It’s important for video businesses to be able to demonstrate to their stakeholders and investors they are capable of growth, which is challenging because there aren’t any established tools or models readily available to help video businesses predict future revenue potential. So, in order to help content owners understand how to forecast revenue and profitability of their subscription business, Zype recently shared a Revenue Forecast Spreadsheet for Video Subscription (SVOD) Businesses.
This video subscription revenue model is incredibly powerful, but it’s important to understand how it works and why to use it. In this blog post, we’ll get into the key components, metrics, and challenges of building SVOD businesses, and several strategies for success.
Subscribers, Recurring Revenue, and Customer Lifetime Value
Customers are the fuel of your subscription business. You rely on the recurring revenue from your subscribers to keep the engine running. That’s why in order to be successful, it’s important to focus your strategy on acquiring new customers, increasing revenue from existing customers, AND retaining your customers longer.
ACQUIRING NEW SUBSCRIBERS
As in any business, you must start somewhere to get your business launched and off the ground. With a subscription business, customer acquisition must always remain a priority. Think once you have sizable base of subscribers it’s time to relax? This is actually when it’s most important to keep your foot on the gas pedal and ramp up your marketing efforts.
Social media and email marketing are the most efficient and effective marketing tools at your disposal to acquire new subscribers. It’s important to have a steady stream of communication with your customers focused on promoting new content and using incentives to drive new subscribers. It’s also important to leverage the insights you gain from your video analytics. Knowing what is and isn’t working helps you make smarter marketing decisions and build up your subscribers quicker.
So now that you have a lot of new customers, what’s next?
CUSTOMER LIFETIME VALUE
Once your video subscription business is firing on all cylinders with a significant amount of subscribes, one key metric you should use to measure the health of your business is Customer Lifetime Value (a.k.a. CLV or LTV). CLV is a simple yet powerful indicator of the projected profit you can expect from your customers during their subscription lifetime with your video business.
You calculate CLV by analyzing the performance of your current customer base and, more specifically, by multiplying your average profit per user (average revenue per user/customer less your average user/customer) by their average lifetime as a subscriber. For instance, if your subscribers spend an average of $10 per month, your average cost per subscriber is $5 per month, and your subscribers stay for an average of 12 months, your effective CLV would equal $60. Petty straightforward, right?
You may be thinking, “great, I know the health of my existing customers, but how is this helpful for forecasting?” It’s easy, really - multiply CLV by the number of new customers you expect to acquire each month. Using the CLV of $60 and average subscriber lifetime of 12 months from the scenario above and assuming you acquire 1,000 new subscribers per month, you’re able to forecast that each month you will acquire approximately $60,000 of profit to be recognized over the next twelve months. That’s an additional $5,000 of monthly recurring profit. Money in the bank!
As you can see, Customer Lifetime Value is more than just a way to track the health of your current business. It’s also a powerful method for forecasting your profit potential. To recap, keep a close eye on your key subscriber metrics - average revenue, average cost, and average lifetime. They’re dynamic so you must continually monitor, measure, and improve each as they impact your CLV. You might be wondering, “wait, these numbers change a lot?” Yes, it’s the cold hard truth in subscription businesses. Let’s dive in and investigate the drivers that affect your subscriber metrics.
Subscriber churn is intricately related to your subscribers metrics and significantly impacts your CLV. The fickle nature of customers is and has always been the cause of uncertainty and challenges in running a subscription businesses. Your subscribers can, and will , cancel their subscriptions. It is inevitable, but there are ways churn can be mitigated.
Let’s now discuss the effects of churn. For this scenario, let’s pretend that you have only your existing customers to generate and maintain revenue and won’t be able to acquire new customers. Your challenge is that subscriber churn will continue to erode your monthly revenue. For example, if you start with 1000 subscribers and 5% of your customers churn each month, what are you left with in twelve months? That would mean you have 50 subscribers leaving per month, adding up to 600 subscribers leaving per year. At the end of the year, you only have 400 subscribers left. Yes, that a 60% loss in revenue over the course of the year. Not a pretty sight.
As I mentioned earlier, Customer Lifetime Value is impacted by Subscriber Churn. But how? What is the underlying driver? It all come down to your key subscriber metrics. Churn directly affects your CLV. Using our examples from above:
$10 average customer revenue
$5 average customer cost
6 month average lifetime (instead of 12 months from above)
Our effective CLV is $30.00. That’s 50% less than our first CLV example. Why? Yep, you guessed it. Subscriber churn. Higher rates of churn will drastically reduce your average customer lifetime. This is a very exaggerated scenario but hopefully clarifies how important it is for you to be resilient and focus on minimizing churn as much as possible.
HOW YOU CAN REDUCE CHURN
One tactic to retain your customers for longer is to always keep your content fresh and frequent. If your subscribers continually have new and engaging content to watch, they are much much more compelled to keep their subscription. In terms of consumer psychology, this behavior can be attributed to “fear of missing out” and “loss aversion”. Simply put, your subscribers will want to stay with you longer because they fear they will miss out on your content (FOMO is totally real) and don’t want to lose access to the entertainment experience you give them. In addition to frequently releasing new content, it’s equally important to engage with your audience. Whether it’s through live streaming, email or social media, you’ll retain more customers with an open line of communication.
Here at Zype, one of the best practices we use for retaining customers is to ensure our customers recognize value from our product, as fast as possible. If we apply this approach to video businesses, we can consider “value” to be the quality of your video content. You must focus on the underlying technology and making it easier for your subscribers to stream and watch your video content. At Zype, we’ve made it easy for publishers and content owners to quickly deploy web and OTT endpoints to stream their video content.
We’ve covered a lot of important items in this blog post so here’s a quick TL/DR; version:
Subscribers are the fuel for your subscription video business
Acquiring new subscribers is and should always be one of your highest priorities - use best practices for marketing & promotions to get new subscribers
Customer Lifetime Value is an invaluable metric for measuring both your existing customer base and forecasting future profits.
Monitor, Measure & Improve CLV by tracking your customers’ average revenue, average cost, and average lifetime
Subscriber churn is inevitable. It negatively impacts your CLV
Combat subscriber churn by keeping your content fresh and frequent. Continually engage with your existing subscribers to maintain share of mind and tap into their FOMO.
I hope that this has given you a better idea of just how important subscribers are, and how churn can be mitigated. Have any questions? Feel free to comment below or shoot me a note at Cal@zype.com
Be on the look for my next blog post where I review and provide details on how to use our Revenue Forecast Spreadsheet for Video Subscription (SVOD) Businesses.