This one’s going to be short and sweet. I met two subscription businesses over the last month. The first business is offline and the second online. The offline business is experiencing high churn rates among its customer base, which it is trying to reduce through an increased focus on customer satisfaction. Some of the measures it is taking include hiring better quality sales staff, training them better, aligning their compensation with the long term performance of their customer portfolio, and improving call center performance.
However, measures designed to reduce the churn of existing customers are only part of the strategy. In addition, the company is looking to attract new customers who are less likely to churn. To achieve this, the company introduced an upfront signup fee. The goal of this entry fee is not to generate revenue, but to serve as a filter which ensures that those customers who do sign up have a greater commitment to the company’s service. While everyone may sign up for a free service, only for the majority to leave once the first monthly bill arrives, an upfront fee makes potential customers think twice. They will only sign up if the service is of long term value to them. Since the customers of this company who churn in the early stages of their subscription have a negative lifetime value, it makes sense for the company to filter these customers out at the beginning.
The online business is in a slightly different, but similar situation. Instead of a high churn rate, it has a large fraction of customers who don’t use its product. Since the company’s business model includes a significant profit sharing component whereby the company only makes money if its customers use the product to generate revenue for themselves, the customers who don’t use the product represent an acquisition cost with no future revenue to make up for it. In other words these customers have a negative lifetime value and the company should try to avoid serving them.
So far the company has relied on a set of questions which it asks each customer prior to signing up to get a feel for how frequently they expect to use the product. While a good first step, this is an imperfect measure as it evaluates future expectations of usage, not actual usage. Customers can also game the system by claiming high levels of expected usage in order to get through the door but not following through on this claim in the absence of a commitment mechanism.
The solution I proposed is to do exactly as the offline business did. Impose a small entry fee, not with the goal of generating revenue, but to serve as a filter which selects only those customers who are serious in their intent to use your product. While this will lower the overall number of customers that the company acquires, it will increase the company’s profits because the customers who don’t sign up as a result of the entry fee are those that would have had a negative impact on the company’s bottom line.