Online membership sites are big business.
Are you thinking of using WordPress to create a subscription business?
Membership sites regularly charge customers—on a monthly, quarterly or annual basis. These make them subscription sites; and I thought it would be helpful to look at a particular aspect of WordPress membership sites that most people forget about when picking plugins and getting to work.
Like I said, membership sites are big business, they’re not just little sites charging $20/month for some marketing tips. Subscription sites also include Amazon Prime—where some twenty million users not only get discounted or free shipping, but also get access to video content on demand.
Subscription sites don’t all have to be video-based, though when you add Hulu Plus’s five million and Netflix’s thirty-two million subscribers, you quickly realize why membership sites are a billion dollar industry.
LinkedIn and Sirius XM, other billion dollar subscription businesses, generate revenue by providing subscribers with music or connections.
The 4 Things They Have in Common
While all of these subscription sites are different—have different numbers of subscribers, charge different monthly rates, and provide different services—they all have four things in common.
1. They all monitor their revenue per subscriber
This calculation is pretty simple. You take your total monthly revenue and divide it by your average monthly subscriber count.
If you wonder how to calculate your “average monthly subscriber count,” I suggest you do this: Take your ending count each day of the month, and sum those values. Then divide by the number of days in the month.
There are so many different dynamics for why this number might start trending down. But, the main issue is that if it’s going down over time and you don’t know why it’s happening, you should spend as much time as you can figuring it out.
- Is it attrition?
- Are more people signing up at lower rates?
- Are you discounting more than you should?
- Are you refunds higher than they should be?
All of these questions should be ones you’re asking. Don’t stop until you get answers.
2. They all know their Customer Lifetime Value (CLV)
You know you’re going to spend money finding and converting customers. But would you ever want to spend more finding them, than they bring in? Not likely.
And yet, some people do that—by spending money on AdWords, and by creating incentives and discounts. They’re doing things that don’t scale on purpose. And I get that. But sometimes it can lead you to making really poor choices. Jason Cohen, founder of WP Engine, wrote a great article about some of this.
There are complicated ways to calculate a CLV. But in simplest terms, take your average monthly charge and multiply it by your average membership duration. It’s not perfect. But if, on average, your customers stay with you at $100/month, for only 3 months, your CLV is simply $100 x 3 = $300.
I’m sure you can create a business on that, but you know what you can’t do? You can’t afford to spend $400 on leads to see if they’ll net you $300.
3. They all pay attention to renewal rates
Your renewal rate is the number of times existing customers decide to renew their subscription with you. In a membership site, that bills monthly or yearly—it’s simply the percentage of customers that renew at month’s (or year’s) end.
I referenced the cost of acquisition above. But a part of that cost is a search cost. Where do you find customers? How do you determine which are the best places to look (that convert well)? Because of this search cost, you can easily see why keeping existing customers is cheaper than signing up new customers.
So, pay close attention to how many folks are walking out the backdoor.
4. They all track monthly revenue
At the end of the day, total revenue should be going up, right? Absolutely. So if you’re in the membership business, you want the combination of revenue from your existing, and your new customers to keep growing. People will debate if it’s total revenue, or only gross profit, or if you want to use discounted or nominal values. The answer is that it depends.
I think we can agree that if your customer signs up for a three year commitment and plans to pay you ten dollars a month for that whole time, the money three years out is worth less than the money you get today. So you may want to calculate it differently.
On the other hand, if they have an option to pay you upfront for a year or two year subscription right away, that’s great news and worth valuing well!
Okay, Here’s What They Really Have in Common
They are businesses that run on metrics. They make decisions based on metrics. And to do that, they have to track their metrics. So, if you’re getting started with a membership site, do me a favor—start now by putting in place whatever you need, so that you’ll have metric data from your first year, your first month, and even your first day.
People ask me, almost daily, which WordPress plugin is the best for them. I push back to hear more about their business model. And, the one feature I almost never hear them ask for is this: “I need a way to capture and calculate three or four critical metrics as time goes on, so I can manage my business effectively.”
Let’s start a new trend!
Chris Lema is the VP of Software Engineering at Emphasys Software, where he manages high performers and oversees product development and innovation. He’s also a blogger, ebook author and runs a WordPress meetup in North County San Diego. His coaching focuses on helping WordPress businesses, or businesses wanting to leverage WordPress.