‘How much should I spend on subs promotion?’ Publishers often ask themselves this question. The answer, of course, depends on our objectives. But some publishers don’t know what objectives to set. They don’t understand subscriptions. They want to set a promotion budget that ‘sounds about right’. By doing so, they often underspend – and make less profit than they should.
There are no guarantees in this world, but subscription marketing is about the only place a publisher can be sure that if he spends a pound he’ll get £1.50 back. Less well understood is the corollary that an underspend on marketing is a failure to generate income: cutting the marketing budget leads directly to a cut in profits.
But there is always pressure to cut costs – and the marketing spend is an easy target. How can we help publishers through this dilemma?
Let’s start with what we know
With five pieces of information, we can work out all kinds of useful numbers. Here are some things we know (or, if we don’t, we had better find out quick!):
* how many subs we have
* how much revenue they bring in each year
* our renewal rate
* how much we spent on subs promotion last year
* how many new subs we sold last year
Let’s take that fine magazine Wombat Weekly as an example.
Average sub lifetime
We can work out the average life of a subscription like this. If Wombat Weekly has 100 subs in year one, and a renewal rate of 75%, we’ll have 75 subs in year two. In year three, we’ll have 75% of 75 subs: 56. In year four we’ll have 75% of 56 subs: 42. Continue in this way and we get a chart like this:
| Wombat Weekly average sub lifetime (75% renewal rate) | |
| Year 1 | 100 |
| Year 2 | 75 |
| Year 3 | 56 |
| Year 4 | 42 |
| Year 5 | 32 |
| Year 6 | 24 |
| Year 7 | 18 |
| Year 8 | 13 |
| Year 9 | 10 |
| Year 10 | 8 |
| Year 11 | 6 |
| Year 12 | 4 |
| Year 13 | 3 |
| Year 14 | 2 |
| Year 15 | 2 |
| Year 16 | 1 |
| Year 17 | 1 |
| Year 18 | 1 |
| Year 19 | 1 |
| Year 20 | 1 |
| Year 21 | 0 |
| Total sub years | 400 |
The total number of years adds up to 400. If 100 subscriptions give us 400 ‘sub years’ then, on average, each sub lasts four years.
Wombat Weekly has 1,000 subs and a renewal rate of 75%. We must sell 250 (1,000 minus 75%) new subs next year to stand still.
Acquisition cost
If we divide last year’s expenditure by the number of new subs we sold, we get the acquisition cost – how much we have to spend to sell a new sub.
Last year, Wombat Weekly spent £10,000 on subs promotion and gained 100 new subscriptions, which gives an acquisition cost of £100 (£10,000 spent divided by 100 subs gained).
So, the cost of standing still is 250 x £100. In other words, the replacement cost is £25,000.
‘Spend 25 grand just to stand still?!’ you can hear the publisher cry. So let’s do another sum: what’s the cost of doing nothing?
The cost of inaction
Wombat Weekly has 1,000 subscriptions, bringing in annual revenue of £150,000. Each sub is worth £150 a year. The value of a sub over its four-year lifetime is £150 x 4 = £600.
Failure to replace 250 lapsing subscribers costs our business 250 x £600 = £150,000. At this point you should be engaging the interest of your publisher…!
So, if we spend £25,000 to replace our 250 lapses, we bring in £150,000 over the next four years. If we spend any less, numbers go down.
Which brings us to Laurie’s first law of subs marketing budget planning: spending less than replacement cost is a decision to manage decline.
A nice spreadsheet that publishers can understand
All this info can be put into a simple spreadsheet (Email us if you would like a copy of this spreadsheet.) Varying any one of the original five numbers (subs volume, revenue, renewal rate, promotional spend and new subs generated last year) changes the other details.
Another thing this spreadsheet highlights is the significance of renewal rates. We’ve always known that our best prospects are our existing customers – but perhaps not appreciated how much money this represents.
If Wombat Weekly could increase its renewal rate from 75% to 76% it would save £1,000 in promoting to new subs. Every year. If, by spending £900, we could get that renewal rate up 1% we should do it at once.
If we can get our renewal rate up to 80%, we cut the number of new subs we need each year to stand still to 200 subs. If we maintain expenditure, we can look to increase our subs total by 50 - and make an extra £7,500 in year one alone.
Make more money - now!
If we deduct the acquisition cost of each new sub from its lifetime value, we are left with the profit. With Wombat Weekly’s 75% renewal rate, that’s a nice big healthy number!
For every £1,000 we fail to spend, we knock 10 subs off the total – worth £1,500 in year one. How shortsighted! We’ve cut £1,000 off our expenditure, but we haven’t put £1,000 on the bottom line. In fact, the bottom line is actually £500 worse off!
Plus, next year, we need to spend an extra £1,000 to get back to where we were – another promotion budget that won’t ‘sound about right’.
But why be so conservative? Why not spend another £25,000, and bring in another 250 subs – and make another £150,000?
Caveats
I have been simplistic. The more subs you sell, the more it costs to sell them (unless your marketplace has infinite elasticity?!). I have taken no account of inflation. You could add in to your lifetime values all the other products you can sell subscribers (directories? newsletters? conferences? other magazines?), and the value of renting their names. We need to include the cost of list-building – which is crucial in promotions. We haven’t looked at the cost of servicing the sub. We should take account of the fact that subs revenue is accounted for over a 12-month period – which may overlap to a greater or lesser extent with the financial year.
But we’re trying to make things easy to understand. Publishers have enough to worry about: let’s not bother them with unnecessary complications.
The more I practice, the luckier I get
What about white mail? Included in the number of subs we sold last year is a quantity of new subs that came through the window. We can’t attribute them to any promotion that we did. Surely we should subtract the white mail from the figure of last year’s subs sold before calculating the acquisition cost?
Well maybe. But my experience is that if you do more promotion, you get more white mail. As Arnold Palmer said, ‘the more I practice, the luckier I get.’ And the converse is true also. One thing we can be sure of: doing less promotion will not create more white mail!
Here’s another thing
We also publish the less successful Marsupial Monthly, with subs revenue of £50,000 and a renewal rate of 50%; all the other numbers are identical to our wombat title.
The cost of replacing MM’s lapsing subs is £50,000. The value of those subs is £50,000. The exercise is pointless. Can we raise renewal rates? Can we raise the price? Or would we make more profit by going over to cc? And so the marketing process feeds back, as it should, into product development.
Perhaps most magazines will more closely resemble Fruitbat Fortnightly, which makes £100,000 in subs revenue, and renews at 75%.
In year one, we break even; it is only when we look at the long term that we see just how profitable our subscriptions marketing effort is. Sure, it cost us £10,000 last year to produce 100 subs; but the lifetime value of those subs is £30,000 – a very nice return on investment. It would be easy – but criminal! – to underspend on promotion and miss out on all this juicy revenue.
So next time your publisher asks, ‘how much should I spend on subs promotion?’, your answer is almost certainly ‘more’ - and I hope this article will help you justify your case.
