent source of repeat revenue from repeat customers. The longer a subscriber is subscribed, the higher retention rates are and the greater their customer lifetime value. This gives value for money in terms of acquisition costs and benefits all-important profit margins.

Benefits of subscriptions to consumers

While subscription services provide businesses with a predictable revenue stream, consumers also see a financial benefit with many services offering a discounted price to consumers who subscribe. On average subscribing saves a consumer £290 a year, a considerable amount and a clear selling point for the service.

Subscription models also offer the perfect convenience for the busy lifestyles we have today. Customers receive what they want and need on a regular basis directly to their door, meaning there is no need to place repeat orders. This type of service is ideal for time-poor consumers that would not otherwise have the luxury of time to browse in-store or repeatedly search online.

This model also promotes the discoverability of new and unique products. Subscription boxes often include samples of new products which the consumer may not have tried before. As such, the consumer is given the benefit of trialling a new product without having to spend extra money.

A subscription box provides a uniquely personalised experience. More and more consumers are demanding a personalised experience tailored to their needs. In fact, studies show that 63% of consumers expect personalisation as standard now. Including products based on the consumer’s tastes or adding a personalised note is a great way to make the customer feel cared for. Touches like this make customers feel understood, valued, and connected – ultimately driving them to return to your business.

How to calculate Customer Lifetime Value (CLTV)

Customer lifetime value (CLTV) is the total worth of a customer to a business over the whole period of their relationship. Subscription services can strengthen your customer lifetime value when properly utilised.

The main way to figure out your customer lifetime value is by using this simple formula:

ARPC x Gross Margin x Length = CLTV

An example of how to calculate this figure in practice is as follows:

Average revenue per customer is £40.
The cost of manufacturing, shipping, and packaging is £20.
The gross margin is (£40 - £20) ÷ £40 = 0.5 (50%).
The average subscriber sticks with the subscription for 8 months.

£40 X 0.5 X 8 = £160.

The total CLTV is therefore £160.

Key factors that influence CLTV

There are many factors that influence CLTV, including:

Customer acquisition cost - How much it costs to get a new customer to buy from your store.
Average revenue per customer - The amount of money the average customer spends in your store during a certain period of time.
Cost of goods sold - The total cost of producing or procuring your products.
Churn - How many customers you gain or lose over a certain time period, usually measured as a percentage.

Tactics to lower customer acquisition costs

One way to improve your CLTV is to lower customer acquisition costs. By lowering how much it costs to get a new customer to buy from your store, you are setting yourself up for success.

Convert one-time customers to subscribers

The simplest way to increase CLTV is to get more people to subscribe. Showcase how your service will solve a problem that a consumer may not realise they had. Before Hello Fresh, how many people knew they had a problem with a lack of variety in the meals they cooked during the week?

One barrier that can make people avoid subscribing is the idea that it would be difficult to cancel or put on hold. This hurdle can be overcome by placing an emphasis on how easy it is to cancel or skip a subscription order, putting the customer at ease and making them more likely to subscribe.

Leverage your customer base

Peer recommendations are more trusting than any advertising. Utilising your existing recommendations is a great way to spread the word about your brand.

Effective strategies include using a refer-a-friend scheme. You can do this by offering your loyal customers a reward for telling their friends about your brand. Provide a tracked affiliate link, that provides a benefit for both your new subscriber and the existing one. An example is £10 off for your friend and £10 off for you.

Another strategy is making the most of organic word of mouth. Encourage customers to share their love for your brand, either on social media or by leaving a review. This lets other people see positive feedback about your business, making them more likely to trust you.

Tactics to increase average revenue per customer

Improving the amount of money your customers spend in your business each time can also boost your CLTV.

Upsell your subscription offering

Give customers a reason to spend more with you by optimising their subscription or adding on one-time products. According to research, loyal customers are 50% more likely to try a new product. Utilising their trust allows you to branch out your subscription offering and keep hold of your customers’ attention with exciting new products.

Provide additional shopping opportunities

Offering further shopping avenues could be as simple as letting customers add more to their subscription or tying in your subscription value to generate more revenue. This will make the perceived value of the subscription be higher than the cost to your business. You could add perks such as free shipping, exclusive discounts on other products in your store, exclusive subscriber-only deals, or access to subscriber-only content.

Tactics to decrease churn

A high churn percentage can really affect your CLTV. Reducing the number of customers that come and go can help to improve your CLTV.

Offer subscriber-only perks

Providing subscriber-only perks helps nurture stronger relationships with your top tier customers. Supplying multiple services in one subscription gives customers more reason to stay subscribed.

A good example of this method in practice is Amazon Prime. Even if a member stops getting value out of Prime’s free shipping, they might not unsubscribe because they still use the streaming services or photo storage.

Reward subscribers for their loyalty

Every customer is worth turning into an advocate but this applies to subscribers more so as they are much more likely to promote your brand as they’ve committed to spending money with you on a regular basis. A loyalty program is a great way to onboard, retain, and reward your most loyal subscribers.

Investing in keeping customers subscribed with discounts, loyalty programs, and other incentives will pay off in the long run. 89% of companies see customer experience as the key to driving loyalty and retention.

Final thoughts

Utilising subscription services is a fantastic method for building relationships with customers and improving brand loyalty. This type of service can impact your CLTV, therefore, it is important to have strategies in place to boost this number.

Get in touch today and talk to our experienced team. Together, we can discuss the strategies that can help you reach your business goals.