Subscription business models allow businesses to strategically plan for growth because they generate recurring revenue. Repeated cash flow that is steady and predictable is business nirvana.
However, before you can build predictable cash flow and revenue, you need to know what the critical success factors of a subscription business model are and how to accurately measure them.
Cannabis products & delivery services are perfect candidates for use in subscription business models. Because they are consumed and need ongoing replenishment, providing products on a timely basis, as the customer needs it, fulfills both your customer need, and provides the holy grail of recurring revenue.
However, because we’re talking about cannabis products, you will need to do your homework on the compliance requirements within your jurisdiction, to ensure that any cannabis products being offered through a subscription business are transacted legally.
If you decide that you are ready to build your own cannabis subscription product, then read on for information to help you get it done.
Critical Success Factors
The three most important factors to determining the profitability of your subscription product are customer lifetime value (LTV), customer acquisition costs (CAC or sometimes CPA), and the cost of goods sold.
How much do you earn, on average, over the life of each customer?
How much does it cost, on average, for you to acquire each customer?
How much does it cost, on average, for you to fulfill orders?
Lifetime value is determined by how long you are able to bill your customer. Your sole purpose is to build a subscription product that retains customers.
Anything that causes them to not pay another month is referred to as churn. The reasons for churn are numerous: bad product, bad customer service, customer cancels for x reason, you are unable to bill their credit card.
It is important to focus on both retention and churn.
To keep monthly retention high, make sure you are vetting products that you know your customers would be interested in. Continue to learn about your customers so you know what they like.
To reduce churn, ensure you have great customer service, both on-demand and live person. Be sure that you are working with your payment processing company so you can bill your customers efficiently. Be proactive with your customer communication and nurture your relationships.
Customer Acquisition Cost
If you are unable to calculate the how much it costs to sign up each of your subscription customers, you are running the risk of bleeding your company dry. Paying more for a customer than what they are worth is a death sentence for your product and even the most well funded ventures.
When you know on average what each customer is worth to you, you can then determine how much you are willing to spend to acquire customers. Knowing what you can spend to acquire customers will help you & your marketing partners strategically focus on the best marketing, advertising & acquisition channels to use, all of which can be measured against a pre-established target cost per customer gained.
Cost of Goods Sold
Whatever it is you are providing your customers, as with any other business, that product or service comes with a cost. It is important when you are calculating how much you can spend for customer acquisition that you are looking at the net customer lifetime values against cost of goods sold.
Don’t confuse this term with the accounting COGS, because this should also include the overhead and other service charges that are incurred with sending out your subscription products.
One crucial factor that must be top of mind for all membership products – cashflow. Let’s take a quick look at an example:
If you are paying $20 on average for each customer and your subscription is $7 a month, you would not make any profit until the third month of a customer billing. That means you have to have the cash to pay for the customer acquisition campaign (and all associated overhead) up front for two months before you will start to see enough cash deposited from recurring charges to cover your costs.
If you don’t have a budget to cover this gap between cost and profitability, you are not able to begin.
Necessary Admin Functions & Dashboards
Whether you choose an eCommerce subscription management system ‘off the shelf’ or you build a new platform custom, you need to consider & prioritize your options based on some must have features.
The functions for billing management include:
- Accepting credit card payments
- Setting up the recurring charges
- Reminding customers of upcoming renewals
- Canceling subscriptions
- Refunding charges
- Providing payment information and changes
For your revenue dashboard, you will need to know. Without this information, you cannot determine profitability.
- Average member values per acquisition channel
- Average retention rates per acquisition channel
- Revenue forecasting including growth factors
- Real time lifetime customer values
- Rolling member value averages over time
- Rolling lifetime customer values over time
- Customer acquisition costs per channel
- Cost of goods sold
- Product Delivery Integration
Your billing system should provide a report every month of what customers need to be sent your product. You will need to have forecasted customer counts to help with product and packaging ordering as well as shipping logistics.
- Customer Relationship Management Integration
Segmenting and attributing revenue to your customer acquisition efforts is a huge win for a subscription product. Knowing the average value of each customer acquisition channel will let you scale those that are profitable and eliminate those that aren’t.
Customer Retention: How Relationships Reduce Churn
It is crucial for the health of your subscription service that you develop relationships with your customers and grow those relationships over their lifetime. That means you need to have proactive communication channels established.
You need to be in a constant state of learning what your customers like and don’t like as it pertains to your subscription service. You need to proactively seek comments and reviews, reaching out to your best customers for input.
Conversational interfaces built into your digital channels give you the opportunity to humanize your brand communications. Reaching out via a text message or email to your customers asking about their experience is a natural extension of relationship building.
Additionally, you can collect data to personalize your user experience so it is relevant to a one-on-one encounter with your customer, every time.
Build a Brand with a Story & Purpose
Businesses trying to grow in the ever increasing world of legalized marijuana have fewer advertising opportunities than brands in other industries. Traditional ad channels are not universally available to many segments of the canna industry.
In addition, an inexperienced pool of customers, new and established, faces an ever-growing selection of cannabis products & supporting information. This makes customer education a top priority, from pre-sales communications to all ongoing outreach, during and after the sale.
A brand with a relatable purpose has a much greater chance of standing out and rising above. Use the opportunity to identify with your target customers while educating them on your value propositions, told through a compelling brand story.
This is good for customer acquisition and customer retention. Make your customers part of your story so they become identified with your brand in a way that earns loyalty, and high customer values!
The legal cannabis industry comes with a heap of compliance requirements, as it should, whether being used for medicinal or recreational purposes. That doesn’t make compliance any easier to navigate. In this larger context, ‘compliance’ includes everything from protecting access to your products by minors – Youth Safety – to ensuring that your product and service offerings (& all marketing campaigns you deploy for these) are not making unverifiable claims of health benefits.
With a subscription service, especially one geared toward plant products being delivered, licensing and logistics must be bulletproof before you acquire customer #1. Investing in customer acquisition that gets shut down because of noncompliance is just stupid, so don’t do it.
Always keep in mind that your jurisdiction’s cannabis business licensing authorities have the right to audit every part of your business infrastructure, including eCommerce and online marketing campaigns, platforms and transaction histories.
Wrapping It Up
When you are operating a subscription business in the cannabis sector, it is imperative that you follow all compliance requirements as set by your jurisdiction licensing authorities.
Once you know that you are bulletproof there, you can focus on building a product that tells a story, and involves customers in its creation. Start with relationship and keep it center focus when selecting products for your subscribers.
Then, it’s only a matter of finding appropriate customer acquisition channels that are cost effective in generating desired lifetime customer values.