How Can Subscription Companies Weather Economic Downturns?
Almost 60% of subscription-focused companies anticipate an economic downturn in 2023, while 48% and 37% believe that acquiring and retaining customers, respectively, will be a challenge, according to a new report released by e-commerce and payments company PYMNTS.[1] However, focusing on a few key metrics may be the key to helping these companies weather an economic downturn.
Focus on Customer Lifetime Value
Customer Lifetime Value (LTV) is often defined as the average amount of money you expect to receive from a customer over the life of the business relationship. Only 8% of companies in the PYMNTS report tracked LTV. Yet, those who did track and optimize LTV were five times more likely to be among the top-performing subscription-based companies, defined as companies that minimized revenue lost due to failed payments.
According to the report, analysis of LTV can help subscription businesses recover up to 60% of lost revenue due to failed payments which may represent a 13% increase in overall revenue.
Tracking Failed Payments
Customer churn rate is one of the most frequently watched metric for subscription-based companies.[2] However, according to PYMNTS, one of the major drivers of involuntary churn is failed payments, accounting for half of total churn.
On the whole, only 15% of subscription companies tracked failed payments, with the remainder viewing the metric as a “cost of doing business” and out of their control. However, nearly 67% of the top-performing subscription companies tracked failed payments.
The report went on to note that subscription companies lost an average of 9% of sales to failed payments, which equated to $278 billion in the 12 months ending 9/30/22.
Top-performing companies that tracked LTV and failed payments were able to recover 61% of failed payments.
Causes of Failed Payments
The top causes of failed payments included software errors and a customer’s credit card being incorrectly declined. Thus, the means to address failed payments is within reach of most companies.
Focus on the Right Metrics
Focusing on LTV and failed payments may improve a subscription-based company’s chances of weathering an economic downturn and becoming a top performer.
The Fount Subscription Economy ETF (SUBS)
The Fount Subscription Economy ETF (SUBS) seeks to provide investment results that, before fees
and expenses, generally correspond to the total return performance of the Fount Subscription
Economy Index. The Index was designed to measure the performance of companies engaged in the business of providing subscription services, i.e., companies that sell products or services for recurring subscription revenue.
SUBS may present an attractive vehicle for individuals to gain exposure to companies offering subscription-based pricing models.
[1] All data sourced from: The State of Subscription Business: Best Practices and Business Performance Drivers, PYMNTS, January 2023
[2] Churn is the rate at which customers stop doing business with a company. It is calculated by comparing the number of lost customers to the total number of customers at the start of the period.
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