More Credit Catastrophes: How To Cope When A Card Payment Fails

Here are strategies for decreasing card payment failures with your recurring customers.

As much as subscription companies like the recurring payments possible through credit card use, there are still plenty of problems that plague those who deal with credit card transactions — and more for those who treat such transactions carelessly.

We detailed a number of these problems in the first part of this two-part series.

Well, as you would imagine, customers have lots of complaints too.

Take a look at the things that bother credit card customers:

TYPES OF CREDIT CARD COMPLAINTS SUBMITTED BY CONSUMERS

BUREAU OF CONSUMER FINANCIAL PROTECTION 2017

It turns out that the number one complaint for consumers is billing. And if I make a non-data-driven declarative statement, billing is also a top concern for subscription companies.

In this column, I want to focus on the ultimate billing failure, when a card transaction fails. There are many ways for a transaction to fail, so let’s look at some data on transaction failure and then examine the trends and causes. 

The following data is compiled and aggregated from PLC. This company works exclusively in the realm of “Recurring Billing” with “Card Not Present” companies. Without the jargon, PLC is a top industry expert in subscription billing. The data is aggregated from PLC’s PULSE platform, which looks at billing data only from companies that are subscription-based, recurring automatic billers.

CREDIT CARD DECLINES

There are a lot of reasons that a credit card transaction may be declined. Smart subscription companies monitor these declines and manage them accordingly. Here are the most common decline codes and how they have changed over the past few years. 

Do Not Honor: Transactions tagged with this code could be just about anything. This means that the card company simply wants you, as the biller, to decline the card and ask the customer to call the card company. You simply do not get to know why.

Credit Floor: This has to do with small transactions that do not actually require direct authorization. According to UniBul’s Money Blog, here archived at the Wayback Machine …

  • Floor limit (sometimes called “credit floor”) is the amount above which credit card transactions must be authorized before being processed. … All card transactions conducted in a non-face-to-face environment have a zero floor limit, which means that all of them must be authorized, regardless of the amount. … In a non-face-to-face setting, the authorization occurs when the card account’s information is submitted online or over the phone. … once the card information is provided, it is routed to the card issuer through Visa’s or MasterCard’s network and then the card issuer’s response is routed back through the same channel, approving or declining the transaction.

Invalid Account Number: This code means that the number was keyed incorrectly, for example, with the wrong number of digits.

Processor Decline: According to Paypal, a processor decline indicates that “the customer’s bank (or other card issuer) has refused the transaction request. Sometimes you can tell why it was declined by reading the response code, but only the customer’s bank can confirm the specific reason.” Commonly, these refer to incorrect credit card numbers and expiration dates. Paypal says that decline rates of 10% or so are normal.

Lost/Stolen: According to the issuing bank, the card has been reported as lost or stolen. The best resolution is to ask the customer to try another form of payment.

Restraint: The restraint decline code is synonymous with “restricted.” Both terms mean that the customer has used the card outside of their normal spending habits, or that the card holder has been traveling.

Expired Card: Simply put, the card is past its expiration date.

Pickup: For some reason, the card issuer or bank wants the card returned.

Invalid Transaction Type: In this case, the card issuer just does not allow this type of transaction.

Insufficient Funds: The customer is over his or her credit limit for the card.

APPROVAL/DECLINE RATES

The dashboards of the media companies I surveyed reported approval rates per month for the past 24 months. Take a look:

When you look at decline rates for subscription transactions, a decline rate of 15 percent is a common norm. Writing for Digital Transactions, Kevin Woodward points to a decline rate for recurring transactions 14.4 percent to 15.9 percent. That’s the flip side of the acceptance rates seen above.

Citing Visa | MasterCard publications and PLC, a post at Agile Payments has some relevant factoids:

  • On average, 15% of recurring credit card payments are declined (with some industries exceeding 30% decline rates). 30% of all credit cards are reissued each year. 1.5 billion EMV chip cards were issued in 2015 and 2016. As of fall 2017 only 55% of payments were made via chip cards leaving many more to be issued.

Of course, decline / acceptance rates can tell several stories, depending on how well the billing company handles problematic transactions. 

One simple way to make good on a declined transaction is simply to run the card again. However, there are nuances to take into account here, as described by Woodward, at the same article cited above:

  • Soft declines might be recoverable by waiting a day or two and running the transaction again, a useful tactic if a credit limit is reached, or by timing the next attempt on the first or 15th day of a month, when many payroll deposits are made. Reversing these declines is especially valuable for merchants because their revenue streams might not exist without recurring payments from consumers

CHARGEBACKS

Even after a transaction processes correctly, there is always the danger of a chargeback. What’s a chargeback? — per Gwen Moran, writing at CreditCards.com,

  • Credit card chargebacks happen when customers contact their credit card issuers to dispute charges. If an issuer deems a dispute valid, your merchant account is debited for a credit card charge that had previously cleared — and you’re out the money, plus a chargeback fee from the processor that may range from $15 to $100. Disputes may be considered valid for a number of reasons. In some cases, the purchase was made fraudulently by a third party, using the customer’s identity.

And for publishers and subscription-service companies, a danger is that subscribers may choose to cancel their subscriptions by disputing the card charge rather than through the usual process.

Chargeback analytics are represented by a chargeback rate. According to PLC, a rate of under 0.75% is fine for Visa and Discover; 0.75% to 1.0% is a matter for concern, and a chargeback rate over 1.0% is dangerous. For MasterCard, those ranges are: under 0.75%, fine; 0.75% to 1.5%, concerning; and over 1.5%, dangerous. The collected data confirms that — MasterCard consistently presented a higher chargeback rate.

According to the Chargeback.com blog, rates under 1.0% are most likely acceptable.

Subscription-based companies need to make sure they adhere to best-practice upfront recurring notification as well as subscriber/member communications and retention marketing to minimize the change of a chargeback. Auto-renew businesses will have higher rates due to, among other reasons, customers who cancel a subscription by contesting the credit card charge. The Chargeback blog gives the example of a subscription gaming site that got in trouble because chargebacks would sometimes spike as high as 2%. A common reason, especially for media companies and firms using recurring payments, is to cancel a recurring subscription — that’s almost a quarter of all chargebacks.

SOLUTIONS

Eventually, all credit cards expire, and every expiration poses a huge risk of losing the subscriber. Not all customers will max out a card, but when one does, how can a subscription company retain the business? Here are several ideas for dealing with the inevitable card declines and chargebacks.

MAINTAIN SUBSCRIBER ENGAGEMENT. Most importantly, be proactive, suggests Subscription DNA:

  • Where it’s possible, never wait until an account is past due to reach out to a customer. In cases where a credit card is cancelled due to fraud or theft this won’t be possible, but it’s best practice to send out a few emails to clients whose credit card on file is set to expire soon.

If all is going according to plan, your excellent subscription service is already creating loyal and enthusiastic users. Extending and supporting that enthusiasm is an opportunity, not a chore.

USE AN ACCOUNT UPDATER SERVICE. If you can solve credit card decline problems without even contacting the customer, so much the better. That’s where an updater service can solve the problem of expired or replaced cards, by matching old card data to updated cards. According to PLC, when a merchant submits accounts to an Account Updater service, here are the possible responses the service will provide:

  • Account Number updates that provide the correct account information for a given card.
  • Expiration Date updates that provide the correct expiration date for a given card.
  • Closed Account advisories that provide notifications that an account is now closed.
  • Contact Cardholder advisories that provide information that typically results from the cardholder opting out of Account Updater programs during his or her payment card application process.

Consider the graphic below, showing the percent of matched cards and reasons that the old cards were initially declined and then successfully updated.

According the PLC, the percentages vary, “due to market factors such as data breaches requiring reissuance of credit cards, poor market conditions forcing consumers to max out their credit cards and many other reasons.” Moreover, the value of the updating service is that you can use is as part of a re-presentment strategy.

IMPROVE CUSTOMER COMMUNICATION: Whether it is before expiration or after a payment is declined, contact with the subscriber is essential. The primary mode there is email. My Subscription Insider colleague Kathy Greenler Sexton has several examples of these outreach email messages. She notes several interesting strategies: a straightforward and simple call to action; persistent daily reminders; and the aggressive and busy approach. That last one only works for some company cultures.

And depending on your payment vendor, you should automate the email contact process when a card fails.

Over at the Baymard Institute blog, there’s an interesting claim: “We’re Salvaging 30% of ‘Card Declined’ Sales”:

  • In the credit card error message we simply suggest the user try out an alternate payment method … The most straightforward solution is to offer one or more entirely new payment methods directly in your “card declined” error message. This can be as simple as offering a third-party checkout such as PayPal … The alternate payment method can however also be truly alternate, i.e. offering check, bank transfer or invoice payment – even if you don’t normally offer these payment methods to your customers.

Insider Take

With a careful attitude and due diligence, credit card transactions are a real boon for a business that depends on recurring charges. Understand the norms and the data standards in the industry to avoid pitfalls that can lead to catastrophe. Then managing these transactions will be much less fraught.

How To Handle Credit Card Catastrophes: Fraud, Data Breaches, Poor Payment Processing

Tactics for dealing with three major issues: card fraud, data breaches, and coping with a bad card data processor.

Americans make recurring payments in several ways, but plastic tops the list. Scheduling payments — set it and forget it, so to speak — are easily charged to a credit card and then tapped per arrangement at regular periods. When you look at exactly how subscribers pay for subscriptions, the dominance of credit becomes clear:

The exact percentage varies by product category. 62% of gift box subscribers say they turn to plastic for regular payments; that drops to 45% for clothing. But for all categories, more subscribers said they use credit cards than other payment methods.

Vantiv elaborates on this research: when you look at the totality of subscription payments, more than half (52%) are made by credit card. Moreover, the volume of transactions made with credit cards is steadily increasing, from $1.2 trillion in 2000 to $2.1 trillion in 2010 to $3.3 trillion in 2016: With the clear importance of credit card transactions, what are the best ways for subscription companies to avoid the pitfalls and challenges that they also present? Let’s take a look at some of the biggest hurdles.

CATASTROPHE 1: Card Fraud

Recurly.com offers a useful synopsis of the dangers fraud poses to subscription firms:

  • Fraudulent transactions costs are multifold for subscription-based businesses. Direct financial impact includes lost goods and services as well as hefty fees by gateways and merchant banks due to chargebacks. And, if abnormal or excessive chargebacks occur, merchants also face the risk of suspension or termination of gateway and merchant bank relationships. In addition, combating fraudulent transactions often requires large investment in personnel to conduct arduous manual reviews of potentially risky transactions.

At the Chargebee Blog, John Solomon raises some excellent points regarding the hidden danger of chargebacks. He says that around 0.01% of all transactions end in a chargeback, and 20% of all chargebacks are fraud. At a cost of up to $40 to fight a chargeback, the expense may not be worth it. There’s also the danger that companies themselves perceived to be frauds may lose the ability to accept credit cards — and that can happen if a company has a too-high chargeback rate. That’s a real danger for subscription companies if users forget they subscribed and then dispute the charge, or if they simply decide to cancel their subscription with a chargeback.

Solomon also has some ideas on cutting back the most fraudulent abuses, including fighting users of stolen card data.

  • Requiring consumers to enter the CVC2 and CVV2 numbers from the back of their card, in addition to credit card number and expiration date, merchants have been able to reduce chargebacks by 26%. … Address verification systems can also significantly reduce the risk of fraud, because many thieves don’t know the address associated with the card.

Winning disputes with actual card holders is easier if you have prepared for the battle, according to Ballistic Merchant Services. Some of their tips:

  • Be clear about refund and return policies.
  • Respond to inquiry letters as soon as possible.
  • Let customers know what name will appear on statements.
  • Watch out for orders using free email addresses

The flip side of fraud is reassuring subscribers that their data is secure. Customers are certainly alert to card fraud issues:

CATASTROPHE 2: Card Data Breach

The first facet of a breach danger is preparation before and response to potential breaches. It should be obvious, but just in case anyone out there thinks it is 1995, no, it is not good to throw a javascript form on your homebrew website to collect and email credit card data to your son’s AOL address so that he can fulfill orders. Just no. In fact, you do not handle credit card data at all! It looks to your customers like you do, but in fact, all data is sent from the customer’s browser to your credit card processor, who uses a tokenization process to handle that data securely.

On your end, you need to ensure that your site is secured via SSL — the little padlock icon in your nav bar tells you if a site is protected with this technology. Also, you need to follow the PCI DSS standard, that is, the Payment Card Industry Data Security Standard. Failing to meet these minimal standards can get you in trouble. At Sysnet, Jeremy Lacy details those consequences:

  1. Lost Sales. Skittish customers often look for other solutions when they think their data is at risk.
  2. Damaged Reputation. Once your customers do not trust you, the damage is very hard to repair.
  3. Compensation Costs: You may need to offer customers free credit monitoring and/or identity theft insurance.
  4. Legal Action. You face steep court costs even if you are sued and win. And if the breach was your fault, a loss could be a true catastrophe.
  5. Fines. While you do not have to reimburse anyone when thieves use data they steal from you, you will likely get fined.
  6. Government Audits. In the U.S., the FTC may audit you and even fine your business if they find that guidelines such as PCI DSS were not followed.
  7. Remediation Costs. The price tag to investigate, fire, hire, and fix problems can be high.

At Air Worldwide, Adam Reichert puts it in stark perspective:

  • It takes time for stolen cards to make their way through black markets and be charged, and the full amount that a merchant is liable for can take years to determine. A large credit card data breach can put an ill-prepared company out of business. Many companies have some form of crime insurance to protect themselves from such losses.

The second facet of card data security is reassuring customers that their data is safe, both before and after a breach incident. The implication is that a successful subscription business has to make customers feel secure. For Crystal Gilliam at the TradeGecko blog, that starts with the company website. Make your website as secure as possible, and bring your website up to PCI standards, she says.

Aarthi Rayapura at Zuora says that providing a solid checkout experience is important when a customer is getting out the credit card and typing in numbers.

  • Many companies focus on marketing their service or product online but neglect their payment pages. They fail to realise how crucial this customer touchpoint really is. If a customer has reached your payment page, it usually means they are interested in signing up. It’s best to ensure a quick and seamless payment process to seal the deal.

Some basics to keep in mind:

  • Keep it short: Ask only for the essential information. You will have other opportunities later to gather more detailed profile information.
  • Automate: As much as possible, auto-fill fields such as card type, zip code, etc. The less work your customer have to do, the quicker the sign-up.
  • Validation and Errors: Identifying errors with inline validation before a form is submitted makes it faster for your subscribers to correct them. If a user hits ‘Submit’ and then has to fill the form all over again due to an error or two, the chances of customer abandonment increases.
  • Design for all screens: Online sign-ups are not limited to computers anymore. Make sure your design is friendly with screens of all sizes including mobile phones and tablets.
  • Localize: One of the most basic ways to achieve a higher conversion rate is to ensure your checkout speaks the same language as your customers. Extremely important for international customers, you should localize your payment pages for different regions.

Writing for Forbes, Matthew Lieberman says that customers need more than apologies and transparency after a hack takes place. They need to compensate victims, improve systems, and offer credit monitoring.

  • Trust is key, and offering the best possible customer experience is critical during the time following a security breach. Companies must also understand and address these concerns prior to any attacks and on an ongoing basis. They can do so by putting cybersecurity and privacy at the forefront of their business strategy and backing it with proven security tactics, implementing robust data governance and customer control over data, going beyond existing regulations to make customers more comfortable, being more transparent when using new or emerging technologies and focusing on continually earning consumer trust.

CATASTROPHE 3: Payment Processors

With the right processor, handling card transactions is easy and simple; with the wrong one, life becomes a nightmare. Here are some tips to help pick the best one and cope with a shady one.

Be alert for signs that a provider offers poor service or outright rips off customers. According to Christina Lavingia at the PayJunction blog, complex bills and clunky websites are danger signs.

  • The main reason providers successfully get away with unfair billing practices is the intentional complexity of merchant statements. It’s just too easy for providers to bury a markup or add a fee without a clear description. As a business owner, you’re busy and want to trust your provider, which incentivizes you not to question each and every fee on your statement in detail. Additionally, some businesses just possess terrible software. Quality is simply lacking, which creates more tension and lost time.

Alex Neir at MaxxMerchants has more danger signs that a processor may be a shady operator. Are low prices hiding unstated fees? Can the contract term be negotiated, or are you locked in to a long term? Is there a merchant account that is right for your business? Neir offers some intense advice on specific fees:

  • Watch out for termination fees; they can be a sign that a company is not invested in helping the business grow, and would rather see a customer terminate his/her agreement early so that it can collect the pricey termination cost. Also keep an eye out for reprogramming fees, as although a company may try to convince your business that it must lease or buy equipment in order to avoid having to re-configure the devices, this typically is not the case; in generally the virtual terminal used for Internet credit card processing is easy to set up or reconfigure.

Say you realize you made a mistake, and you need a new company to process card transactions for you. Unfriendly processors can also sabotage your business by refusing to move your customer’s card data to a new provider when you want to switch. If your new processor does not have all the old data, you will have to go to each customer and request the data again. That’s a situation almost guaranteed to lose you some customers. A different post from John Solomon at Chargebee addresses this issue:

  • Before you sign up with a payment gateway, you need to know whether it supports credit card data portability. With no regulations in the payment credit card industry with regards to data portability, merchant account providers have been operating on their own terms and leaving merchants at the mercy of their terms and conditions. This is very problematic since it locks merchants from changing providers lest they lose all their customers’ credit card numbers.

The solution to these kinds of issues, according to the Tandem blog, is due diligence piled upon due diligence.

  • The terms and conditions from a credit card processor can be bulky and confusing, but if you skim over their contents, you’ll regret it later. Take your time and read carefully so you don’t miss any red flags. If you find something suspicious, ask your potential processor about it and make sure the problem is resolved before signing a contract. … You don’t have to sign with the first eCommerce processor you find. Instead, shop around. Read reviews. Talk to processors personally. Wait until you find one who’s transparent, affordable and responsive, and you won’t have anything to regret down the road.

Insider Take

Credit cards makes commerce possible, but they come with challenges. The cards themselves expire or fail; users, both criminal and merely contrary, derail the process; and shady or incompetent processors throw sand in the gears of your business. Fortunately, all three problems can be minimized with the right preparation.

Understand A Subscription Payment In Action

Understanding how payments work is a key foundation to selecting the right vendors for your subscription or membership business.

This guide will help you understand the mechanics of a payment, key terms, and the key players involved from the moment your customer submits a payment to your business, to when the money for that customer’s subscription gets into your bank account.

Remember, there is no ONE right set up of payment vendors. Some vendors support one part of the payment process while others support many. The right set up is what works for you and your business. So, its imperative you understand the process, what your business needs, and know the right questions to ask when selecting your payment partners.

STEP #1

Your customer submits his/her credit card for a Payment for your subscription or membership service. This payment can be done online, over the phone, or even via a mobile app. The payment can be set up to be hosted either on your site or on a payment page (that looks like your site) that is actually hosted by your subscription management or payment vendor.

STEP #2

The charge “Authorization” process begins. Your Payment Gateway provider manages the complex routing of the data on behalf of you, the merchant. A Payment Gateway is an application that connects your site’s shopping cart or online order form with the other pieces of the credit-card processing chain. Some Payment Gateways are point solution vendors, while others include the Payment Gateway as part of a larger offering.

It is important to note that you should make sure you understand how your Payment Gateway supports failed payments both initially, and upon a renewal payment. Using an Account Updater service is a best-practice for recurring (subscription) billing. This service is provided by credit card Issuers like Visa and MasterCard to provide merchants with updated payment card information and not all Payment Gateway vendors provide access to it. Some Payment Gateway vendors provide an “Account Updater-like” program to update payments cards using their own data as well. Either way, make sure you understand the specifics of if, and how, your vendor supports failed recurring payments. Payment Gateway vendors also can provide additional services such as fraud detection, address verification, and Account Updater types of services.

STEP #3

Your Payment Gateway provider passes the transaction information via a secure connection to the Payment Processor either in real-time for your initial subscription transaction or in “batch” mode, which is typically daily, to process your subscription renewal (Recurring) transactions.

Payment Processors, also known as Merchant Acquirers, are the only transaction-handling entity required between the merchant and the card companies (Visa, MasterCard, etc.) known as the “Issuers”. The Issuers use a Global Interchange Payment Network that connects all payment card Issuers globally with Payment Processors to support payments globally, in real-time.

STEP #4

Your customer’s Payment Card Bank, the “Issuing Bank“, approves or declines the transaction based on the customer’s available funds and passes the transaction results back to the Global Interchange Payment Network.

The  Global Interchange Payment Network then relays the transaction results to your Payment Processor. Your Payment Processor then relays the transaction results to your Payment Gateway. Remember, for the initial transaction, all of this is happening in real-time. For renewal or recurring charges, this would typically happen in a “batch’ with multiple transactions together on a daily basis.

STEP #5

Your Payment Gateway now stores the transaction results and sends them to your subscription management vendor and “front-end”, or website shopping cart page, for your customer to see if the charge for your subscription or membership product was approved or declined. Your Payment Gateway also provides reports and alerts for merchants on successful new transactions and batched transactions.

STEP #6

Assuming the payment was successful now its time for you, the merchant, to provide your subscription or membership product to your customer.

STEP #7

You’ve made the sale. Your customer considers the sale complete. For you, however, the transaction is still in process, since it must now be “Settled” and “Funded”. Your customer’s issuing credit card bank sends the appropriate funds for the transaction to the Global Interchange Payment Network, the network for issuing credit cards such as Visa, MasterCard, or Discover. The Network passes the funds to the bank where your merchant account is. Your bank then deposits the funds into your merchant bank account. This is called ‘Settlement’ and typically the transaction funds are deposited into your primary merchant bank account within two to four business days. When that happens, that is called “Funding“.

Final Thoughts

Note that with some Payment Gateways and Payment Processors, the funds are not passed directly to your merchant account bank. They are instead passed from the Global Payment Network to your Gateway/Processor and then to your merchant account bank. How your payments flow will determine your fees, when fees are taken out, and timing of Settlement and Funding.

Re-engagement Redux: Why Lapsed Subscribers Make the Best Prospects, and How to Bring Them Back

How much would you pay for a list of leads who are demonstrably interested in your service, are proven purchasers, and are familiar with your brand? Hint: You already own that list. 

CONDUCT TESTING

A key first step is to learn about the lapsed customer’s demographic. This information is essential because it forms the basis of tailored messaging used to bring lapsed subscribers back. For example, game maker Blizzard recently polled gamers who had unsubscribed from a new service, even asking for Skype chats with them, in order to learn why they had left.

Also this year, the American Art Therapy Association used A/B testing to figure out if lapsed members were more likely to respond to instant gratification (a $10 Starbucks gift card) or long-term benefits (a three-month extension on their annual membership)? The long-term benefit was more than twice as likely to bring a member back to the association.

Community Brands polled lapsed members to determine motives for unsubscribing in greater detail. 

OFFER INCENTIVES

One obvious way to target these former customers is to “make them an offer they cannot refuse” — that is, an incentive. If you offer them discounted prices, expanded services, or some form of more of what they want, that may well inspire them to return.

Researchers at Georgia State University partnered with a telecom company to test different offers intended to bring former customers back into the fold. They divided lapsed customers into two groups — those who left over service, and those who left over price. They offered discounts to some, extra free service to others, and a bundle of both to still others. 

  • Recent technology, particularly more-sophisticated customer databases, allows companies to draw on information about how people used their service the first time around to craft more-successful win-back offers and to identify and go after the most profitable defectors.

The different trials offered success rates from 41% to 47%:

It is interesting to note that the strategy with the highest success rate also offered the lowest ROI. That may not matter, however, when the goal is to increase market share.

A pure example of this incentive strategy is the recent drive by Spotify to woo back former premium subscribers with an offer of $9.99 for three months, which is what the company usually charges for one month.

DEMONSTRATE VALUE AND ENGAGEMENT

The problem with incentives, however, is that they may send the wrong message. If a subscription service has a strong brand loyalty component, then offering to buy back members may backfire. As an industry expert tells online magazine Associations Now:

  • Win-back campaigns are not easy, and you have to tread lightly when you’re aiming to reengage former members. “Obviously a discount or promotions help, but that’s not everything,” says Dan Ratner, membership and business development strategist at the Next Steps LLC. “Associations need to evaluate strategies and, most importantly, demonstrate a strong value to win back former members.”

There is a portion of every lapsed customer demographic that simply forgot to resubscribe. The right appeal to these former customers can bring them right back. First priority in this process is to analyze the resubscription system and make sure it is as easy and user-friendly as possible.

Another set of lapsed subscribers will be moved by appeals to the existing relationship. Consider a successful program launched by the Audubon Society, reported at Cause & Effect. The bird-lover’s association sorted their lapsed list by the number of years the former subscribers had been active. After identifying those who had been active for 20+ and 10+ years, the association sent hand-written and personal notes to these former longtime-supporters. They were thanked for their years of support and offered free subscriptions, as well as membership cards:

  • Something unexpected happened. These lapsed members started sending in their member dues at $45, and a number of them sent larger donations, often at $100 and more. Last year, Audubon decided to extend the program to 10+ year members. Did it make a difference? What are the numbers, you are probably asking? Since the program started, Audubon has mailed out about 300 handwritten note cards to lapsed members – around 15 a month. Each note is carefully crafted, so the task takes donor relations manager Sharon Cresci almost a full day each month. Is it worth it? 50% renewed their membership.

On the other hand, let me offer an aside on what NOT to do: Don’t email lapsed subscribers to inform them that you are restarting their subscriptions and will be charging their credit cards unless they let you know otherwise. I’m looking at you, here, MoviePass! Yes, incredibly enough, the troubled movie subscription company is monetizing its lapsed customers by resubscribing them, unless they opt out. One can only wonder at the calculation that weighed this strategy against the inevitable bad press and legal action and still decided it was a worthwhile idea.

Insider Take

Once upon a time, every lapsed subscriber was a new subscriber. Some of those who cancel will not come back, of course, but many former customers will give their subscription another chance – if asked in the right way, and offered the right reason to do so. 

The Subscription Churn Primer: How to Maintain a Healthy Renewal Rate

Our tried-and-true tips for minimizing your churn

If you’re spending a large amount of time and money to acquire new customers, do renewals really matter? They do, and it’s a matter of your profitability.

That’s because there’s a good chance that you’re spending quite a bit of money to acquire every new subscriber. In general, the average subscription business pays about what the first term of service would be in order to acquire that new subscriber. Unless they just appear out of thin air, which is pretty unlikely, there will be some investment required in marketing efforts, marketing time, and marketing dollars to acquire them.

The baseline cost for a renewed subscriber, on the other hand, is just the cost of credit card processing. You may have a small marketing cost if there was some telemarketing, direct postal mail, or some special campaign or premium involved, but generally, it’s just the credit card processing cost. Renewed accounts are as close to pure profitability as you can get, so it will positively affect your subscription business to have as many renewed accounts as possible. Here are some tried-and-true tips to help you maintain a healthy level of renewals, and limit your subscriber churn.

  • What is Churn?
  • Auto-Renewals: Subscriptions in the Modern Age
  • Improving Recurring Charges
  • First-time vs. Second-time Renewals
  • Two Non-renewal Myths
  • Engagement Tactics
  • Improving Perceived Value
  • Renewals Through Customer Service
  • Regression Analysis for Renewals
  • Improving Group Subscriptions and Site License Renewals

What is Churn?

Churn can be simply defined as people falling off your customer list after they’ve joined. It is the result of different actions or inactions on the part of the customer, the most common being account non-renewal, cancellation, and expired or declined credit cards. Whatever the reason, the end result is that your subscriber base gets smaller and smaller. Without proper controls in place, the end result is that you spend a large chunk of your budget to acquire new subscribers, but all you’re doing is just replacing the customers you’re losing through churn. All the work you’re putting in isn’t contributing to growth. Improving your rate of renewal means that you won’t lose as many subscribers and the company as a whole can reach a rate of growth that will bring you to a more profitable future.

Auto-Renewals: Subscriptions in the Modern Age

In the old days before the internet and credit card technology, account renewals meant that you would wait on your customer to send in their payment at the beginning of their next subscription period. These days, the vast majority of customer renewals take place through auto-renewal of credit cards. This is indeed the connective tissue of the emerging “Subscription Economy” that we talk so much about because it opened up the doors of persistent streams of automated recurring revenue. The days of waiting around by the mailbox for a check to arrive are over, now you can automatically bill the customer when their term is up. This has changed the dynamic of renewals and left the ball in the court of the subscription business to fully engage the customer in an active, not passive, manner. What a time to be a subscription merchant!

It’s important to remember that when signing customers up for auto renew, you are explicit in your language that this subscription will renew on a pre-determined schedule, at a pre-determined price until the subscriber decides to cancel. It is very important ethically and legally that the subscriber knows exactly what they are signing up for, and are reminded in due time that their subscription is about to renew. In the meantime, the opportunity is yours to engender an active relationship with your subscribers where they wouldn’t even consider leaving you.

Despite this technological gift, the main problem with auto-renew is the inevitable credit card declines. There are several reasons for declines, the most common culprit being card expiration. Your customers could have also changed cards, hit their credit limit, or have committed some sort of fraud. The reasons are legion, but the bottom line is that it will negatively impact your subscription business. Active planning and maintenance of your customer database is key to maintaining a high rate of successful recurring charges.

Improving Recurring Charges

A recurring charge is the credit card processing terminology for when a customer auto-renews. The following actions can help you cut down on declined transactions and chargeback’s and raise your overall renewal rate:

  1. A dedicated in-house staff member to keep track of and improve your credit card processing is a good place to start. They can keep tabs on how you are handling your clients and potential fraud, as well as chargebacks, which are when the customer essentially disputes the transaction and the credit card company attempts to recover the cost of your subscription. Chargebacks are costly for you and should be mitigated from the beginning.
  2. Sending an email informing your customer that they are about to be auto-renewed is not only good, above-the-board business, but it will also help to cut down on the surprises of a previously-unknown, expired, or otherwise bad card. It could either be an email telling them that they have been renewed or they’re about to be renewed, but the key thing here is that a lot of your members won’t remember they’re up for renewal and that they’re about to be auto-charged. It may seem counter-intuitive but you essentially want to give them the opportunity to cancel before it costs you money.
  3. Work with the credit card companies like Mastercard, Visa, and American Express to edit what your charge will look like on the customer’s statement. This is to avoid the situation where people open up their credit card statements and they immediately ask: “Did I buy this? Should I be paying for this?” You want to make sure that at least if they’re looking at their current statement or if they’re calling and asking for a refund that it’s a company name they recognize, and they know where to call. The last thing you want them to do is to call the credit card company because that could quickly become an expensive chargeback. The operator at the credit card company doesn’t care about your business. They are just going to say, “Oh, those bad people, they falsely charged you? Let’s get that off the statement for you!”
  4. Investing in the Account Updater service provided by the major credit card companies will work wonders for your payment processing activities and improve your renewal rate. This service tracks changes in account information to provide a seamless transition when cards change.
  5. Hire a payment-processing consultant like Paul Larsen who can dive deep into your processing activities, and can help immeasurably in recovering lost revenue.

First-time vs. Second-time Renewals

A strange thing about customer renewals is that the first time you harvest this field you’re going to get a pretty low renewal rate. Then the second time you renew the exact same people the renewal rate actually goes up. This happens across the board to subscription businesses.

What this means is you need to be tracking a few things. First of all, you shouldn’t be analyzing a general renewal rate for all of your buyers together. Split this number up into first-time renewals and the rest of your customers. What happens is when the first-time renewals come up, you end up getting rid of people who never would’ve renewed in the first place. This is a major hurdle for subscription businesses. The ones who fall off simply just weren’t right for you, but after this, you end up keeping the best people. Those best people, when it comes to their second renewal are much more likely to stick with you because you’ve already weeded out the bad seeds. Even better for you, your best customers are also those who end up buying your cross-sales and other promotions.

Don’t spend any time worrying about the customers who don’t renew after the first term. They simply weren’t the right fit for your product and were probably indulging a momentary interest in your product that has since waned for whatever reason. Your focus primarily should be on keeping the good customers you already have.

Two Non-renewal Myths

Sometimes you will run into the situation where you’ll have customers who have been with you for a very long time, even since the beginning. They renewed steadily until one day they just disappeared.

It hurts because you know that they’re in the right market and they certainly have had more than a momentary interest in your product. So what’s really the problem?

There are actually two myths that most subscription business owners believe. The first one is money. Most customers, when asked, will tell you that your membership costs too much money or that their budget for your subscription was cut. Most often, if they could afford it the first time, they can afford it the second time. If the product is right for them, if you were really solving their needs or really hooked into their passion, almost no price would be too much.

They should be so deeply interested in the product that it’s not about another $5. They are telling you it’s the price because it’s an easy answer. Nobody wants to tell you that you aren’t living up to expectations or that they just didn’t like your product or services. Nobody wants to tell you, “I just really didn’t like or I didn’t use it.” It’s easier for them to get out without hurting your feelings by saying that they don’t have the money right now. Don’t believe people when they say that. Always believe that you may have a different problem, and take action to correct it.

The other myth is that your competition caused the non-renewal. In fact, often your competitors should actually be your biggest marketing partners. Because the secret is that people who buy content on a particular topic tend to buy a lot of content on that particular topic. Great content should speak for itself. If you publish it, they will come, regardless if they are doing business with someone similar to you.

Engagement Tactics

The real number one reason people don’t renew is because they simply forget that they had a membership with you, which seems insane, especially if your subscription is quite expensive. It really is up to you as a marketer to communicate with them actively throughout their lifetime as your customer so they’ll get value out of your business and continue along with you. Sending an email newsletter to your subscriber list once a week with updates on the content, products and services you provide is a good place to start, but is just the bare bones approach to keeping them around.

When someone is a newly minted customer, you’ll need a marketing program so they’re engaged and involved in their membership from day one. The last thing you want is for someone to buy your subscription, get the one thing they came looking for, and promptly never return again. Program a series of welcome messages for new buyers to help them get to know your business. Those first 15 to 30 days of a customer’s lifetime are when you can make a huge impact because anything you do in the beginning will show up down the line in renewals and thus recurring revenue. Phone calls, if you can afford them, also make a real difference in your bottom line. Think of them not as sales calls, but as service calls to get people involved in your community.

Consider sending something tangible to your customers in the mail, even if it’s just a signed welcome postcard, because the senses do matter and something your customers can touch has a much longer impact than something virtual.

Another common product problem that impacts renewals is that what your customers expected to get from your site is not what they actually got out of your site. Another key to ongoing engagement is that your members generally use different content when they’re long-term members versus when they’re first-time members. Make sure that you have content that pleases both types of members and that you’re promoting the content for the long-term members. Customers who tend to feel like they are part of a community will stay around longer.

Improving Perceived Value

In short, improving renewals is about first improving perceived value. First of all, find out what your members, your current paid buyers, really want. The folks who have hung around for a while are going to give you the best ideas, because what they like will end up attracting other people like them. Consider the following tips to improved the perceived value of your subscription product:

  • For new members, conduct a welcome survey as part of your automated email welcome campaigns.
  • Hang out on the message board or member forum and monitor what people are talking about.
  • Study your web analytics. Search terms are incredibly useful to finding out what topics appeal to your readers.
  • Meet with people in person when traveling for business. Host an informal meetup event at a local restaurant or coffee shop. Face-to-face interaction is invaluable as people generally are excited to meet you once you are a member.
  • Implement an exit survey for non-renewals. Ask them what they would’ve liked to see more of and less of from your business. Don’t ask them anything about price, because we already know they will most likely say your subscription was too expensive.
  • For content publishers, make sure the Content Management System for your site allows you to place promotions for your most popular content on your homepage, and not just your newest content either! This ensures that you can get your best and most popular content in front of your readers, especially new members.

Improving Renewals Through Customer Service

In the end, despite all of your best efforts, renewals are won in the trenches. Sometimes it comes down to a conversation to talk your customer off the cancellation ledge. That’s why it’s important to always have a customer service representative available during business hours to save an account that’s threatening to cancel. They need to be available for the times when the majority of your customers are looking at their credit card bills. If you miss them and they leave a message, you’re running the risk of a chargeback.

Running customer service hours from 9:00 AM ET until 7:00 PM ET is a good tip because you want to cover a little bit more of the Pacific time zone working hours. Give your customer service reps a list of “save offers” they are authorized to give to potential cancellations. It may not work, but it never hurts to attempt a save. Or you could offer them a premium, or a few dollars off the renewal price. Maybe you can offer them just a few more weeks. Think about what you can offer them that might save the account.

Train your customer service reps to be experts on what’s available from your business, so that when they’re talking to customers they have at the very least the same knowledge, but hopefully even better knowledge of your business than the customer does. This way, they can really speak to the customer in a consultative fashion. The important thing to remember is that often this is the only person in your entire company that your average customer is ever going to talk to in person, so a trained rep makes a huge amount of difference in renewals. Your hires in this area need to be people who love talking, consulting, and helping people and are probably from a sales background.

Last but not least, you need to give them the ability in your backend to look up accounts quickly and add notes to them, in particular, “do not email” and “do not contact.” It’s very important that they’re able to append that information to an account so that no one else ever emails that person again. The last thing you want to do is to upset these customers and end up with bad word-of-mouth on the internet. Also, keep in mind security precautions that give your reps a customer service screen that doesn’t show credit card numbers, just their contact information.

Regression Analysis for Renewals

Conducting a regression analysis will help your overall renewals. Put simply, it means determining the kinds of customers who have renewed really well for your business, then looking back (the “regression” part) at their account lifetime and attempting to determine where they came from. You’ll find that your most fabulous renewal-heavy customers all come from very few sources. Your non-renewal customers that fell off, cancelled, or charged-back within a month or two and never ended up being any good to you, all tend to come from different sources. You’ll end up seeing that certain sources just deliver pretty crappy customers and certain sources deliver fantastic customers.

The foundation for this ability is to have the proper marketing attribution for your members to track their initial source. You have to be able to look back and analyze these numbers. Start by tracking prospects by campaign type and perhaps even by the list within each campaign. It could be particular keywords on PPC campaigns, tell-a-friend specials, sale offers, or even a certain marketing list.

Each different media source where you place your ad and each different list you use will deliver a different quality of customer to you. You need to be able to look back, and ask: What was my offer? What kind of campaign was I running, where did I stick it, where did they see it? Ultimately, this is going to radically improve your renewal rate because it will inform your acquisition campaigns based on it. Say, for instance, that your tell-a-friend referral campaign delivered fantastic customers. You can then recalibrate your marketing time working on a campaign of that type, and dial down the time spent on the campaigns that didn’t perform as well. Very large membership organizations often have a full-time person who’s just doing regression analysis, it’s that important.

Improving Group Subscriptions and Site License Renewals

If you’re operating mainly in the Business-to-Business space and selling site licenses or group subscriptions and you want to improve renewals, your email newsletter will not be enough because you’re not going to get the amount of renewals that you should be getting. From the start of the membership, you should get these customers on 2 or 3-year term if at all possible. For one, if you have to send a sales rep to negotiate in meetings, that’s really high cost to getting an account. What you really want to do is reduce that cost in time.

One of the ways you can do that is to make your group subscription a three-year term. You don’t want to begin the sales process, have it take six months just to acquire the account, and then six months later when they’re up for renewal, you have to sell them again. It’s just exhausting and you’re never going to get anywhere. Make these things as long as you can so then you can focus on getting new business and growing the total number of your site licenses accounts.

Another tip is to get as many contacts as you can at your prospective customer. The truth of the matter is that even in fairly small organizations you’re going to have eight to 10 people who are actually on a formal or an informal committee deciding whether or not they should buy a group subscription from you. Even if you think you have buyer contacts, they may not even be the people who have the power. You also need multiple people because after a two or three-year term, you don’t know who’s going to be still left with the company. The more people you have in your pocket, the better.

Next, you’re going to start heavily promoting the site license or group subscription after you’ve already sold the account to get the user base to use the product. You can conduct webinars for that particular account, or get a top executive to give a one-minute video testimonial, “I love this thing. You guys ought to use it.” It’s not a tutorial, and it’s not how to use it. It’s just a simple endorsement. You can even do in-person presentations where you go over to that particular site and have a meeting with everybody to talk about how great the product is and demo it. Some subscription companies even go on-site in a cafeteria and have a mini trade show of sorts. Last but not least you can give people gifts. Obviously, there are corporate rules and guidelines, in particular on the government but also in large corporations about what you can give for tokens of affection to your users.

Recap

Customer renewals aren’t easy but are the lifeblood of subscription businesses. The genius of the Subscription Economy is that the value you get out of your customer doesn’t end at the initial sale. Proper maintenance directed in the right ways goes a long distance in ensuring that you get the maximum Lifetime Customer Value out of your subscriber base. The tips in this article will help you to establish processes and procedures to make the most of your customer renewals so you can ensure a steady stream of revenue and customers who always renew for more, no matter what your subscription business sells.

Subscription Price Optimization: Six Tactics to Get It Right

Price your products for maximum lifetime value and profitability

You have set your subscription price, now what? Now one of your more difficult tasks as a subscription business owner is just beginning: Optimizing your price so you can realize the maximum lifetime value and profitability. Of course there is no single, or correct, answer. Said another way, finding the pricing that works best for your business requires a consideration of many factors, including price testing, site design and sale pricing.

Remember from our previous article, Six Concepts for Pricing Subscription Products, that the price of your subscription will primarily depend on the perceived value your product or service provides, rather than the cost of labor and materials that constitute the price of non-subscription products. It should be noted that these factors are not mutually exclusive, as subscription box companies provide physical products as part of a membership, and any subscription company will have basic costs it will seek to recover, no matter what subscription product you provide. But the fact remains that as a subscription company, your price must reflect the market’s perceived value of your goods or services.

But before you seek price optimization, remember avoid these key mistakes outlined in our previous article:

  • Asking your customers (or even worse – your prospects) what they think your price should be.
  • Basing pricing solely on recovering your costs.
  • Copying your competition’s pricing.

This article will introduce some price optimization concepts to get you started toward maximizing the performance of your business

1. Setting Optimization Goals

2. Price Testing

3. Site Design

4. Using Two Prices for Perspective

5. Sale Pricing

6. Offering Premiums

1. Setting Optimization Goals

The cardinal rule of successful testing is to “begin with the end in mind.” You may remember that phrase from Steven Covey’s 7 Habits of Highly Successful People. The same is true for price testing. The goal of your testing could be the price point at which you achieve any of the following:  

  • The highest amount of conversions.
  • The highest revenue for a certain month or the entire year.
  • The maximum Lifetime Value (LTV) of your customers.
  • The lowest rate of customer churn, or highest renewal rate.
  • Which subscription term (and its companion price) brings you the highest amount of conversions, revenue, LTV, or renewal rate?

Subscription businesses that are just starting out will be most interested in either the price point that will get them the highest amount of conversions, or the highest amount of revenue. No matter your goal, it’s important to understand what exactly it is you are trying to achieve before you begin, as it will save you time and frustration later.

2. Price Testing

Depending on how complex your goal is, there are different ways to approach your testing. At the very least, you’ll need:

  1. Website pages graphically designed with the different price points.
  2. The pages linked to your shopping cart.
  3. Enough traffic to achieve statistical significance.
  4. A way to split the traffic evenly between the test pages.

If you are testing for a simple metric like conversions, much of what you are doing will follow the basics of A/B testing. Splitting the traffic on your own will depend on technological ability of your company. Better yet, there are great tools available for A/B testing on the market you can use to test that won’t involve a development project each time you want to run a test, like Google Analytics or Optimizely.

It’s important to note when price testing, don’t change anything but the price on the test pages. Keep images, buttons and the copy on the page the same. If you’re testing the layout on the page and the location of your price, make sure that every other element remains untouched. Leave all the other pages on the site and the shopping cart exactly the same while you test, because in the end you won’t know what element caused the behavior you saw – was it the price or the headline that influenced conversions?

If you don’t send the same amount of traffic to each page you are testing, your results will be invalid. If you are using testing software, it will tell you which page version got the highest amount of conversions. Look for 95% conclusive results.

If your site traffic or the amount of your conversions is small, try testing by posting your different pricing pages for uniform periods of time, and then track the Bounce Rate and Exit Rate of each page through Google Analytics. This is not optimal, but a way to understand directionally which price is better. That challenge with this approach is that seasonality and other factors can includes this “sequential” testing. That said, if you have low traffic and want to start testing, this may be a good option for you.

If your goal is more advanced, like measuring the LTV of customers at a certain price, make sure you have set up tracking codes to track the subscribers in each pricing group after conversation to understand how long each stays and their ultimate value. As you can imagine, this analysis can take many months so make sure your tracking is set up correctly at the start so you don’t have to start ovoer!

If you are testing additional variables like page design or the placement of your price on the page, you’ll need to use Multivariate Testing software. It should be noted that Multivariate Testing requires a very high amount of traffic, which you may not have if you just launched or if you are measuring a pricing page with low traffic. Multivariate testing is used to measure the performance of many different aspects of your site, while A/B testing is used to measure just one variable.

When analyzing your results, you may find that a lower price attracts more conversions, but provides you with less initial revenue. A higher price, on the other hand, may attract fewer conversions but provide you more initial revenue. If more LTV is your goal, setting a lower price is the way forward as it brings more customers into your orbit. The bottom line is that you won’t know any of this until you test.

3. Site Design

While testing is the most important task you can undertake to optimize your price, there are a many other design variables that will impact whether or not a prospect converts into a paying subscriber or member, and should be taken into consideration:

  • Strong guarantees on the page.
  • Descriptions of particular product features.
  • Compelling benefit copy.
  • Significant differences between you and a competitor.
  • The overall design of your landing/offer page.
  • The usability of your Shopping Cart.
  • The difference in price between the subscriptions you offer (ex: monthly and annual).
  • Overall performance and reputation of your service and site.

Taking into account these factors along with your price will give you a well-rounded insight into how well your site converts visitors into customers. Make sure you run tests to understand how design and copy impacts conversion and ultimately the LTV of your subscribers.

4. Using Two Prices for Perspective

A classic pricing tactic is to give your potential customer the choice of two offers – one lower priced and one higher priced. One will make the other look more reasonable than it otherwise would appear. Say your price point was $49 per annual subscription. Here are two ways you could you position the pricing:

  1.     Levels of service: “Pay $45 for Silver or $49 for Gold”
  2.    Price it monthly: “Pay $9.95 per month, or just $49 per year”

In the first example, customers will feel they are getting a little more value with the Gold level, with just a slight increase in price. In the second example, perspective is especially powerful for month-to-month vs. annual sales. With this in mind, never set your monthly price by dividing your annual price by 12! First of all, understand what your average months your subscribers join for and use that as a guide to determine pricing. Secondly, consumers are accustomed to getting a bargain when they buy in bulk. Thirdly, inflating your monthly price a bit makes your annual price look like a bargain. We have seen many tests focused on just the variable pricing between monthly and annual subscription plans, and the results are always surprising. If you have not tested this yet. You should.

5. Sale Pricing

Because subscriptions for online content and software products aren’t tangible, it’s often hard to convince someone they’ll want to enter into a subscriber relationship for the long-term, especially when they need to hand over their credit card information for re-billing until they bother to cancel. Relationship sales like subscriptions are more difficult than one-off eCommerce sales, and when selling internet content, it’s even more difficult competing with an ocean of free content. Even if your content is superior to anything on the internet, many people won’t care. They’re either ideologues who believe that everything should be free, or they believe if they search hard enough they’ll find something “good enough” that’s free.

Of course the subscriptions economy is worth more than a billion dollars a year, but it takes work to convince your marketplace that your subscription is worth paying for, so why would you want to immediately undercut your premium value by putting it on sale?

There are only six situations, in our view, where a sale or discounted price is warranted. These situations fall in line with expectations of when a high-value brand might offer a discount without lowering its intrinsic value:

A. Launch Sale

For a limited time, you can offer a special “launch” price. This tends to work best if the sale price is no more than 30% lower than your regular price. The goal is to get people to sign up quickly before your offer runs out, so your time limit should be carefully chosen (30 days maximum) and overly promoted as a special “one-time-only” offer. Raise your price to the “regular” level once the launch sale is over. This offer works best for businesses that already have an opt-in or past buyer list relevant to the marketplace, or who have a lot of relevant traffic already coming to the free areas of their site. This offer should be targeted to a population that has either heard of you or has had a previous relationship with you.

B. Price going up “Last Chance” warning

This is an offer that works best with sites that are about to raise their price and who have an established list of prospects, or perhaps even opt-ins who never converted. It’s also a traditional offer for subscription products that don’t utilize recurring billing, instead depending on customers to make a renewal buying decision every time their term runs out. Just as with a launch sale offer, you must establish and promote a firm deadline that’s not too far into the future, and stick to it. 

C. Trial offers 

A trial offer should be for a very limited term, anywhere from a few days to a month, based on what works best for your site. Many sites don’t charge for trials, but do require a credit card so the customer will automatically be billed when the trial ends. If you don’t require a credit card, your conversions will drop sharply and you’ll end up nixing the offer test pretty quickly. Requiring a card up front preemptively moves the prospect along toward their buying decision. You’re also psychologically establishing “premium value” from the very start of the relationship. Also, some subscription businesses require a small fee upfront to initiate a trial. It can be as low as one dollar, but is only a sale price for the trial term. If trial participants are sent marketing materials during the trial term, this fee can be used to cover printing and mailing costs. If you’re counting on cross-sales, up-sales and ancillary sales for revenue, paid trials may help you better pre-qualify incoming leads and determine who will be the best spenders on your site.

D. Package or Bundle discount

If you are offering groups of products, it makes sense to give a discount on the bundled offering. However, don’t toss in the subscription for free! Instead, give a certain amount off the total.

E. Bulk discount

People buying a group subscription of site license expect considerable savings on the per-individual price. However, this doesn’t mean you should hold a specifically-timed sale for them. Instead, this discount should be routine. The decision-making process with groups is complex enough that a timed sale will generally not lead to a faster decision. Decisions are made according to the group’s needs and financial rhythms, and are not generally impulsive.

F. Partnership deals

Some marketing partners, especially associations, will try to insist on a special discount for their members. This is part of their own internal marketing to prove to their own members that unique value is being provided in exchange for membership fees. These types of offers should be approached with caution, however, as you’re effectively giving strangers a better deal than you give your own opt-ins and subscribers. Your own list should always get the best deal. These partners typically want to promote their special deal year-round as well, so the sale price doesn’t help incentivize timely action. Also, to enable the discount, you’ll probably have to add a coupon section to your cart or order form. Every additional form field in a cart can reduce conversions overall because it clutters the page and potentially causes confusion. Try to find a partner that can feel like they’re giving something special to their members without hurting your business. Sometimes a special premium will work, like an eBook specially made for their members as a bonus for signing up at the regular full price. Put a price tag on the book so that “savings” are represented. Instead of giving their members a discount, give the partner a direct commission on all the sales they send you.

6. Offering Premiums

Instead of lowering your price to get more sales, try offering your prospects more perceived value. A classic example of this is the old infomercial trick, “But wait. There’s more!” The seller has already established the basic price of the product, but is piling on perceived value through the addition of other products, when consumers “Act now!” This is known as offering a premium with your subscription, the premium being whatever you offer as a free gift.

Premiums that work best in subscriptions are those related to the theme of your product, software or content. If you’re a publisher, a free giveaway of something like an iPad wouldn’t work as well as a specially-produced topical report.

If you’re marketing premiums outside the United States, check direct response laws for any regulations about the value of the premium. In the past, Germany’s direct marketing law has limited the amount of money a premium can be worth in relation to the amount paid for the subscription.

When picking a premium, consider something that sounds valuable enough to be worth the entire price you’re asking the subscriber to pay up front. Remember that very often a subscription purchase is an impulse buy and the premium you’re offering may be the dominant reason why they buy. In their mind, they’re buying a premium where a subscription happens to be attached. To encourage impulsive shoppers, give a deadline for these offers.

For that reason, premium selection and naming can make a big difference to your response rates. It’s as important as naming a product because you are, in fact, naming a product. Market research surveys can be a big help with this. However, as we mentioned in our previous pricing article, never ask “How much would you pay?” in a survey. Surveys help you find out what topics and items are desired, not a particular price point you should assign to them.

Conclusion

Optimizing the price you charge for your subscriptions is a mixture of goal setting, testing, website optimization, perception, sale pricing and offering premium value. You can run tests to inform you on the best price, where it’s displayed and how it’s explained. You can change how your price is perceived by how it’s broken down by subscription term. You can add value to the price you charge by offering special pricing or adding premium value. Taken altogether, these tactics will help you determine the best path forward as you seek to get the maximum value from your subscription business.

Many subscription businesses want to just stick to a price based on their gut or their competition, which guarantees they won’t be making the money they could – and should – be making. Price optimization is a profit-making activity, and we strongly suggest that not only do you test, but have a program where you are continually testing elements of the pricing of your product or service.

Six Concepts for Pricing Subscription Products

Price setting to maximize subscription sales and profits

Pricing is one of the most significant tasks for a subscription business owner, from pre-launch research to the routine price tests that ensure you’re getting the most sales and profits as is possible. Yet pricing is a nuanced task that many tend to overlook, or simply settle on a price that’s a gut reaction based on what they perceive will bring them the highest amount of revenue.

It goes without saying that knee-jerk reactions should be avoided at all costs. Instead, your pricing decisions should be deliberate and well-thought-out. The six concepts we discuss in this article are important to keep in mind as you develop a pricing strategy for your subscription business:

1. Benefits and Desires

2. Strategic Pricing Goals

3. Free Versus Paid Pricing

4. The Three Biggest Pricing Mistakes

5. Pricing Psychology

6. Conducting Market Research

Understanding these concepts will help you build a more objective view of your subscription offering and more importantly, help you understand where you need to test, which we will address in the next article.

Benefits and Desires

In deciding on a beginning price point, understand that would-be customers don’t care about your bottom line. Unless it’s a very rare occurrence where your service is commoditized with multiple look-alike competitors, they don’t make buying decisions primarily how your price stacks up to the competition.

Rather, customers purchase subscriptions or memberships because the service promises a benefit that meets their desires at that moment. With that in mind, consider the following five critical pricing points:

A. Benefits outweigh pricing. If a potential customer turns you down because of cost, they are really telling you that the benefits of the membership aren’t worth the cost. Pricing problems often stem from improper marketplace Research and Development. Testing different benefit and offer copy can help increase sales at the same price point.

B. Positioning can inflate or deflate what’s considered a “reasonable” price. For example, iTunes prices an hour of a TV show at $4.99, but a two-hour movie starts at $19. Both may be equally entertaining and professional videos that feature household-name stars, but consumers perceive a movie is “worth” almost 400% more than a TV show, hence their disparate price points.

C. While any subscription sale is an ongoing relationship, subscriptions are most often an impulse, of-the-moment purchase. Business information provider Hoovers says its best customers are sales reps who are desperately researching prospect information the night before a meeting. Your pricing structure may be devised for a long-term relationship, but remember that the prospect is still making their buying decision with a single moment’s needs in mind. As yourself: Is what they’ll get right now worth the amount you’re asking them to pay? How can you convert that short-term need into a long term subscriber?

D. Subscription buyers usually look at pricing at the very end of their decision-making process. They don’t start out looking to purchase a subscription based on brand and offers, or searching the web for the best bargains. Rather, they start by looking for subscription content, services or products after they’re completely sure you have what they want, and then they look at the price tag and make a final decision.

E. The “right” price for a consumer may not be the lowest price. Not everyone is motivated by sale pricing or bargains, and lower prices actually run the risk of negatively affecting your sales, in the sense that nobody would trust information you advertise as high-level business research, but sell for only $1.99 a month.

With all of these points in mind, the success of your subscription pricing is first and foremost tied into how well you serve the passion or need that drove the prospect to your site. Without the right value proposition up front, your prospective customers wouldn’t have made it to considering your price in the first place. If your value appears high enough and is clearly understood, it can lift your prospective customer right over the pricing hump.

The tightness between your value proposition and your primary market’s desires is what really makes the difference in conversions. Your price point is ultimately secondary in the decision to buy.

2. Strategic Pricing Goals

Before setting your specific price, you must arrive at an overall pricing goal of the metric you believe will be the most helpful in the growth of your business. Examples of pricing goals include aiming for the following:

A. Accounts which are as profitable as possible at the moment of sale. These are customers willing to pay a high price for a subscription. You might have fewer unit sales, but a higher value per order.

B. Accounts which are more likely to renew, and thus have a longer subscription lifetime value.

C. Accounts which are more likely to buy other products and services from your site, and thus have a higher account lifetime value.

D. The highest possible amount of accounts, even if they are not highly profitable or generate a lot of value up front.

E. As many buyers as possible, at a moderately profitable net at the start.

F. Extremely high-priced accounts, even if just a handful, that can be upsold to stratospherically-priced personal consulting services.

Knowing who you are targeting with your strategic pricing goal will give you a direction in which to move, which you can always refine as time moves along. Different competitive situations and target markets, along with what your typical customer is willing to pay, will heavily factor into your decision in this regard.

3. Free Versus Paid Pricing

Unlike physical products, when your subscriptions involve things like online content or freemium software, you face an additional pricing obstacle from the “free lunch” crowd. These are the people who have been conditioned to believe that anything they could obtain or experience for free elsewhere should always be free of charge. In most categories, the fact that you’re asking for money at all, even if it’s just pocket change, presents an additional psychological barrier that your marketing must overcome.

The key to transforming these “freemium” prospects into buyers is to segment your offerings. Provide a basic version that introduces your subscription, educates and creates a perception of value and need for the premium piece over time. This gives you a chance to introduce your brand, product or service slowly and turn prospects into subscribers through a mixture of previews, deals or freemium access to your software, service or content. But be sure that when offering a free trial, freemium access or discounted access that you don’t go broke!

4. The Three Biggest Pricing Mistakes

There are a few mistakes to absolutely avoid when setting your initial price point: Asking what the price should be, basing your pricing on costs and copying your competition’s pricing without testing.

Mistake #1: Asking what the price should be.

Do not base your subscription pricing on a survey where you ask “What would you pay?” What people think they might pay, what they tell you they’ll pay and what they actually will pay are indeed very different. Surveys for pricing are fundamentally flawed, because respondents will tell you what they think you want to hear, or worse, that your subscription offering should be free.

There are many tactics to help you hone in on a pricing strategy including “Dry Testing” products/pricing and A/B testing live products. What people will pay often changes considerably with different benefit copy and marketing tactics. Pricing isn’t a flat data point, but informed by running tests when your business launches (which we’ll cover in the next article).

Mistake #2: Basing pricing on costs.

Do not base your pricing on how much money you need to make to cover costs, or for your anticipated profit. Your customers won’t care about how much a product costs to produce, nor how much money you want to make. They’ll pay only for the perceived value they’ll receive. Set your initial pricing based on what customers will pay and then do the math to see if it makes sense to launch the site at all.

Mistake #3: Copying your competition’s prices without testing.

Do not assume your competitor’s price is the price to match or beat, unless you’re providing heavily commoditized information in a saturated market. Your competition may not have done price testing, and other factors about your competitor’s perceived value or primary market may be more different from your own than you realize.

5. Pricing Psychology

Counterintuitive as it might seem, higher prices don’t always mean fewer customers, nor do lower prices always mean more customers. Just because a subscription is super-cheap, doesn’t necessarily mean that a lot of people will buy it.

In general, each site has a neighborhood of value, a range within which you could make the majority of your sales. If you’re priced too low in that range, people in your target market will think your site isn’t worth bothering to take seriously to make a purchase. If you’re priced too high, they’ll also pass.

Within that range of value, you may find that a higher price could get more sales, just because your target market thinks a higher price indicates a better product for their needs. Consider a luxury retailer versus a dollar store. Consumers at both buy the same things but they pay very different prices for them, for very different reasons, because perceived value and target market psychology have a lot more to do with pricing than the actual cost of the goods.

The following tips don’t always hold true, but they are worthy of your consideration nonetheless:

A. Buyer Price Points:

$10, $20, $50, $100, $500 and $1000 are all examples of typical price points that can cost you sales. Someone who’ll shell out $99 will balk at paying $100. If you can get a buyer past that point, they may then be willing to pay much more. Someone who’ll pay $100 would probably also pay $110, $119 or even $125. A few brands will price directly on a point, such as $20, to appear transparent, clean, and honest. It can work, or it can flop. The only way to find out is to test.

B. The Number 7:

Some subscription businesses have found that a price ending in the number seven will outperform any other price in tests. The seven can be in dollars or cents ($97 or $9.97). On the other hand, if your price starts with the number seven and you’re selling very well, you are priced far too low. Those who will pay $7, $70, or even $700, are willing to go up to a number that starts with nine. Try charging $9, $90 or $900 instead. Don’t even bother with eights.

C. The Number 3:

Three is a rotten number to end a price on, and generally anyone who will pay an amount starting with the number three will also pay an amount starting with the number four. This is particularly true for prices in the three and four digit range. For example, if you are getting $397, you might be able to get $497 just as easily for the same product.

D. $500 (or rather, $499)

If you are selling to middle management in Corporate America, research what’s their typical “sign off” level, or the price point at which a typical manager can make a buying decision without seeking authorization from a boss. For many years this point typically was $499. If they have to get a purchase authorized first, you’re going to lose sales because it’s not worth the trouble to ask, people simply forget about you and bosses always have different spending priorities than their underlings. Worst of all, you may see a high level of credit card chargebacks, which cost you real cash and harm your reputation when impulse buyers fail to get reimbursed and cancel the purchase. Tip: Make sure any taxes and shipping and handling costs don’t exceed this level.

E. Seats

If you intend to sell a substantial number of group subscriptions and/or site licenses, build your individual price based on how you plan to discount it “per seat.” For example, an individual price point at $499 and $999 per three users sounds like a bargain and perhaps an easy upsell. However, if your price per individual is $19.97, your price per seat for large groups may be at a point where your costs outweigh your income.

F. Cents

For prices over $100, omit cents in all marketing copy. The three extra characters in the price make it seem larger than it really is. A visually intimidating price limits sales.

G. Cents Redux

In situations where you are talking about savings, like promoting “Get $10.00 off!” always include the cents so that the savings look larger.

6. Market Research

All potential subscription businesses should see the value of prior market research before launch. Of course, it’s good business practice to gauge the size and scope of the market you are planning on operating in. If the market is saturated, it may be a sign to move on to something else. However, competitors in the same space aren’t a bad thing and will help inform you on whether or not to launch your subscription business. It’s the spaces with no competition that potentially should be avoided, because that’s indicative of a potential lack of interest in your topic.

When conducting market research, remember to avoid becoming wedded to what your competitors are charging. Every target market has its own spending quirks and you should keep your focus there, rather than on any secondary markets you may have identified. Your goal is to establish a best price for your target market that’s not too high for your secondary markets either.

Look for indicators of how much your primary market has spent on subscription products overall. For example, professional engineers are infamous for never paying more than $50 for any type of professional content, whether it’s a book or a website. On the other hand, top executives at companies that target the engineering marketplace will pay thousands for useful, highly relevant market and sales research.

Ask questions that will provide you with insight into the behavior of the prospects in your target market.

  1. Are your prospects motivated by saving money?
  2. Do they buy now impulsively on credit and worry about paying tomorrow?
  3. Do they research competitive offers and try to compare apples-to-apples when making a decision?
  4. Do they enjoy the feeling of safety and/or status that buying a top-priced product may bring?
  5. Will they promise to pay anything as long as they can cancel and get their money back?
  6. How likely are they to cancel?

Subscription Pricing: The Basics

When pricing your subscription product or service, keep the six points found in this article in mind in order to arrive at the proper pricing points that will ensure the success of your business:

  1. Benefits and Desires: Proper subscription pricing is a mixture of understanding your market’s desires and how well the value you provide corresponds to those desires.
  2. Strategic Pricing Goals: Determining the type of accounts you are seeking to attract will help to chart your course.
  3. Free Versus Paid Pricing: There are always people in your prospect pool who will not pay a cent for your subscription product. Try to bring them in with a freemium offer, or ignore them altogether.
  4. The Three Biggest Pricing Mistakes: Avoid basing your price on what your customers think, on your costs and what your competition is charging.
  5. Pricing Psychology: Higher prices don’t necessarily mean you’ll lose out on customers, and low prices don’t necessarily mean that you’ll gain customers.There is a range that your prospects will pay you based on the perceived value of your offering.
  6. Conducting Market Research: Take time to deeply consider the motivations and behaviors of the prospects in your target market.

Once you have considered these six concepts for pricing your subscription products and services and have settled on a proper beginning price point, it’s time to test, which will be covered next week.

Trial Offers: Four Questions to Consider Before You Offer Them

Subscription trial offers are often the most debated and discussed topic at a subscription business. Opinions range from offering a free trial, a paid trial to no trial at all. The important thing to remember is, no matter how much experience you or anyone else has on your team, no one has the experience and data on current products and prospective customers to know the perfect answer. Typically, surveying customers on what your offer price and the package does not yield accurate results because survey respondents do not respond in a way that will accurately tell you with confidence if they will actually pay and what price.

The best you can do is start with a well-informed plan based on the questions outlined below – then test, test, and test some more, to confirm your assumptions and optimize your results.

I. Should You Offer a Free Trial?

II. Should You Require a Payment for a Free Trial?

III. How Much Should You Charge?

IV. How Long Should a Trial Be? 

I. Should You Offer a Free Trial?

The first question when you’re considering a trial offer is whether you should be offering a free trial in the first place. Even if you find the answer is “no,” that doesn’t mean you can’t still offer a trial. It just may have to be a paid trial of a small amount instead of a completely free trial. Consider these questions as well:

  1. Do you already offer lots of free content?

If you do, you probably shouldn’t give a free trial. For example, newspapers that offer free online content won’t want to offer a free trial if their content is already available for free online. A newspaper like the Guardian actually gathers subscription revenues through its iPad, iPhone, and mobile apps, proving that you can have subscription revenues even if you’re free online, but you shouldn’t be giving a free trial to those subscription apps.

2. Do a lot of people try to only use your information for a short period of time?

A good example of this is ConsumerReports.org, which has a lot of reviews and product recommendations listed on their site, but they keep the actual scientific ratings behind the paywall. A site with this setup shouldn’t offer a free trial when they’re already giving so much away for free. The problem here is that trial participants will just sign up for the free trial and then cancel right after they obtained the information they wanted. It certainly isn’t conducive to getting a lot of paying subscribers.

You May Be Interested In:

  1. What about offering free samples to compel people to convert from free to paid?

A good example of this is Testing Mom, which offers 100 questions in exchange for just an email address. By obtaining an email address, they can then market other offers and potentially upsell you into a paying subscriber. A best practice to remember is if you’re giving access to one singular piece of content, you shouldn’t also be giving away free access to your entire subscription site.

2. What about offering a “light” version of your subscription to get people hooked so they’re going to want to pay for full access over time?

A good example of this is the subscription site Fast Case, which has a free iPhone app and a couple of other mobile apps for the Android and for the iPad. Because of this, it doesn’t make sense to just offer free access to their site on top of everything. Visitors can get a “light” version of Fast Case’s content for free through the mobile applications, and if they’re really interested in the service, they’ll pay for full access through the site.

3. Is your content or service unusual enough that it’s hard to explain to a newbie?

In some cases, letting visitors experience your subscription could be an easy way to get people interested in your product. A really great example of this is A Story Before Bed. A Story Before Bed records a grandparent or a parent reading a children’s story out loud. The site allows visitors to record a story for free with 19 available titles to record. Then they market to those people who have recorded for free to get them to pay to record other titles.

4. Are you in a highly competitive marketplace and you’re not really dominant?

This may be the time to offer a free trial. A good example is MorningStar, which offers information and databases regarding stocks, bonds, and mutual funds. This is obviously a very competitive marketplace and MorningStar, while being somewhat well known, is not a dominant brand like Financial Times, Forbes, or even the Motley Fool. So they offer a two week free trial to their premium service.

5. Do you have a refer-a-friend program built into your trial offer?

If you do, you may want to offer a free trial because you’re obviously going to get more leads that way. A good example of this is Dropbox. When Dropbox sends an email to someone who signs up for their service, they have an offer to get extra space for free. The offer is actually a link to refer-a-friend. For every friend referred, you get more gigabytes of storage space on Dropbox. Your friend who accepts the offer is sent an email where they can also receive 250 megabytes of bonus space. This is a great way to generate leads, generate word of mouth, and draw more people into your free offer and then try to sell them into your paying subscription plan.

6. Are you in a highly budget-conscious market?

A good example of this is Education Week, which markets to school principals and people in the education sector who are deciding policy, a very budget-conscious market. They offer a 2-week free trial. They also have a lot of free newsletters they use to try and get paying subscribers.

7. Is your content or service so engaging and segmented into chapters that almost once people get started, they’re going to want to keep going?

A really great example of this is Lynda.com, where they offer Google analytics essential training. If you go to the table of contents for the Google analytics essential training, the blue lines of text are videos that anybody can view for free, whereas the gray lines of text require a subscription.

Obviously, if somebody wants to learn Google analytics, they’re going to want to watch a sample to make sure that the content is the type that they can understand and is worth their while. If they’re really invested in learning Google analytics and they find that those first few videos are really great, they’re obviously going to be hooked and are going to want to continue into a conversion so they can get the full breadth of content.

 II. Should You Require a Payment for a Free Trial?

A credit card number at sign-up should always be required to automate the process of charging for a subscription when the time arrives. It also psychologically conveys the idea that your content is worth money and they are signing up for something that will eventually be converted into a paid service.

Avoid charging a preauthorization hold, which is a minimal amount like a dollar or the monthly subscription amount, held until the end of the trial. Those sorts of charges are getting a lot of pushback from the credit card companies, so it’s advisable to wait until the end of the trial to actually charge somebody’s credit card.

One option is to implement a paid trial for just a dollar. When you implement a paid trial, you’re getting a much more qualified lead of somebody who’s willing to pay for your service. If somebody is willing to spend a dollar, it’s highly likely that they’re also going to spend more money on your site.

The exception to the “always get a credit card” rule is if your trial is a light version of your service. An example of this is Highrise. If you look at the very bottom, they have a free plan for 2 users and 250 contacts. They are offering a light version for free, which is effective because people who may not need more advanced services can first get accustomed to the site. Then as their career blossoms or as their business grows, they will probably upgrade. Another interesting move is how they bury the trial. There’s no big “Free Trial” button, which allows people to choose from their subscription plans first.

As for processing the first charge, it’s advisable wait until the end of the trial, or to give a little bit of a grace period. For instance, if someone signs up for a 10-day trial, wait until day 12 to charge their card, as they may cancel on day 10. The more chargebacks and refunds are minimized, the better. A grace period tends to minimize all the dreaded payment processing snafus.

Providing written confirmation of the charge either by mail or by email is a must. An email will usually suffice, and when the account is charged, make sure that your merchant account, or the account that’s listed on your customer’s credit card statement, is your site’s name and not that of your parent company (or educate that the parent company will be billing). This may require setting up separate merchant accounts for each of your sites, if you have different sites. Making it very clear to your trial members about what they’re getting will minimize chargebacks. An unfamiliar name on a credit card statement is a surefire way to have people start questioning those charges and possibly issue a chargeback.

III. How Much do You Charge?

It is advisable to just go as low as 99 cents, which seems to be working really well in the newspaper industry for metered paywalls. Testing is key along with measuring the conversions and the lifetime value by test group before beginning. If you have a rather expensive business-to-business (B2B) subscription plan, you could make the case that a $99 trial for 14 to 30 days might help with your customer base.

IV. How Long Should a Trial Be?

Many sites vary the amount of time they devote to a trial. Seven, 14, and 30-day trials are the most popular amongst B2B and B2C sites. 30 days is usually too long, and unfortunately, most subscription companies don’t test their trial length. Testing will really help to determine how long your trial should be. Here are some questions to ask to help you get to a starting trial length:

  • How long does it take someone to become fully engaged in the service, so much so that leaving your service would be painful for them because they’ve gotten so accustomed to it?
  • How long does your new user education process take? If you have an email series that offers first steps and then follow up emails to get new members on board, how long does that usually take?
  • How long does it take for them to forget that they got the service entirely?

A high amount of churn due to trial cancellations can be a sign of a trial period that is too long. Shortening the length of a trial will cut down on people who sign up for the trial, get access for free or for a dollar, and then leave.

As with any offer, you will need to test all of your assumptions. Many subscription businesses simply do not do enough testing in this area. One of the reasons is low traffic, which means it will take a long time to get enough data to be statistically relevant. And that’s with an understanding of the upfront conversion of your trial offers! You will need to track each test group through trial conversion to customer their first renewal anniversary and even long-term, understanding the full lifetime value of that customer!

Referrals: The Unsung Hero for Creating Subscription and Membership Growth

A primer on building a referral program, with a directory of 15 referral platforms.

Referrals are one of the most effective ways to generate new subscribers for your site at a very low cost, but not nearly as many subscription businesses use this tactic as they should.

What is a Referral Program?

When we talk about a referral program, we’re speaking of a specific program which could leverage software, an app or a marketing campaign to get your existing members to recommend your site, service, box subscription or publication to their friends, their peers, their family members.

Recommending tools, services and content is something people do all the time. But for your business to be effective at getting your visitors, members or subscribers to recommend you, you need to make it very, very easy for them to recommend your product or your service. The reason is, studies have shown that people really do tend to listen to their peers or their family members when it comes to purchasing decisions.

“What You Should Know About B2B Referrals (But Probably Don’t)” by Influitive and Heinz

The customers that you get through referrals also tend to be much higher quality. We have found that referred subscribers can have up to a sixty percent higher lifetime value than subscribers you get through other paid media channels. That’s a significant improvement. You might not see sixty percent in your specific business, but study after study have shown that they do generate higher quality subscribers.

Referrals are also a very, very cost-effective channel. Referred subscribers cost one-fifth to one-tenth what you might pay for a subscriber generated through paid media on a cost per acquisition basis. When setting your goal for your referral program, try to generate up to fifteen percent of your monthly new members, a good small but steady contribution month after month at a very low cost per acquisition. This allows you to use your budget more effectively for some of your other subscriber or member acquisition channels, like paid search, email marketing, or advertising.

Types of referral programs

Here is our list of how you can generate referrals with five specific types of programs. We chose these because they’re applicable to both B2B and B2C, though some work a little better for one or the other, which we’ll explain as we go into them.

Referral Program #1: New Subscriber Referrals

The first program is something we like to call “referral at birth”. That’s where you present a new subscriber with an option to refer this service to their friends right at the moment of sign up. Essentially, when somebody joins your subscription or membership, you build in this type of “tell-a-friend” or “recommend us to a peer” pitch right into the sign-up process.

When designing referral at birth programs, focus on your new member onboarding process to include the promotion.

You should also think of other key points in your subscriber lifestyle where you might be able to insert a referral program. This could be if somebody comes back and makes an additional purchase from you in addition to their subscription during the checkout process, you might insert some kind of referral program. Also, think about renewal. If a subscriber is renewing, they’re probably happy with the service, they might want to recommend it to a friend or a peer in the B2B space.

It’s very important if you’re considering referral at birth, test this against other offers you might make during that process. We’ve seen a lot of marketers like to use their thank you pages after a new registration to offer some co-registration deals or maybe some upsell offers. If you’re using something else on your thank you page, definitely test which is going to be more beneficial for your site in the long run, whether to generate referrals or to generate co-registration revenue or a direct sale.

Referral Program #2: Direct Referrals

Another program is a direct referral request. These are special promotions that are designed specifically to get your member base to recommend your service to their friends, their family members, their peers.

The idea is that you want to make it something that your subscriber would want to share. Why would they want to share this? It makes them look like they’re offering a special deal to their friends. They get to feel like they’re a part of something. It’s also important to create a deadline to create a sense of urgency. That way you can also measure the effectiveness better rather than having an ongoing program month after month after month.

We recommend you try and send your referral request in multiple channels because some people respond to email, some people respond to direct mail and others, social media. Also, you might consider building something into your customer service scripts where you can have if somebody’s on the phone with a customer service agent where they present an offer with some kind of benefit for their family members, business colleagues or their friends if they were to make a referral.

Referral Program #3: Reward Program

You could consider implementing a very specific reward program.

We sometimes get questions about what the difference is between a direct referral program and a reward program. It’s an astute question! The difference between a direct referral and a reward program is that a direct referral program benefits the referred subscriber, the reward program benefits the referrer.

You want to give your existing members a bonus every time they refer someone. These should be an ongoing program, not a special promotion. This is something that lives on your site, it’s always there, members know about it, and then any time they refer someone, they’re going to get their benefit.

Your program could be a cash benefit, credits to their account, an extension of their subscription or membership term, or additional services that you might offer.

If you’re going to use cash or credit for your reward program, it’s important to figure out how much can you offer. You’ve got to look at the lifetime value of a subscriber, look at the other cost-per-acquisition and figure out how much can I really afford to spend on these referrals in order to make it profitable.

Don’t just think that cash is the only kind of reward to offer. In fact, non-cash rewards can be really effective when executed in the right way.

You don’t even have to send anything. You don’t have to send a product, you don’t have to send cash, you don’t have to give them credits, you can also just simply recognize your subscribers. This can work really well because sometimes that’s all people really want is to feel engaged with your site, and feel appreciated. If you make it very easy for your customers to refer your site to other people, then also make it very easy for you to recognize them publicly in some way.

Referral Program #4: eCards

Another program you can consider are eCards, and I’m sure everyone listening to this has received or seen an eCard. These are essentially just online greeting cards. Sometimes there’s an animation, sometimes some sound, but basically, it’s things that people can customize and send to their friends or their peers.

In addition to making it personalized from the existing subscriber and letting them personalize it to their recipients, you also want to try and tie in some way that when the person receives it, they’re brought back to your site. You could also include a special offer for new subscribers with these eCards so that the people who get it see that it came from their friend who’s a subscriber at your site, but now they’re offering you a special offer, or you could include a direct signup form. Make it engaging, and then also make it so that it can take another action and become a member of your site.

You can make these as simple or as complex as you want. The key here is that the more personalized you make it, the more your customer is likely to share it.