Study Insights: Best-in-class companies organize their subscription activities as a separate business within their organization

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A survey of 140 consumer good companies finds that the best-in-class are laser-focused on managing customer relationships in a proactive way. The study finds they personalize and customize their offers based on market research and use omni-channel strategy to connect with customers across the entire customer journey. Best-in-class companies are focused on Customer Lifetime Value while the ‘Rest’ prioritize more short-term metrics such as profitability per order.


[Boston, MA] – As the pandemic drove consumers to shop online at unprecedented rates and interest in subscription offerings surged, global pricing and strategy consultancy Simon-Kucher & Partners and Babson College surveyed 140 decision-makers in consumer goods companies to explore the best-in-class practices in subscriptions. Their study compares the ‘Best’[1] to the ‘Rest’ and details the best practices of the most successful companies offering subscriptions.

Measuring Success: The Front End

When comparing the importance of relevant goals of subscriptions, the study found that both the Best-in-class companies and the Rest similarly prioritize their objectives – both groups selected that their primary goal was to generate predictable recurring revenue streams, followed by reducing churn and/or regain lapse. Although both groups share similar goals, execution separates the Best from the Rest

“One of our findings is that the Best-in-class companies offer more choices to cater to a greater breadth of customer needs than the Rest,” says Shikha Jain, co-author of the study and Partner in the consumer goods practice at Simon-Kucher. “This variety allows the Best to offer customers plans that are easily understood and not overwhelming. What’s more, as differentiated plans and price levels appeal to a broader set of needs, this tactic also drives customer acquisition and retention.”

Personalization and customization are two other areas where the Best stand out.  All companies collect a certain amount of billing and transaction data, but the Best use formal market research more often. “The biggest difference among companies is that the Best are proactive vs. the Rest, who are reactive in how they understand customer preferences and customer information sources. All companies collect transaction and billing data, but the Best rely on formal market research more than the Rest. This allows them to make key decisions based on the entire market, including prospective customers,” adds Dr. Lidija Polutnik, co-author of the study and Professor of Economics at Babson College. “This knowledge helps them personalize and customize offerings to get closer to customers across a variety of needs.”

Subscription Delivery: Managing Customer Relationships and Expectations

More than 60 percent of all companies in the study keep in touch with customers through different channels. The Best companies rely more on an omni-channel strategy to stay connected with their customers. “The Rest over index on monitoring their website metrics like ‘drop-off point’ and ‘time on site.’ The Best focus on customer engagement, improving functionality and the user experience for their company app. They collect customer feedback and they monitor social media and online reviews to find out what customers think of their products,” explains Jain.

The study found that the Best stand out in their approach across the entire customer journey. The Best companies track, monitor, and involve customers not just with every transaction, but with every interaction. They do this by performing activities that are not necessarily “contractual” in nature. For example, the frequency of the Best companies using automated processes for relationship management. They reactivate lapsed subscribers, cross-sell additional products or services, and drive increased customer engagement. The Rest rely on less sophisticated methods such as scripted sales dialogues. “They do this with many activities, not just contractual or monetary such as billing or website purchasing. All customer interaction with the company is important for managing relationships. The Best use more data and technology than the Rest to learn about customer wants and needs. This helps them decide if and when to pivot product and business strategy,” adds Polutnik.

Understanding Costs is Key to Success

The study found that Best companies are better at tracking and prioritizing the metrics of the subscription business model. It found four key differences in how companies measure and track metrics:

  1. Cost per acquisition and profitability per order are tracked by 78 percent of the Best companies. The Rest prioritize tracking profitability per order, which is short-term oriented.
  2. The Best outperform the Rest when tracking repeat purchase probability (65 percent vs. 51 percent). Tracking this metric through predictive analytics capabilities allows the Best to keep a pulse on their customer base, as needed for successful relationship management. 
  3. Best companies also track Customer Lifetime Value (CLV) more than the Rest (70 percent vs. 63 percent). This is especially important since the success of subscriptions depends on acquisition costs and on the cost of servicing customer accounts.
  4. Finally, the Best recognize the importance of optimizing prices early.  
    They over index on testing and learning, from price response by segment, to understand customers and their willingness to pay. The Best seem to understand the importance of price, relative to the value provided at each subscription stage, from converting trial to acquisition, and finally to retention. The Best offer more packages than the Rest, as they aim to capture the differences in willingness-to-pay across target customers.

Jain adds a final comparison, “Our study finds that both Best-in-class companies and the Rest track multiple measures of success for subscription models. However, relatively more companies among the Rest track profitability per order, compared to the Best. We see this as a transactional, short-term measure of success, not as long-term strategic thinking. The Best-in-class companies focus more on relationship-oriented measures of success such as cost per acquisition and CLV.”

Study report available upon request.

*About the Study:
In their exploration of best practices for subscription models, Simon-Kucher & Partners and Babson College surveyed 140 decision-makers in the consumer goods space. Most decision-makers held the title Director or above. The survey consisted of questions relating to their subscription model: its characteristics and current performance, its strategic role within the overall company, the principal metrics used to measure success, and the company’s internal organization and processes to execute subscriptions.

Simon-Kucher & Partners, Strategy & Marketing Consultants:
Simon-Kucher & Partners is a global consulting firm with more than 1,400 professionals in 41 offices worldwide focusing on TopLine Power®. Founded in 1985, the company has over 35 years of experience providing strategy and marketing consulting and is regarded as the world’s leading pricing advisor.

Babson College:
The top-ranked college for entrepreneurship education, Babson is a dynamic living and learning laboratory where students, faculty, and staff work together to address the real-world problems of business and society. Babson continues to advance Entrepreneurial Thought & Action to generate sustainable economic and social value.

 

[1]Best-in-class companies make up 15 percent of the study sample and were identified and evaluated based on four key metrics to determine the success of a subscription model: i) future outlook, represented by the average monthly revenue growth rate; ii) profit, as shown by the current average profit margin; iii) customer acquisition rates; and iv) churn rates. Revenue growth and profit are most common key performance indicators (KPIs) used to identify strong business performance.