William Hicks, co-founder and president of Magic Mind, knows the value of turning one-time customers into monthly subscribers. The more subscribers your company has, the better your retention rates will be. But getting customers to commit to a subscription requires strategic action. You have to prove to your customers that a subscription is worth the commitment. On this episode of Subscription Radio, Ben and William talk through strengthening your subscription model, how to get customers to agree to a subscription, and why you shouldn’t look for a silver bullet.

Show Topics

  • Invest in positive changes
  • Pay attention to your model
  • Focus on subscription
  • Give your customers a guarantee
  • Listen to your customers’ needs
  • Don’t underestimate operational complexity
  • Demonstrate success
  • Utilize your financing
  • Give customers an out
  • Don’t look for a silver bullet

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Key Takeaways

4:33 – Invest in positive changes

Making changes is hard with a subscription model, but you have to keep pursuing a more improved product.

“It’s an interesting challenge for us, honestly, because we are continually trying to improve the product and some of that comes with changes to taste. I'm actually, I currently took about an hour and a half ago, and I'm very locked in on some R & D products that we're working on that's kind of a leaps and bounds improvement from where we're at even. And it's difficult with subscription being the primary focus of the business to consider these changes that will really change the experience for our customers and always laddering up to the best possible products that we'll ever have. And that's the goal. But along the way, people do get used to it. And it is a concern of mine. Even if the product benefits are 40 percent, 50 percent greater in a reformulation, do we lose people just because they say, ‘Hey, this isn't the product that I subscribed to. This isn't what I've been taking for the last six months.’ So that is a constant thought for us. And it's a unique challenge for our brand, but for all subscription brands really.”

8:05 – Pay attention to your model

If you want to make better, more strategic decisions for your company, you have to listen to what your model is telling you.

“One of the strengths of the company is in our model. We have a very well built out, interactive model, and we were looking at everything and we were able to see that, okay, our cost of acquisition is going to be higher in this new world of iOS 14, but what does success look like in this regard? How does it all funnel down into cash flow? And what's the best cash position we can be in in 6 months, in 12 months, in 18 months, given these increased costs? And the math said and the model said, you actually have to go and accept this higher CAC. You have to acquire these customers. You have to build that subscriber base to the point where you're able to cover your overhead with your current customer revenue and more, and then some to fund your new growth. So we made a strategic decision in July of last year to really put the foot back on the gas and just take the hit on increased CAC. And we resumed our growth curve from there. And that's where we are today, just continuing that strategy in a lot of ways, while diversifying our growth spend.”

9:32 – Focus on subscription

If you can get more people to be subscribers instead of one-time buyers, you’ll have a much better retention rate.

“We increased the pricing of our one-time purchase options, and the third reason we did that was to funnel more and more into subscription. And this model, in a simplified version, I created a toggle with different assumptions and inputs, really said that if we can get from say 50 percent of our first-time customers coming in as subscribers to 70 percent to 80 percent maybe, what would it look like at a hundred percent? And it really blew me away that that was the most important thing, what cost of acquisition can we afford? More so than the dynamics of growth rates and payment terms that affect your working capital, more so than retention rates, to a large degree. Looking at the ways we can boost our curve by 20 percent even, the effect of getting first-time customers in as subscribers was even more important than all those things. So everything we do, the very north star is how do we treat our subscribers amazingly and give them the best experience possible? But as a business, from a business perspective, how can we drive our subscriber number higher every day, every month?”

12:51 – Give your customers a guarantee

People might be hesitant to subscribe to a service they’ve never tried. You can help ease them into it by offering a money-back guarantee.

“One thing that's been really important for driving that trial into subscription for us, I believe, is our first purchase money-back guarantee. And that's something we really started promoting after that three-pack sample test didn't really go as we had intended. We wanted to give people the opportunity to try this product. It's a very different product offering. It's promising you that limitless pill. And if we're not careful we can seem like we're over-promising, but to your listeners, I would urge them to try it for themselves and see. I think it really does work really well. But after getting rid of the three-pack sample, we were like, ‘Okay, how do we give people comfort around trying this as a subscription?’ And the first purchase money-back guarantee has been huge. I think a lot of brands have this, but really putting it front and center and talking about it in our newsletter, sponsorship copy, and just various places, landing pages. It's been important to give people that trust to say, ‘I can try this and get my money back if I don't like it,’ which is true.”

15:27 – Listen to your customers’ needs

Most customers keep or end subscriptions based on two questions: am I enjoying this product? And am I getting the right amount of it at the right time?

“We have an internal thing we say, that if we bankrupt the company by showing love to our customers, then that's the way it went. We go out of our way to make the subscriber experience as good as possible. But at the end of the day, I really think that 80 percent of a customer's decision, maybe 90 percent of a customer's decision to either cancel a subscription or not, is am I enjoying this product? And am I getting the right amount of it at the right time? And if you're getting it piling up on your front porch, you're going to cancel that thing right away. So the two biggest things that we've done is these continual improvements in the product itself. We can actually see a set change in retention based on one version to another. In particular, every monthly cohort afterwards has 5 to 10 percent better retention than the previous version. So that's the key thing, and that's why we're very focused on continually improving the product. But also the subscription experience is wrapped up in that.”

23:22 – Don’t underestimate operational complexity

You have to be certain that the skew you want to implement has a good chance of success, otherwise it’s not worth the investment.

“I think the operational complexity cannot be underestimated for what we call skew proliferation. You need to really be sure that that skew’s going to be additive to the business's cash flow when factoring in the working capital requirements of adding more inventory to your balance sheet. And the complexity of that really is not a linear path, it's exponential I think in a lot of ways. And so you’d better have a good operational mind in there to manage that if you're going to have more than one skew. But for us, we're not averse to adding more. We think we have a great product that's found product market fit amongst our audience, and we're trying to find new markets for it, if anything first. But we're open to it, it's just every time we talk about a new skew, I'm like, ‘Well, it's got to be a sure thing winner.’ And we should have a clear case that it’s not just boosting AOV. Does it boost AOV and therefore our monthly cash flow is going to improve because we can afford to order it quickly and get terms, and here's our manufacturing relationship that's going to make this really work. So it needs to be more than just a growth decision to add a skew in my opinion.”

25:34 – Demonstrate success

Subscription models add a level of consistency to your revenue that shows vendors and suppliers you can be successful.

“I think models are awesome, but every model is wrong. And the best thing to do is to always consistently be second-guessing your model with back-of-the-envelope math and gut feelings, and just always listening to that gut feeling. But in using our models and just in focus and finding the importance of working capital, which we've always known to be true, but just seeing how truly impactful it is. I think it's really the most under-discussed part about DTC and consumer goods, businesses in general. It's really impossible to grow quickly without a ton of capital unless you have your working capital figured out. And that takes demonstrating success a lot of times to your vendors and your suppliers, namely your co-man and your packaging suppliers. So the subscription model has really helped us because, with our co-manufacturer, we have consistent orders where our revenue's not doing this every month. It's pretty steady. And so they can bank on us as a customer and they see our consistency. It gives us leverage in negotiating terms. It gives us leverage in negotiating pricing. and the same goes for all of our suppliers. And it's also a benefit of the one product focus. But really everything you can do to get paid sooner and to pay other people later should always be on the mind of every wise savvy DTC CPG operator.”

27:34 – Utilize your financing

Negotiation is important, especially if you don’t have a lot of capital. You have to know how to use your finances to your advantage.

“Better relationships lead to better negotiating. And it's all in negotiation. It also has led us to be able to find cheap financing even at an early stage. So we actually use a company called Ampla, formerly known as Gourmet Growth. And I think highly of them, and they are a credit partner. And when they underwrote the business, the subscription online revenue was the only reason why we got the rate that we did. And so you’re constantly thinking about not only your working capital terms and your payment terms when you're receiving revenue, but also thinking about ways you can finance expenses, ways you can add positive cash flow just based on your financing. Line item is huge.”

31:15 – Give customers an out

Sometimes people are wary of subscribing to services, but if you give them a way to pause or skip for a month, they’re more likely to commit.

“That was such an easy choice for us because of that guiding north star of, if giving our customers, if giving our subscribers the best experience is going to be detrimental to us, then so be it. And so that was a super, we had a quick discussion about it internally and we thought if this was going to make our subscribers' lives better. Let’s do it. It's a no-brainer. And we saw month two to three month retention came down a bit as people might not have gotten through their first month, but every month after that, it improved. And I think that's just based on the flexibility of being able to now access subscription pricing, but in a way that you don't feel the anxiety. I think there's an anxiety about subscriptions sometimes. ‘I've got to get through this. I got another one on the way.’ But by making it super easy to manage that process of skipping or changing the date, it removes that anxiety, I think is critical.”

37:14 – Don’t look for a silver bullet

There is no silver bullet for subscription services. You just have to be open to feedback and advice.

“I think the inclination to look for that silver bullet is dangerous. I think you need to be constantly advancing the ball in all directions. We like to say, ‘Shoot bullets and then cannonballs.’ So be testing, and then once we find a test that works, go all in on it. And the great thing about DTC is that there never will be a silver bullet. And anything that is won't be one for long. It's divorcing yourself from that anguish of that search has been important for me. And I like to also say, you’ve got to have three months trailing average emotions in this business. You’ve got to be Zen about things. It’s important. And I don't have a big ask, and I think personally that not having to ask who's led me to have the peace that I seek on a personal level. So, if anyone has any feedback or advice, I'm always open ears. And I think that's how we got connected is just openness to new connections and advice. So always open to it, but not seeking it with my every breath. And that's helped me a lot personally as an operator.”