Dose #105: Financial Mastery for Subscriptions

Matt here with your weekly Subscription Prescription 💊

Finance. The bane or boon of a business. In this week’s dose we dive into some important elements of subscription businesses, like contribution margin, how to think about LTV (lifetime value), and why you need consistent financial planning.

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Failed Payments

There’s an invisible problem plaguing subscription companies: accidental churn. This is when an otherwise happy customer’s legitimate payment is falsely declined by the credit card company, resulting in their subscription getting canceled.

Subscription Prescription has a new partner and sponsor that tackles this very problem: Butter Payments. They focus on reducing accidental or involuntary churn and keeping customers who want to be on their subscription around. The problem with churn like this is that a lot of customers don’t know they are being canceled and don’t want to be canceled.

Butter is able to automatically resolve those failed payments that otherwise would have led to churn and keep your recurring revenue and subscription customers as healthy as possible.

The bottom line for any business is profit. Profit lets you invest more money in growth. Profit is what pays for the big trip or second home. Profitability is what we all strive for and the reason we sell subscriptions.

The north start for any ecommerce business is contribution margin. We’re going to be talking about that a lot, so let’s dive into what it means.

Understanding Contribution Margin

Contribution margin is what remains after subtracting all variable expenses from your revenue, covering fixed expenses such as salaries and rent. A healthy contribution margin for Amazon sellers might hover around 15%, while other e-commerce platforms should aim for closer to 20%. This helps maintain your profitability and cash flows effectively.

While contribution margin per order is important, we can also think about it in terms of lifetime value (LTV). We can influence lifetime contribution margin in a few different ways. We can:

• Increase the average order value each time someone orders (AOV)

• Increase the average number of times someone purchases from you

• Increase the number of people purchasing from you

In subscriptions, you can think of increasing contribution margin as a total aggregate or average for your store. If you can increase AOV, it improves the average contribution margin. If you can acquire more people, you increase total profitability. If you can get more people to stay on a subscription, that increases the average contribution margin, too.

Balancing Subscriber Acquisition

A significant risk for subscription-based businesses is the rapid acquisition of subscribers without adequate financial backing. To prevent depleting resources before these investments mature, businesses must balance the subscriber acquisition cost with their long-term value carefully to avoid financial pitfalls that could jeopardize their operations.

You need to be careful managing your cashflow. If you invest $100 to acquire a new subscriber, but don’t recoup that money outlay until order #3, then keep in mind how long you’ll need cash to keep afloat.

Strategic Financial Management

Several management strategies can significantly impact the financial health of an e-commerce operation:

• Inventory Management: Avoid overstocking to keep your cash flow fluid. Excessive inventory ties up funds that could otherwise facilitate growth and operational flexibility. But if you run out of product you have nothing to sell. I can recommend some amazing contractors that help with this if you need it.

• SKU Performance Monitoring: Regularly assess the performance of your SKUs. Discontinue underperforming ones unless they contribute strategically to customer retention or acquisition.

• Implementing Robust Financial Planning: Establish thorough bookkeeping and conduct regular financial reviews. These practices are essential for spotting opportunities, mitigating risks, and ensuring the agility to adapt strategies effectively.

Leveraging Financial Analytics

The strategic use of financial analytics to guide decision-making is crucial for mastering e-commerce dynamics. Ultimately, your investments in the business should result in a stronger contribution margin per subscriber, or at least to certain cohorts of subscribers.

That’s why I call it the north star metric. If an action isn’t improving contribution margin, there needs to be a strong reason to do it.

Cultivating Financial Acumen

One of the first things I do with most of my clients is build out better financial reporting. We need to know if an A/B test is resulting in a net contribution gain (for example, you give an extra 10% off to improve retention) to know if it is benefiting the business positively.

So, pay attention to the contribution margin and the profitability of each subscriber when making future decisions and understanding what has been happening in the past.

That’s it for this week! Stay tuned for dose #106 out next Tuesday.

 - Matt Holman 🩺

The Subscription Doc

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