Direct Debit

You are probably already using direct debits as part of your subscriptions marketing. But are you using it strategically? Is it just an additional payment method that you bolt on to your standard acquisition activity, or are you really focused on maximising its impact on your bottom line?

There are three major areas where DD can help your business if you have the right strategy – acquisition, renewals and subscription increases.

To start with the basics, what are the benefits of direct debit?

That’s easy – better and cheaper renewals. It’s not unusual to have renewal rates running well above 95% for DD subscribers, whereas cash renewals rarely rise much above 80% even for three year plus renewers. Why is this? Of course, it’s mainly because of the ‘inertia’ element: the renewal will go through automatically unless the customer decides to cancel, whereas with a cash subscription the customer has to decide to renew and take some positive action to effect the renewal. But renewals can also be improved because of the lower price points offered with quarterly and six monthly subscriptions.

And the benefits aren’t just from renewals. It’s also about using the ease of collecting payments and the mechanics of DD to make offers that ‘hide’ the cost of subscribing by reducing the visible price and lowering the commitment. This works because people see a lower price on acquisition and on renewal. So, it’s very important to test different lengths of subscription and analyse the combined effect on take-up of the offer and on renewals.

Start as you mean to go on

To get the real benefit from higher DD renewals, you need to get your subscribers onto DD at the start – at acquisition. This is really key to improving the LTV of your subscribers; the most vulnerable renewal is the first one, which is where it’s not uncommon to lose more than half of your subscribers if they are paying by cash. By getting your subscribers straight onto DD, you immediately retain a far higher percentage which gives you a larger base for future renewals. If your strategy is to bring people in on cash and then convert to DD on renewal, you are missing out on the most important renewal and missing a real opportunity to improve your LTV.

So, how do you get the bulk of your subscribers onto DD at the beginning?

The main elements to consider are length of subscription, price point and choice of payment methods.

Length of subscription

DD gives you the ability to break the price down into smaller amounts – offering a lower visible price for your subscription and offering the customer a lower level of commitment which can go a long way towards alleviating their concern at signing a DD. So you should be testing different DD offers that make use of the structure of DDs: six monthly, quarterly or even monthly payments (lower price, less commitment), maybe in combination with free issues or the free or low priced trials that the DD mechanics allow you to offer, after which the subscription can move gradually to a higher price. These offers are proving extremely successful for publishers in getting customers to try the product and can lead to good conversion rates onto ‘normal’ prices.

Price points

An important way to maximise your DD take-up is to consider the price you are offering. A DD price is often set by simply taking the cash price and dividing it by, say, four for a quarterly offer and perhaps then subtracting a discount for payment by DD. What’s wrong with this? It doesn’t consider whether it’s an attractive price in itself. What you should be doing is looking at the ballpark price you want to charge for a quarterly subscription and then finding the best price point. Retailers still price items at £x.99 for good reason. A subscription priced at £9.95 will sell better than one at £10.25, more than enough to make up for the extra discount. £14.95 is a lot more attractive than £16.25. Is it better enough to make up for the lost revenue with better take up and renewals? Only testing will tell you.

Different payment methods need different pricing strategies

A key point is that your pricing strategies for acquisition, renewal and subscription increase should be different for cash and DD, as the price you can charge and the way the subscribers behave will differ depending on the payment method. If you are corporately uncomfortable with this and need to maintain a relationship between the two, then you should set your pricing depending on which method is the most important for your subscriptions business: if DD subscribers represent the bulk, or if that is your goal, then set your pricing to reflect this.

Offering choice

The third element to maximising DD subscribers is not to offer a choice of payment methods. This is important for two reasons. Some publishers feel that they have to offer all possible payment methods, so their advertising contains both the annual cash price and probably a quarterly or six monthly DD price. This has two negative effects – you immediately lose the benefit of ‘hiding’ the full annual rate because it is there on the same page! Although the DD offer represents a lower commitment, this is often not perceived because customers (and often publishers!) still see the commitment being for a year even with a quarterly or six monthly offer. The other negative is choice itself, which can reduce response simply by asking people to make a decision. Your advertising should be focused fully on persuading people to take up the subscription and it can stop the process if they then have to make another decision about payment method. Some acquisition methods (eg online, telephone) lend themselves more easily to offering customers alternatives without losing the advantages of lower visible price / no choice, but generally, if you want them to subscribe by DD then only offer that option.

Do the maths

Of course, when looking at applying these principles to acquisition offers, you need to run your test plans or results through LTV models to ensure that your DD offers are affordable and work for you. And you’ll remember when comparing DD offers with cash to annualise your DD renewal rates (a quarterly renewal rate of 95% sounds wonderful but it equates to an annual rate of 81% - however a quarterly rate of 97%, which is not unusual, equates to 89% annual which would be exceptionally high for a cash renewal). Increased frequency of payments gives more opportunities to cancel but the lower price and less commitment leads to higher take-up: only testing and good analysis can tell you what balance is right for you.

The requirement to sign a DD instruction is more of a commitment and you need to get over that negative with good offers – and DD lends itself to some strong techniques. Even with attractive introductory offers and quarterly or six monthly subscriptions, you may find that offering DD-only brings in less gross response than cash, so these offers may extend the break even period and have a higher CPA than a straight annual cash offer. But subscriptions marketing is a long term strategy and over time you will retain more subscribers and gain a higher LTV through your DD offers.

Renewals and subscription increases

Having got your subscribers onto DD at acquisition, you now get the benefit of automatic renewals with no costly renewal programme. You should see even first time renewals coming through at significantly higher levels than cash and subsequent renewals improving at each renewal point.

However, there is a downside to this wonderful automatic flow of money coming in! The inertia effect that makes DD renewal so good means that when you do remind subscribers about their subscription in any way beyond sending them the magazine, this reminder alone can prompt a level of cancellations. This is an important factor when considering your subscription increase strategy for DD. It is likely that when you decide to increase your rates for new subs, you will apply a higher rate to your subscribers on their next renewal. However, for DD subscribers this may not be the most effective strategy. Because any communication regarding their subscription can prompt a level of cancellations regardless of the amount of the increase, it’s important to ensure that the level of additional cancellations caused by the increase will at least be compensated for by the number of subscribers who remain paying the higher subscription. This has a number of important implications:

* If you increase your new sub rate, don’t assume that an increase to the base of renewing subs will automatically follow immediately.

* Any proposed subscription increase to DD subscribers should be tested before being rolled out to the bulk to ensure that the increased income will cover the additional cancellations.

* Testing may identify some groups where the increase will be cost effective but some other groups where the loss of income will not be matched by higher revenue from the renewing subs. You then have to make a strategic decision: can you support a system that applies increases to only part of the subscriber base depending on economics? This will be the most economically effective strategy, but it will have systems and corporate implications that you might not be able to justify.

* If you need to apply your subscription increases across the board to the whole of your base, then you must ensure, through testing, that overall the level of increase will compensate for the lost subscriptions you will incur.

* The majority of your subscription income will be coming from your renewing base of subscribers rather than from the acquisition activity. If your policy is to increase renewals at the same time as a new acquisition price, any decision on increasing the new subscription rates needs to be made on the basis of what effect it will have on the renewing base. This means ideally testing the proposed increase on renewals before implementing it in new acquisition activity, which could mean testing a price in renewals that is higher than the official subscription price so it has to be handled carefully.

* Any proposed subscription increase for renewals and new acquisitions should at least be run through a modelling process to ensure that the overall economic effect of lower renewals and lower take-up on acquisition will be more than compensated for with higher net income – including, if necessary, factoring in any loss of ad revenue if circulations drop too much.

As a general rule, subscription increases to DD subscribers should be held back as long as possible so that they get infrequent, but larger, increases. It’s not worthwhile giving them small increases as the level of cancellations the letter prompts will not be matched by increased income from renewals. On the plus side, although you can expect to see a significant drop in renewals for the payment after the increase notification is given, you can expect the renewal rates to quickly climb back to where they were before. Cash is the opposite: small, more frequent increases work best. If your systems or corporate sensibilities do not sit well with the complexities this can lead to, then your pricing strategy should be led by where the bulk of your subscription income comes from.

To summarise

* Is your thinking long term? Even if cash offers give you a better CPA, do you model your cash and DD acquisition and renewal data to examine the LTV to see how much they are worth to you over their lifetime?

* Is your pricing strategy designed to give you the most attractive pricing points for cash and DD on both acquisition and renewal and are you looking at them independently? If you have a unified pricing structure, then are you setting your subscription prices to suit the payment method that is the most important for your business?

* Do you test your subscription increases to ensure you get the right balance between size of the increase and the level of extra cancellations the increase will prompt?

* Are you maximising the potential to get your new subscribers onto DD straightaway by limiting their choice and making strong offers that present a lower visible price and less commitment?