The Automatic Customer: Creating a Subscription Business in Any Industry by John Warrilow

Book Notes: The Automatic Customer

1. Valuation is largely based upon what our systems are to both acquire and keep customers.

Nine Subscription Business Models

As we look at these, ask “How could this model apply to my industry?” and “What part of this model could I borrow for my company
1. Membership Website Model

• When it comes to their livelihood, people are much more willing to pull out a credit card.
• Letting people sample the content helps overcome an objective of them not seeing what is available.
• Used as a way to cross-sell other things which really gets the income going.
• Think about ways you are unique, your knowledge is unique, so you can put that behind a paywall.
• Ideas

2. All-You-Can-Eat Library Model

• The consumer is basically renting access to an unlimited warehouse of information
• Winning formula to pay for a subscription:
  • First, get unique visitors to your website to opt in torelationship with the company (email newsletter, FB fan page, etc.)
  • Second, have a sales funnel to convert those visitors to paying subscribers.
• An example was 3% of visitors become email subscribers, then 3% to 30% become paying customers of some kind. So worst case it is .09%, which is really 1 out of 1000. Best case is 1%, which is 1 out of 100.
• Successful AYCEL model owners sprinkle just enough new content to keep subscribers loyal
  • there must be a reason for them to stay or to keep going
• Ideas

3. Private Club Model

• Ongoing access to something rare, and part of it might be the networking with people
  • Not just what you’ll learn, but who you’ll meet
  • Can offer social status by being part of the “club”
• Barriers to entry
  • Price
  • A limited number of memberships available
• Ideas

4. Front-of-the-Line Model

• Selling priority access to a group of customers.
• Important to leverage technology and systems for standard customers (like a help desk) so there is something in place for them so we don’t lump the premium customers in with them.
• Ideas:

5. Consumables Model

• Subscription to a product the customer needs to replenish on a regular basis.
• The best defense to keep the big boys from overtaking you is Branding. If you don’t do this, you’re selling a commodity, and the fastest, least painful option always wins.
  • Amazon will always be cheaper, so your brand must be important to customers AND unique, offering a better experience.
• Ideas

6. Surprise Box Model

• Subscription to a box of goodies each month that are different.
• Ideas

7. Simplifier Model

• People will outsource something to make their lives simpler as life has become more complex. This model does two things
  • offers to take one or more recurring tasks off of your customer’s to-do lists.
  • you become the one reminding the customer that the task needs doing.
• Richer the customers, the acuter their need for simplification.
• A key is to communicate regularly with them
  • Summaries, statements, and reminders of work that has been done and what is being planned.
• Jobs that fall outside of the subscription but are related tend to go to the company because of the ongoing relationship with the buyer
• Ideas

8. Network Model

• As more people subscribe, the utility of the subscription improves.
• Ideas:

9. Peace-of-Mind Model

• Offers insurance against something your customers hope they’ll never need.
• You are there to help your customers when they need your service but otherwise you stay out of their way.
• You invest the money when they don’t need you to pay for when they do need you.
• Challenge is to estimate how often your customers will need this service.
  • Look back over the last x number of services you’ve done to gauge this.
• Ideas

Building Your Subscription Business

You can go relatively quickly from handling a few customers to juggling a larger group of subscribers.

Idea: Ticketing system will be needed

The New Math

MRR = Monthly Recurring Revenue. The amount of revenue generated from the service on a monthly basis. A yearly subscription must be divided by 12.
LTV = Lifetime Value of a subscriber.
LTV = Average MRR per customer x (num months customer with you) – (cost of serving them during lifetime of subscription)

CAC = Customer Acquisition Cost. The amount of money spent on sales/marketing to win a new subscriber. It’s revealed AFTER you pick the low hanging fruit, meaning after the “love and guilt” subscriptions.

For Viability, must meet this: LTV > 3 x CAC. Only when you hit that benchmark is it time to step on the gas. Otherwise, tweak the system until you reach it.

Churn = amount of lost MRR in the month / MRR at begin of month (will be a percentage)

Must look at Churn in relation to how much it costs you to win a customer.

Margin: Must consider costs of serving each new subscriber. Support department, servers, etc.

Example 1:
Say you have a CAC of $500 for the month (spend $2000 and get 4 customers, which is one per week), with an average MRR per customer of $99, and lost 1 customer last month. You had 47 customers at the beginning of the month, and now have 50. And a monthly business cost of $2500 (includes salaries, etc.).

Your revenue begin of month is then 47x$99 = $4653. (This is the MRR for end of month)
Your revenue end of month is then 50x$99 = $4950. (This is the MRR for end of month)
Your margin end of month is (1-$2500/$4950) x 100 = 49.5%
Your churn percentage is $99/$4653 = 2.13%
The LTV is then
Average MRR x Margin / Churn

$99 x 0.495 / 0.0213 = $2301

LTV to CAC ratio = $2301/ $500 = 4.60

Cash Suck vs Cash Spigot

If the cost to acquire a customer is bigger than what you get up front, you’ll be sucking cash as you grow.

CAC Payback Period is how many months it takes you to make back the cost of acquiring a customer.

• CAC PP1 = Total Sales & Marketing Costs for month / New MRR added for month

to onboard and any other hard costs when adding a subscriber

• CAC PP2 = Total Sales & Marketing Costs for month / (New MRR added for month x Gross Margin)

CAC PPs of 6-18 months for SMB with higher churn rates, as it will depend upon your churn rate what this needs to be. A CAC PP of under 6 months means it’s time to step on the gas.
Three ways to raise cash since the MRR per customer is always less than the CAC:

• Take profits from other part of business to build this subscription offering.
  • Idea:
• Outside investors
• Charge up front
  • Setup Fee or Initiation Fee, or up-front Yearly fee
    • With a Yearly fee, note your MRR goes down
  • Idea:

CUF:CAC Ratio = Customer Up Front Fee: Customer Acquisition Cost.
If you can keep this close to 1, you won’t run out of cash as you grow.

Summary

* your LTV:CAC determines whether or not someone will want to invest in your business.
* your CUF:CAC ratio will determine how much other people’s money you’ll need.

Psychology of Selling a Subscription

1. When selling a subscription you’re proposing a relationship over time.
2. We’re increasingly sold subscriptions, so we scrutinize more and more which means the bar is getting higher.

1. Selling Point: Think 10x vs 10%

• Think “10 times” whenever there is an easy way for your customer to get your product or service without committing to a subscription.
• Ideas:

2. Selling Point: Appeal to their rational side

• People are buying more rationally, not on whims or emotions as much when it comes to subscriptions.
• Appeal to convenience.
• Ideas:

3. Selling Point: Give Customers an Ultimatum

• Make subscriptions the only way to get your product (they can’t buy it a la carte)
• Ideas:

4. Selling Point: Give them a “Freemium” option

•  Give them a free taste of what they’ll get with a full blown subscription
•  A good taster gives you just enough to assess the product but leaves plenty of temptations behind the curtain.
• Ideas:

5. Selling Point: Offer a Trial

• Good for products that are hard to describe and customers have to use before understanding the benefits (I’m thinking of coaching programs, masterminds, etc.)
• This is done with timeshares often; pay x dollars and you get a week to try it out at any of our resorts.
•  Getting people to just sign up for a free trial may be the most important first step in converting a user into a paid customer.
•  Making the focus USING the product rather than BUYING it increases the chance someone will buy it.
• Ideas:

6. Selling Point: Offer subscription as a gift

• Let’s other people show appreciation.
•  Challenge is that gift subscriptions are notoriously difficult to renew as the consumer didn’t make the initial decision to purchase.
• “Nicely Noted” company says for every 100 gift subscriptions, only 2-3 renew. Normal renewals each year are 90/100.

7. Selling Point: Set Fire to the Platform

• For consumers, the subscription offering is always “on” which is good for them. But it can be bad for us.
• One way to get people to subscribe is to set fire to the bridge and artificially simulate a burning platform that causes the customer to act to avoid losing something.
• This can work when the customer has already decided to subscribe but the only question is WHEN.
•  t may just take a quiet, authentic conversation with your prospect who is 95% of the way there.
• It’s best not to publicize your burning platform offer; you want to avoid the perception you’re a discounter to people much earlier in the buying cycle.
• Usually best to communicate selectively with people on this.
• Ideas.

Scaling Up

Before scaling

must find a way to consistently acquire customers for no more than a third of their lifetime value
need to reduce number of customers that cancel (churn)

• This is avoidable churn, as there are going to be some people that will move, divorce, go bankrupt, etc.

First step to reduce churn is understand why customers leave.
1. Churn Lowering Idea 1: Be a rogue jet

•  Insert yourself into their normal routines, and if you can, their daily lives, to be as sticky as possible. Always ask how you can be part of their daily lives.
• If your customers MUST use your product to get their jobs or make their lives better, it will lower your churn.
•  Ideas:

2. Churn Lowering Idea 2: Watch the 90-day onboarding clock

• Get the first few months (or even the first 30 days) of a customer relationship right. It’s typically very critical.
• Several important customer experience factors
  • they expect high levels of interaction
  • they expect to be asked for personal information
  • they are in “switch mode” and open to new offers
• they are much more likely to defect before “bedding in.”
• Offering your best stuff up front seems to increase the LTV of a customer, apparently because of the importance of the 90-day rule.
• Biggest reason people stop subscribing is the perception they are paying for something they aren’t using. Thus your biggest competitor is NOT your rival, it’s the customer’s inertia to not using it. For a subscription to stick, customers need to change their behavior and actually use the service.
• Process to onboarding:
  • First do it manually to see what works, testing alot of things to optimize the experience
  • Once you know it works, automate it
  • Then integrate that learning into the software or product itself.
• Education: Don’t do an hour long webinar, break things up into short videos, just a few minutes long.
• Getting someone to completely delegate their management of a problem or issue are much more likely to renew.
• 90-day markers: need to track a group of customers (“cohorts”) over time to see what effects your onboarding changes have on your customer’s behavior. But don’t wait a year; limit it to 90 days.
• Ideas:

3. Churn Lowering Idea 3: Reduce Your Time to Wow

• Give them a quick win early to give them the motivation to want more, and/or a WOW.
  • See what is “fun” about your process or product, and have them do that immediately.
• Ideas:

4. Churn Lowering Idea 4: Charge up front

• This helps with cash flow but also gives the customer an incentive to follow through.
• Prepay for a year will get them to follow through because they more they pay, the more they are motivated to get their “money’s worth” and to make a deeper commitment.
• Charging up front means they invest more which makes them stickier in the long run.
•  Ideas:

5. Churn Lowering Idea 5: Communicate like a Giddy Lover

• Think of a new subscriber as a new lover; a new lover has a thirst to understand you intimately
• An older subscriber will find your constant communication annoying after awhile though.
• Ideas:

6. Churn Lowering Idea 6: Drop a “Happiness Bomb”

• Even long-time Lovers want a small gift or surprise every now and then, so sprinkle in something surprising.
• Doesn’t need to be related at all to the service you’re providing.
• Ideas

7. Churn Lowering Idea 7: Target Larger Businesses

• Larger businesses don’t change as often as smaller ones, but larger businesses are harder to acquire, so watch your CAC.
• Ideas:

8. Churn Lowering Idea 8: Focus on “Net Churn”

•  You can focus on upgrading your existing customers.
• Net Churn = Gross Churn minus Upgrade Revenue
• Ideas:

9. Churn Lowering Idea 9: Reduce “Logo Churn”

• This means that a customer has stopped doing business with you altogether.
• The key here is to offer a number of different subscriptions to the same company or person.
  • Let them turn off one while keeping the other going, for example.
• Ideas:

10. Churn Lowering Idea 10: Go Evergreen

• Don’t have an end date to your subscription; go evergreen. Don’t ask them to proactively resubscribe.
• If you’re offering a great service, people don’t want the hassle of telling you they want to resubscribe.
• Note: Large subscriptions to big companies aren’t really allowed by the companies.
• Ideas