Cost per subscription: E-Commerce Explained

Understanding Cost per Subscription

Simply put, cost per subscription refers to the total expenses your business incurs to acquire and retain a single customer's subscription. This metric is crucial for determining subscription prices, managing the budget effectively, and ultimately achieving profitability. Let's look at its key components in detail.

Definition and Importance

Cost per subscription is a way to analyze and monitor the financial performance of your business in a subscription-based e-commerce model. It involves adding up all the costs associated with acquiring, onboarding, and retaining a subscriber, and dividing them by the number of subscribers gained during a specific period. This makes it easier to track expenses and make informed decisions, such as whether to increase prices or reduce acquisition costs.

Key Components of Cost per Subscription

The following are the main components you should consider when calculating cost per subscription. Keep in mind that these may vary depending on your business model and industry.

• Marketing and advertising costs

Marketing and advertising costs are expenses incurred to promote the subscription service to potential customers. These costs can include social media ads, Google ads, influencer marketing, and other advertising expenses. To reduce marketing and advertising costs, businesses can focus on organic marketing strategies, such as search engine optimization (SEO), content marketing, and social media marketing.

• Cost of goods sold or service delivery costs

Cost of goods sold (COGS) or service delivery costs are the expenses associated with producing and delivering the product or service. In a subscription-based e-commerce model, this can include the cost of producing and delivering digital content, such as music, movies, and software. To reduce COGS, businesses can negotiate better deals with suppliers, optimize their production process, and use more cost-effective delivery methods.

• Software and platform expenses (such as subscription-management software)

Software and platform expenses can include the cost of subscription-management software, payment processing software, and other tools needed to manage the subscription service. To reduce software and platform expenses, businesses can opt for open-source software or negotiate better deals with software vendors.

• Payment processing fees

Payment processing fees are the fees charged by payment processors, such as PayPal and Stripe, for processing payments. These fees can vary depending on the payment method used and the volume of transactions. To reduce payment processing fees, businesses can negotiate better deals with payment processors and encourage customers to use lower-cost payment methods.

• Customer support and service costs

Customer support and service costs are the expenses associated with providing customer support and service. This can include the cost of hiring customer support staff, training them, and providing them with the tools and resources they need to do their job. To reduce customer support and service costs, businesses can use self-service tools, such as chatbots and knowledge bases, and encourage customers to help each other through online communities.

• Overhead and administrative expenses

Overhead and administrative expenses are the expenses associated with running the business, such as rent, utilities, and office supplies. To reduce overhead and administrative expenses, businesses can opt for remote work arrangements, reduce their office space, and negotiate better deals with suppliers.

By understanding the key components of cost per subscription, businesses can make informed decisions to reduce expenses and increase profitability. It's important to regularly monitor and analyze cost per subscription to ensure that the subscription service remains financially viable and sustainable in the long run.

Calculating Cost per Subscription

Now that you have a better understanding of what cost per subscription entails, let's explore how to calculate it effectively. As mentioned earlier, it involves adding up all the costs associated with acquiring and retaining a subscriber, and then dividing this by the total number of subscribers acquired during a specific time period. Here's a step-by-step process to follow:

Step-by-Step Process

1. Start by identifying the costs associated with acquiring and retaining a subscriber. This could include marketing expenses, software fees, and customer support costs, among others.
2. Add up all these costs to arrive at the total amount spent during the specific time period. For example, if you incurred $10,000 in total expenses during the month of May, your total cost would be $10,000.
3. Next, divide this number by the total number of subscribers acquired during that same time period. If your business gained 100 subscribers during May, your cost per subscription would be $100 ($10,000 divided by 100).

Common Mistakes to Avoid

While calculating cost per subscription may seem straightforward, there are some common mistakes to avoid to ensure accuracy:

• Leaving out important costs: Be sure to include all the expenses associated with each subscription, no matter how small.
• Incorrectly attributing expenses: Ensure that you are only attributing expenses to subscriptions that were acquired during the specified time period.
• Using a limited time frame: It's essential to use a long enough time frame to capture sufficient data samples.

Strategies to Lower Cost per Subscription

Once you've calculated your cost per subscription, you can start exploring ways to reduce it to increase your profitability. Below are some of the most effective strategies:

Improving Conversion Rates

Conversion rates refer to the percentage of users who complete the desired action (in this case, subscribing to your service). Improving conversion rates through better website design, user experience, and testing can significantly lower your cost per subscription.

Reducing Customer Acquisition Costs

By carefully analyzing your advertising and marketing efforts, you may be able to reduce advertising and customer acquisition costs while still maintaining your customer acquisition goals.

Retaining Existing Subscribers

Retaining existing subscribers is much less expensive than acquiring new ones. Designing loyalty programs, offering incentives for referrals, and creating community-driven experiences can help keep subscribers engaged and reduce churn.

Analyzing Cost per Subscription Metrics

Finally, it's critical to track and analyze KPIs and benchmarks to ensure you are meeting your cost per subscription goals. Here are two key metrics:

Key Performance Indicators (KPIs)

• Customer acquisition cost (CAC)
• Customer lifetime value (CLV)

Benchmarking and Industry Standards

By comparing cost per subscription metrics against industry standards, you can identify areas for improvement and gain insights on the competitive landscape.

Case Studies: Successful Cost per Subscription Management

Example 1: Company A

After analyzing their cost per subscription data, Company A discovered that their customer acquisition costs were high due to inefficient ad targeting. They restructured their ad campaigns, resulting in a 35% decrease in CAC and a 28% increase in subscribers.

Example 2: Company B

Company B implemented a referral program for their subscribers, offering discounts for each new customer referred. This led to a 15% increase in customer retention rates and a 12% decrease in churn rate.

Conclusion

Calculating, managing, and ultimately reducing your cost per subscription is key to running a profitable subscription-based e-commerce business. By understanding its components, calculating it accurately, and implementing effective strategies to lower it, you can achieve sustainable growth and profitability. Be sure to track KPIs and benchmarks to stay on top of industry trends and gain a competitive edge. Good luck!