What can we learn from today’s “legacy business” to help us prepare for the future? Today’s growth businesses, defined by those adding subscribers, will be similar to today’s legacy businesses some day, right?
In the last application of the “Value Threading” model, the expansion use case was created to address how a B2C company would move existing customers to a Subscription program. This would be done in combination with innovative development of digital offerings and the addition of partner solutions. That article summarized the value model and the potential financial returns.
It is easy to get lost in the numbers. To recap, at the core were two assumptions.
1 – There is a set of customers that are moving to Subscriptions – these represent net new Subscribers.
2 – Engaging the “ecosystem” through “super bundling” increases adoption, reduces churn, and is critical for capturing the net new Subscribers.
At the core is the value of the offering and whether you have a platform to manage the required use cases. More than simple bundles is required. The bundles must be driven by customer engagement and tailored for each Subscriber.
I discussed this with a smaller-market cable and Internet provider who asked a question related to their business problem. It’s a very different scenario to the growth business of the last article. Let’s examine what is possible.
What is their business problem?
- Net New Subscribers is a challenge because their market size is fixed. Gaining 1% is difficult and often unprofitable because of the incentives required to pull customers away from the competition.
- ARPU (ARR/customer in the generic Subscription model) has been going down for the last five years. Why? Customers are unwilling to pay more and expect internet costs to decrease over time. Most importantly, cable/TV services are moving from a higher-cost model to a lower-cost model.
- The result is a company with flat to lower sales for the last five years.
At the highest level, there are two business strategies.
1 – Pursue cost reduction to maintain profitability. A sort of “return on capital model.”
2 – Build new revenue sources to increase ARPU.
If the decision is to pursue growth in ARPU, building an ecosystem is the only future strategy to assure growth and lower existing churn. Adding products and services that lack a “sticky” nature can only add value to a bundle that offers customer flexibility and aggregate value. Relating this to the original use cases is essential. We are NOT talking about adding more fixed bundles, similar to TV & cable packages, but rather a “Subscription Hub” that creates combined bundles with incentives & value alignment. It also allows each Subscriber to mix and match as required.
In this case, there are complexities in the core offering. However, the “net net” is to determine the impact on churn and the value of flexible bundles in keeping customers.
The current situation (anonymized):
- 3,000,000 current customers with “no growth”
- Current churn is 6%
- There are currently five packages, from $9.99 to $65.99 per month.
The question is, what would be required to grow ARPU knowing the current customer base is decreasing?
Proposed future model:
- We reduce churn from 6% to 3%
- Over time, we add new Subscription Services
- Ranging from $4.99 to $24.99 per month. (Wellness, Loyalty, Personal IT, etc.)
- Expect a slow adoption rate of these new services being added to the bundles
This is NOT a healthy business. However, it illustrates what is required to keep Subscribers and build for the future. At the core, there is a need to move churning customers into flexible new bundles or add a flexible bundle to existing bundles. The future will emerge from these use cases if your IT system provides flexibility.
Under these assumptions, the following results would be achieved.
#1 – Increasing ARPU will help total ARR stay flat. The existing business quickly loses revenue at the current 6% churn (blue).
#2 – Based on the assumptions, we are still losing subscribers. Clearly, we need more attractive offerings that would bring in new customers or more attractive bundles that increase the ARPU. However, the move from 6% to 3% has a measurable impact.
#3—In addition to providing value, the ARPU (ARR per Subscriber) must also increase over time and keep subscribers in the program.
While this is NOT a great business, it illustrates the value of minimizing churn and adding new product bundles. If you have a fixed customer set, you benefit from creating bundles driven by customer-friendly use cases to survive. Most companies I work with are in this situation but have pivoted to growth areas and can add subscribers. However, that does not diminish the foundational use case required for today’s legacy business because today’s growth will be a legacy business in the future.
If you would like, the detailed model is available at www.valuethreadingsolutions.com.
