4 Levers Subscription Ecommerce Sellers Can Pull to Impact Revenue

You're already selling products and subscriptions. So now what? 

You could sell more, sure. That’s always a good thing. But you should also test additional methods for maximizing margins. 

When Austin Gardner-Smith, Co-founder and President of Bainbridge, a company committed to helping DTCs understand their data and take control of their finances, joined us for an episode of Subscription Ecommerce Live, he offered 4 specific actions a subscription merchant can take to impact revenue.

Below, we've broken down the 4 levers Austin recommends pulling. We’ll cover what type of impact you can expect with each and what you'll need to do to test if it works for your brand. Plus, we've included a bonus tip he offered about a better way to measure the true contribution of your customer. 

Lever #1: Reduce Customer Acquisition Costs (CAC)

Austin called lowering CAC "the most obvious lever." Many ecommerce brands think of this as the default way to get more out of each sale.

Customer acquisition cost measures how much you spend to gain a new customer. You can calculate CAC with the following formula:

(All sales and marketing expenses associated with acquisition over a period of time) ÷ (number of customers won in that same time period.) = Customer Acquisition Cost

Reducing CAC will undoubtedly impact overall revenue, but Austin also mentioned a challenge with this lever: You can only reduce acquisition costs so much before you hit a floor.

Compare your costs to industry benchmarks to get a sense of how much (or how little) this lever can help you. Shopify breaks down some numbers across various sectors. While the numbers were derived from ecommerce brands with less than 4 employees), they can still give you some idea of what’s normal if you interpret them with caution:

• Business and industrial = $533
• Furniture = $462
• Electronics = $377
• Clothing, shoes, and/or accessors = $129
• Home and Garden = $129
• Health and Beauty = $127
• Arts and Entertainment = $21

If your brand's CAC comes out higher than these benchmarks, you might consider starting with this lever to increase profits.

5 Ideas for Reducing CAC

Acquisition costs come down with better marketing plans and customer experiences.

Improved marketing will help you get customers through the door. Better experiences will get them to stay.

Here are 5 quick, out-of-the-box ideas to bring down your CAC:

• Optimize your site for Google ranking so you don't have to spend so much on ads (hat tip to our friend Katharine McKee who talked with us about how to do this well).
• Cut out low performing ads by identifying the ones that work and the holes in those that don’t. 
• Use user-generated content in your ads. (Neil Patel found that this method brought out 50% lower cost per acquisition).
• Focus on conversion rate optimization and customer experience on your website and store. (Check out what Jon MacDonald suggests to make this happen).   
• Embrace referral programs. (See how BoxyCharm used this to grow their subscriber base by 15 thousand month over month).

Improved marketing will help you get customers through the door. Better experiences will get them to stay.

Customer retention also functions as a back-door way of affecting CAC. You don’t have to acquire the customers you already have, so emphasizing retention can help you gain more from the customers you’ve already won over.

You can boost subscription retention by offering

• Upcoming shipment delays (available via ARPU).
• Failed payment recovery plan (available via Churn Buster).

Lever #2: Raise Your Prices

This lever feels almost as obvious as reducing CAC. Want higher profits? Just raise your prices!

The simple solution doesn't always resonate, though. Most brand owners fear this idea because it could push customers away. You may have even felt a little chill run down your spine just reading the words.

Austin explained that some of that fear is unwarranted. "There's almost always headroom to raise prices beyond a level that you're comfortable with," he said.

That doesn't mean you should just go out and raise everything without a plan. He recommends looking into pricing strategy and finding nuanced ways to raise prices without scaring away customers, like:

• Complementing your sales with great customer service
• Gradually increasing prices in small doses
• Cutting back on promotions and discounts
• Adding perceived or actual value to the product
• Bundling items together

A Brief Warning About Price Increases

You don't have to fear price increases if you do them strategically. But part of that strategy should include a plan to address the temporary drop in customers.

Austin said that price increases nearly always lead to lower conversion rates in the beginning. This drop doesn't mean you have to back down.

If you put in the strategic work beforehand, you should see those numbers bounce back up shortly after making the change. If they stay low, you might want to evaluate the initial strategy and try again.

Lever #3: Evaluate Variable Costs

Subscription businesses have plenty of additional costs for getting a product into a customer's hands. Austin talked about fees associated with:

• Shipping
• Fulfillment
• Packaging

Unboxing is trendy. Fast shipping is a necessity. So reducing these costs often feels like you have to choose between a good experience or reduced costs, but Austin believes that brands can strike a balance between the two.

Cutting these, he said, may not be "as sexy" as some of the other options because of the value placed on the customer experience.

Unboxing is trendy. Fast shipping is a necessity. So reducing these costs often feels like you have to choose between a good experience or reduced costs, but Austin believes that brands can strike a balance between the two.

Ways Subscription Businesses Can Reduce Variable Costs without Sacrificing Customer Experience

Austin provided a few tips for how brands can bring these costs down without chipping away at valuable customer experiences.

It starts with a deep dive into your actual expenses.

• Look for things, like accessorial fees, that you don't need
• Renegotiate your contracts with your carriers and stand your ground
• Look for the best 3PL carrier

The biggest difference-maker? Bringing fulfillment in-house. 

He knows this is "a big scary thing to bite off," but he has also seen the results it can produce for brands of the right size.

Austin had one subscription business client save nearly $300,000 over the year with this strategy. It also helped them correct some of their marginal spending until they started making money in areas where they were originally losing.

The total profit swing resulted in almost $2 million in the opportunity found.

Is it scary? Absolutely. But it could result in some big gains.

Lever #4: Look for Higher-Up P&L Line Items that Could Impact at Scale

As you look closely at your P&L statements, you can identify the things creeping into your margins and get a more complete view of your profitability. He recommended looking at things like 

• Discounts offered
• Returns fulfilled
• Taxes paid
• Shipping costs

Even the smallest changes to these numbers (charging a dollar for shipping instead of offering it for free, for example) could directly improve your bottom line when done at scale. 

A New Metric to Measure True Profitability

Now that you’ve got some idea of how to increase your brand’s profits, it's worth assessing how you calculate the profits from each customer.

Austin mentioned that most brands forget about the difference between gross sales and net revenue. Some sales may not contribute as much profit as others, depending on the associated costs. That’s why he has endorsed a new metric subscription business can use to better understand and calculate their bottom line: contribution profit.

Contribution profit focuses on how much profit each customer brings to your business. It differs from the more common metric, lifetime value, because LTV is usually revenue-based, leaving the business with a few loose ends.

"When we talk about lifetime value of a customer and what they're worth to your business," he says, "you have to go beyond revenue and start trying to get to some notion of profit broadly."

For Austin, focusing on contribution profit allows the brand to understand the actual contribution each customer makes to your company.

How to Calculate Contribution Profit

Austin provided the example of a fictional retail brand that sells sweatshirts for $100 to demonstrate how and why a brand would calculate contribution profit.

Take the $100 sale and remove:

• Production costs
• Shipping costs
• Fulfillment costs
• Expenses for Shopify, Recharge, or another ecommerce platforms

After all that, you can identify what's left to pay overhead, salaries, and other operational costs. Then you have a better sense of the actual contribution dollars of each individual customer.

Austin takes this one step further by narrowing it down to a specific period to get a truer sense of each customer's value.

"The right to think about this, to me, is contribution dollars per customer over a certain period of time." This allows you to dive deeper into your data and know the contribution over their first three months, over a year, and so on.

Let Solid Data Drive Your Decisions

Each lever comes down to accessing and analyzing the right data. When you look closely at these numbers and make the necessary adjustments, you'll get more out of your sales efforts.

Austin provided other great insights about how financial data can help ecommerce brands improve their business. You can check out the whole episode here and subscribe to Subscription Ecommerce Live to get more practical tips from industry experts.

And if you’re hoping to increase AOV and LTV within your upcoming charge messaging to subscribers, check out how ARPU helps Recharge merchants with upsells, swaps, and delays.