2 questions media companies should ask about profitable subscribers

By Jim Fleigner

Impact Consultancy

Santa Monica, California, USA


One of the major misconceptions in news media subscriber acquisition strategies is that optimisation necessitates rationalisation across the entire subscriber population.

In other words, the only way for news media companies to improve their cash flow performance is to eliminate unprofitable starts, which results in a net decrease in subscriber bases.

Implicit in this assessment is that there are no other profitable subscribers to be captured.

This is usually incorrect and, even if it is true in any case, it is never sufficient.

As has been demonstrated many times in prior articles, a news media subscriber base often contains a mix of highly profitable and highly unprofitable subscribers, both old and new.

As such, optimisation is not just about rationalising the unprofitable subscribers. It is also about finding new ways to grow the profitable portion of the subscriber base.

Two key questions arise from this supposition:

  • Where should a news media company look for new, profitable subscribers?

  • How can a company quantify how much it should spend to acquire new, profitable subscribers?

In any business, optimisation extracts as much of the surplus value as possible derived from customers.

Not every subscriber is going to generate the same amount of value on a dollar basis, as two customers may value the same news media subscription differently, or they may have a different cost to serve, or they may want different products (e.g., a four-day versus Sunday subscription).

But in a world of true optimisation, a news media company wants to secure the subscribers who generate US$100 in lifetime value along with the subscribers who generate US$1 in lifetime value, as well as every subscriber in between.

It is only when all subscribers that generate positive value are captured that a news media circulation campaign can be considered optimised.

Returning to the first question, if it is agreed that optimisation requires capture of all positive value subscribers, where should a company look? And how can it acquire them?

The short answer is to identify the segments that are already generating positive value and then invest additional, disproportionate resources to make the product offer more attractive to the next subscriber who is “on the bubble” in terms of committing to buy.

This is not as easy as some may believe, as performance measurement must be drilled down to the micro-targeted level , which many news media organisations are not currently equipped to calculate.

(Segmentation can occur along many dimensions. For this exercise, it is assumed the initial segmentation scheme will be micro-targeted by acquisition channel, delivery frequency, and original subscription term — the “CFT segment.”)

As can be seen in this chart, because subscriber segments almost always have widely varying degrees of financial performance, the goal is to pinpoint and pursue for growth those segments that are profitable. Note that this strategy comes at a cost to the company, as a decrease in price might attract another subscriber, but it will be at a slightly lower margin than if the discount was not offered.

Pursue growth in those areas that are profitable.
Pursue growth in those areas that are profitable.

But, as just delineated above, the relevant metric is not whether the next subscriber is less profitable than the prior one. Instead, it is whether it is profitable at all. If it is, then it should be pursued to optimise value.

One immediate objection that arises from circulation managers is that such a strategy can endanger the profit performance of current profitable subscribers, which leads to price erosion and some loss of the surplus value extracted.

For example, commodity industries have such a high degree of price elasticity that there is only one price. And as soon as one price is adjusted upward or downward, all prices adjust immediately and emphatically.

Our experience is that this is generally not true with news media subscriptions.

As has been documented elsewhere, a news media subscription is not a commodity in any sense of the word, and the customer offer is sufficiently complex to shroud its market price. However, because the product does demonstrate characteristics consistent with supply and demand, a more attractive offer is likely (in the long run) to attract more customers, without dooming the company to losing its best subscribers.

How can a news media company quantify how much it should spend to acquire new profitable subscribers?

Once an existing segment has been identified as profitable, the question becomes how to proceed in order to generate incremental subscribers from that segment. To facilitate this approach, a news media company must have explicit, quantifiable guidance on starts segments that can be targeted for profitable growth.

The key is to know the surplus value of each and every start in the existing segment. Referring back to the earlier example, an average start in a segment may be forecasted to generate a lifetime value of US$100.

But this number is not only its lifetime value — it also represents the starting point for growth. In other words, US$100 represents the potential headroom that is available to invest in acquiring another start to generate incremental value, while providing an investment ceiling not to be exceeded.

Use Big Data to understand where to focus financial and manpower efforts.
Use Big Data to understand where to focus financial and manpower efforts.

Fortunately, Big Data can provide just such guidance, in the form of micro-targeted performance curves. As seen in this chart, every start (or segment of starts) can be quantified along a start’s three key drivers. Two of them — weekly net margin and retention performance — are represented by the location of the gold star relative to the two axes.

In this case, 4,132 seven-day starts with a three-month term from the door crew channel were forecasted to retain for 31.2 weeks (on average) and generate a net margin (circulation revenue, preprint revenue, newsprint and ink expense, and delivery expense, among other factors) per week of US$2.20 (also on average). These starts incurred an average acquisition cost of US$32.49.

Multiplying the first two numbers and subtracting the third number yields a lifetime value of US$36.15 per subscriber, which equates to a payback in excess of 100%.

The location of this gold star is then compared to the location of the black breakeven curve, which represents the various combinations of weekly net margin and retention that will allow a start to break even but nothing more (i.e., a lifetime value of US$0, or a rate of return of 0%) at the current cost per start (i.e., US$32.49).

The further the gold star is above the breakeven curve, the more profitable that subscriber segment is. With a payback in excess of 100%, it is no surprise to see such a large visual gap between the gold star and the black breakeven curve.

As discussed earlier, what will likely need to happen to generate more sales? The news media company will have to improve its offer in some way. But the nature of that improvement varies greatly, depending on which of the three drivers is employed.

The most obvious example would be to reduce its introductory subscription rate, which will reduce weekly net margin. This will, in turn, cause the gold star to shift downward, closer to the black breakeven curve.

Ideally, every time the company reduces price, more subscribers are added — at lower levels of profitability, but still positive since it is above the black breakeven curve.

This decline in price and net margin is represented by the red vertical line that connects the gold star to the breakeven curve; it quantifies exactly how much the weekly net margin can fall in order to attract new profitable starts.

In this example, a decline in weekly net margin from US$2.20 currently to as low as US$1.04 would allow this segment of starts to garner incremental subscribers while avoiding unprofitability.

A second example as to how a news media company might generate new profitable subscribers would be a willingness to take on incremental subscribers that retain at levels lower than the current average of 31.2 weeks.

How much lower can retention fall before the start becomes unprofitable?

The blue horizontal line that connects the gold star to the breakeven curve shows us. In this example, a decline in average retention from the current 31.2 weeks to as low as 14.8 weeks would allow this segment of starts to garner incremental subscribers without losing sufficiency.

A third way to motivate more subscribers would be to actively manage the cost per start.

Generally speaking, an increase in cost per start in a given segment should engender more starts, whether in the form of creating a greater incentive to the vendor to find more starts by expanding its reach to more marginal ZIP codes, greater or more frequent direct mail solicitations, or perhaps even in the form of creating a greater financial incentive directly to the prospective subscriber (e.g., rather than just reduce price, also offer a US$20 gift card to the subscriber to “close the deal”).

Because each curve assumes a single cost per start, an increase in the cost per start is represented by a new green breakeven curve.

In this example, an increase in average cost per start from US$32.49 to as much as US$68.47 would allow this segment of starts to garner incremental subscribers without losing sufficiency. In other words, this news media company should be willing to spend up to US$68.47 to acquire new starts with the same weekly net margin and lifetime retention.

Think about that: The company is already generating 4,132 highly profitable starts while spending US$32.49 for each start. This analysis demonstrates that it can spend a lot more and generate incremental starts that are still profitable.

Although these three examples depict how each driver could be managed while holding everything else constant, the most common and practical option for news media companies is to create a hybrid solution in which some combination of decline occurs in two or all three of these drivers, e.g., reduce net margin and retention, increase cost per start and reduce net margin, and increase cost per start and reduce retention.

Any of these combinations will allow the segment to grow while simultaneously pushing the gold star downward and/or to the left, or move the breakeven curve upward, such that the gold star and breakeven curve meet.

As you may recall, at the start of this article, a question was posed as to how much a company should “spend” to acquire new subscribers. The reality is that the source of the “spend” to acquire a new subscriber is sometimes explicit (e.g., higher cost per start) and other times implicit (e.g., pursuing lower retaining subscribers).

Either way, news media companies need to accept that true optimisation requires the capture of all profitable subscribers, and this necessitates “spending” more to acquire that next profitable subscriber.

One other essential point to realise is that these performance improvement requirements are unique for each segment of starts, since each collection of starts (typically within a single acquisition channel, delivery frequency, and subscription term) has its own unique performance characteristics.

Thus, its distance and placement from its own performance curve will be unique.

As a result, there is no universal set of performance curves that can assist a media company. Each channel-frequency-term (CFT) segment has its own curves, and thus its own unique solution to generate incremental profitable subscribers.

In sum, performance curves offer a quantifiable road map for newspapers to follow in pursuit of incremental profitable growth. By following the concrete markers that performance curves can provide, media companies can move closer to optimised investment in subscriber acquisition.

About Jim Fleigner

By continuing to browse or by clicking “ACCEPT,” you agree to the storing of cookies on your device to enhance your site experience. To learn more about how we use cookies, please see our privacy policy.