Subscription Companies are Experiencing The Perfect Storm. Acquisition is now harder and more expensive.
Subscription POV #27
By Morten Suhr Hansen
There is one question that I’ve been met with in the past weeks when I talk to different subscription companies. “Are your clients also experiencing that it is getting more difficult and more expensive to acquire new customers this past quarter?”
When I’m met with that question, it might be because the answer is yes. Subscription companies are struggling with acquiring new subscribers. Most of the people I talk with mention that it might be because of the failing consumer trust happening around Europe right now.
But exactly how bad is this issue? I decided to find out!
My survey shows that acquisition has become both harder and more expensive
For the past few days, I’ve performed a survey among some of our customers. I’m talking about a line of Denmark’s biggest subscription companies across a wide range of different industries, and all companies that operate in the consumer market (B2C).
I’ve asked them two questions: 1) How do you experience the acquisition of new subscribers when compared with last year? 2) How do you experience the cost of each new subscriber when compared with last year?
The result of this little survey confirms the hypothesis. Just one of the companies is experiencing the same amount of acquisitions compared to a year ago and all of the companies experience that the cost of a new subscriber (Customer Acquisition Cost) has risen. Across all of the companies, acquisitions lie on an index of 78 (spanning from index 55 to 100), while the customer acquisition cost lies at an index of 136 (spanning from 105 to index 200).
In other words, subscription companies experience getting far fewer customers now and the ones who are acquired, are acquired at a much higher cost. A bad combination that hurts both the top and bottom line.
Higher prices and the war in Ukraine is ‘the perfect storm’ for many subscription companies
The most obvious explanation of the missing acquisition is that Danes are holding off committing to new costs because the trust in the economy is low. Actually, the latest numbers from the Consumer Trust index measured by Danish Statistics show that Danes haven’t had lower trust in their private economy since 1988. Not even during the financial crisis of 2007 was the trust as low as it is today!
The low trust in the economy must be assumed to come from rising prices and high inflation and of course the war in Ukraine which has caused energy prices to skyrocket. In addition, the uncertainty around interest rates has risen and many economists suspect that this will rise as well. In other words, ‘the perfect storm’ has hit the economy of the Danes.
In this light, it’s not that surprising that many consumers are reluctant to buy new subscriptions. By nature, a subscription is a future and fixed expense and this might be a natural place for consumers to restrain themselves. A part of the explanation is probably also the COVID-19 pandemic giving a positive push to a lot of subscription companies. So, there could also be an element of natural adaptation in these numbers.
Hard times require an increased focus on subscription operations
The good question then becomes what subscription companies experiencing these challenges should actually do! And if a subscription still is the right business model?
Answering the last question first. It might be worth remembering that many companies who are subscribed also experience that consumers are holding on to their money. And that situation is even worse if you’re a traditional transaction company, and you need to create your revenue every month. Luckily, most subscription companies that I’ve spoken to don’t experience an increase in churn on the existing subscriber base.
So, subscription is still a superior business model for most businesses. However, two things will get a renewed focus in the coming years. First of all, subscription companies will look deeper into how to create value from their existing subscriber base.
Secondly, there will be a renewed focus on acquisition – the fight between companies for subscribers will become tougher. The companies who have the most control over their campaigns and channels will prevail.
The positive point is that when consumer trust turns around and becomes positive, subscription companies that understand to develop and professionalize their subscription operation will be stronger in the fight for more subscribers.