In business it can be easy to focus on individual sales, and talking about “the deal”. But companies who focus beyond individual transactions, and more on building ongoing relationships with those making the transaction, tend to be in business longer. Which is why those building customer-centric businesses in today’s environment are finding success offering subscription-based products and services.
Amir Elaguizy, CEO and co-founder of subscription commerce platform Cratejoy, shares his thoughts on why subscription business models are taking off, how they differ from more traditional transaction-focused business models, and how they are inherently more suited to capitalize on social networks like Instagram and Pinterest.
* * * * *
Small Business Trends: Give us a little of your personal background.
Amir Elaguizy: I’ve been a life-long entrepreneur. I dropped out of college when I was 20 years old to start my first company and ended up running that until about 2011. I sold that company to Zynga in 2011, and worked at Zynga as a CTO of a division for a couple of years. I left Zynga and ultimately founded Cratejoy with one of my co-founders from the previous company.
Cratejoy is a Y Combinator funded startup. We are [about] a two years old subscription commerce platform; we make it really easy for people to start their own subscription commerce business. You can think of things like Plated or Birchbox or Dollar Shave Club. We make it easy for a non-technical person who hasn’t raised millions of dollars in venture capital to start a business using the subscription commerce business model.
Small Business Trends: Why is the subscription business model is so attractive, particularly to entrepreneurs and startup kind of folks?
Amir Elaguizy: The subscription business model completely took over the software world. It’s literally ludicrous to sell software on anything other than a subscription basis right now. And the reason that it’s that way is because the subscription model is so much more powerful than the transactional model. Every single month you know how much money is going to come in. It’s roughly the same that came in last month, plus a little bit more as you’ve gotten new customers. And as — especially as a founder of a new company — you’re trying to predict what your sales are going to be in three months and ordering all the inventory. Making sure you’re ahead of that is almost impossible.
With the subscription model you get a predictability that comes with the revenue. So you’re not opening your store to get $3,000.00 in sales one month and nothing the next month, and then $20,000.00 in sales a few months later and you’ve really got no predictability of your life; and you can’t really plan for anything. With the subscription business model, every single month you’re getting that same recurring revenue, and it makes it easy for you to fit this into your life.
It’s sustainable. It keeps coming as opposed to a transactional business where you’re just selling things online. It can just go away, and that doesn’t really happen with subscription businesses.
Small Business Trends: What are some of the important things somebody coming out of a more traditional business model need to take into consideration as they think about and begin a subscription business?
Amir Elaguizy: One of the most challenging things about starting a subscription business — especially if you’re somebody who has actually run transactional businesses before — is understanding the importance of retention, or churn is what people call it. And that’s the percentage of your customers that you lose every month essentially. And that metric is not really existent in transactional businesses. You don’t really optimize for your churn.
You might optimize for repeat buyers, but for the most part the thing people optimize for in transactional businesses is conversion rate. What percentage of people click the big buy button when they visit my home page, right? And yes, conversion rate matters in subscription to a point. You need to get some people through and actually purchasing. But the thing that really matters more than anything is churn. You have to keep your churn really low. There’s actually a mathematical cap on the number of subscribers, and therefore the amount of revenue you can make, based on your churn.
If you’re churning off 20 percent of your subscribers every single month, it really doesn’t matter what your conversion rate is because your user-acquisition costs are going to eat up all of your money and you’re never going to have a very big business. So it’s a mindset shift from, “I’m trying to get as many people to click buy as possible” to, “I’m trying to make sure as many people are extremely happy with my offering as possible.” And it’s more of a relationship and less of a transaction, if that makes sense.
Small Business Trends: How is customer acquisition strategy different when you’re doing a subscription-based company versus a transactional-based company?
Amir Elaguizy: This is where it starts to get really interesting. Your subscriber base — especially if it’s a big, happy subscriber base — is your biggest customer acquisition asset. Because every single one of those happy subscribers is somebody you talk to every single month, and every single month you have another opportunity to say ‘hey delighted customer, why don’t you tell your friends about how awesome this subscription is’. Or why don’t you come right a review. Or why don’t you just tweet out that you just got your box, or if you’re product came in the mail, take a picture of you opening it and put that on Instagram.
As your business grows, that asset becomes more and more powerful. And because you’re having those frequent interactions with them, you can really maximize the value you get from those subscribers as opposed to a more transactional business.
Small Business Trends: When you think about the resources that go into acquisition and retention, do you put more effort and resources into retention?
Amir Elaguizy: The answer is absolutely yes. You have to have enough customer acquisition such that people are coming through the door. So you have to have a flow, because you can’t retain nobody right. So you have to have a least some amount of customer acquisition. But if you’re pouring water into a bucket and your bucket’s got a bunch of holes in the bottom, you’re never going to fill that bucket. And as soon as you’ve got the water going, meaning you’re getting at least a few customers every single month, you should be concentrating on making sure there’s no holes in the bucket. And if there are hole, plugging the holes in that bucket before you pour any more water in there.
And the cool thing about it is if you nail your retention, if you get your product to a good point or your customer experience to a good point — if you really have a healthy relationship with a bunch of satisfied customer — you can always invest more in customer acquisition. But if you don’t nail retention and have a high conversion rate, it’s really hard to come back and fix that product or fix that customer experience because you end up on this treadmill of needing to acquire more and more customers to keep the water level in the bucket at the same level it was last month.
Small Business Trends: Talk about the importance of the customer service model at the beginning — or the creation — of the subscription business model.
Amir Elaguizy: It underpins everything. The cheapest customer to acquire is one that you didn’t lose. If you lose a customer, then you have to go pay to get another customer. You’ve both lost revenue and you had to pay out so you’ve double-tapped on getting back to where you were — net zero. And the key to good retention is great customer service.
The big difference between a transactional business and a subscription business is that in a transactional business, the person really is probably only going to come around once or maybe twice if you have a really high repeat order rate. But in a subscription business, you’re going to see them by definition, over and over and over and over again. And you’re going to have an opportunity to impress them every single time. You’re in a relationship. Every month, they’re going to be coming back if you’re doing a good job. So it’s really important to understand that from the beginning because everything follows from that. That’s where you get high retention. That’s how you get happy customers.
Small Business Trends: Are subscription business models inherently more suitable to capitalize on social networks like Instagram and Facebook?
Amir Elaguizy: Yes, because you’re building a more engaged audience, fundamentally. They receive something in the mail from you every single month. It’s a real relationship — not just a once and done. Good subscription businesses take advantage of this to impressive effect, check out how engaged followers of Fandom of the Month and BoxyCharm are on Instagram.
These customers are in an actual relationship with a brand; it’s not one directional — they speak to you, you speak to them (at minimum in the form of a product that shows up at their house). I can’t think of a single big merchant that doesn’t also have a huge social networking component of their business.
Small Business Trends: Where can people go online to learn more about what you guys do?
Amir Elaguizy: Cratejoy.com
This is part of the One-on-One Interview series with thought leaders. The transcript has been edited for publication. If it’s an audio or video interview, click on the embedded player above, or subscribe via iTunes or via Stitcher.