Today's podcast features Steve Weiss and Directade CEO Rob Reynolds and they discuss how to build a scalable subscription business & understand your data.
Episode Transcript — How to Build a Scalable Subscription Biz w/ Directade CEO Rob Reynolds
00:01 Announcer: You're listening to the "Spend $10K a Day" Podcast brought to you by the performance marketing experts at MuteSix. This is your source for cutting-edge insight into the world of online advertising from the team with more Facebook case studies than any other agency on the planet. Here are your hosts, Steve Weiss and Stewart Anderson.
00:26 Steve Weiss: Alright guys, welcome back to the "Spend $10K a Day" Podcast! Today, we have an awesome guest, Rob Reynolds from DirectAde, and you're gonna learn today how to build a scalable subscription business and how to understand your data. Rob, welcome to the podcast! Tell us a little more about yourself.
00:44 Rob Reynolds: Hi Steve, thanks for having me. Yeah, so I'm Rob Reynolds, the co-founder and CEO of DirectAde. I started DirectAde about two years ago, and we are focused on providing an analysis to our clients that enables them to make the best marketing decisions. I've been working in direct marketing for about 20 years. I cut my teeth at 1-800-FLOWERS, and then, I was at the Book of the Month Club, all those companies. And then, I started the MP&A group at Guthy-Renker.
01:12 SW: Wow! Cool! Those are two...
01:13 RR: Yup! And for those who aren't familiar, Guthy-Renker is behind Proactiv like infomercial, legends in the biz.
01:19 SW: You've worked with some of the biggest subscription companies out there from Proactiv, Guthy-Renker, Book of the Month Club.
01:26 RR: All the old-school direct marketing guys, yup!
01:29 SW: Wow!
01:30 RR: And then, over the last few years, there has been this obvious trend of all these new direct-to-consumer companies coming out, for very good reasons. Great products, and they've been really focused on growing quickly, and building those products out. But with all that spend and growth, there was clearly a lot of marketing optimization that's possible. So if you're spending a tons of money, you can improve that business. So that's why I started this agency.
01:56 SW: Cool! So you and your team specifically focuses on data.
02:02 RR: Yes.
02:02 SW: How do you pull data from your subscription box company...
02:05 RR: Exactly!
02:05 SW: And not only just pull it, but how do you understand it? How do you make that data actionable? So literally, based on this amount of retention, this amount of churn, we're gonna do this, and...
02:15 RR: Exactly, right! And it's what... A lot of companies know the right data to pull; it's how to look at it the right way. So if there's the KPI, and then, how do you use that KPI and apply that KPI to your business so you can make it better?
02:27 SW: Could you give me an example of some of the biggest mistakes that a lot of these subscription box companies are making?
02:32 RR: Yeah. The biggest one, I think... Every company knows they need... Well, basically, every company knows; they need to know LTV, their customer lifetime value. So what is a customer worth? And lots of companies build out LTV, but they don't... There's two different issues, usually. First one is how to apply that to their business. So they're usually focused... They'll usually apply it to the customer CPO. So their CPO elaborates of what you can spend to get the customer. But then, there's also calculating it. And there's lots of different ways you can approach that.
03:06 SW: Let's go into that. That then...
03:07 RR: Yeah. This is the crux, right.
03:08 SW: The million-dollar question is... Everyone wants to know how do you evaluate LTV? How do long does it take to get LTV? How do you trust the LTV data? A lot of our partners, if you're from box companies, subscription companies, and there are... The age-old question of because... How do I look at data from a cohort on LTV? Let's start, number one: How do you get LTV? What is the best most efficient way?
03:34 RR: So the approach that I see most companies taking, which I don't like, is a top-down approach. So what they do is you take the P&L, you take your company, your budgets, and how the company's looking, and you take some of those numbers to get averages. And then, you're trying to back into like, "Okay, what do we think our customer is worth last year?" And they're using that to build up their budgets for the next year, but that's not how a subscription business works. What our approach is, you take all those details at the lowest levels, like returns, churn, by cohort, by source, by offer. So breaking out customers at a very low level of detail. You add up all those details, and then...
04:14 SW: So one second, you said... You hit on something really interesting. So before you calculate LTV for your business, you have to break down your LTV by cohort. You can't look at it from a whole big picture. So you gotta look at where people...
04:27 RR: Right, then you're dealing with averages.
04:29 SW: Yeah, exactly, so you're breaking down by offer. Offer's very important. What offer... Did someone come in from a free month? Did they come in from...
04:36 RR: Free shipping.
04:37 SW: Free shipping? You gotta separate those people. And then, you...
04:40 RR: Absolutely.
04:40 SW: Number two, traffic cohort. Not only do you wanna... There is gonna be overlap, obviously, but now, you wanna break down, "Okay, all the people who came in from Google. All the people who came in from... "
04:50 RR: Facebook, from Instagram.
04:51 SW: From Facebook, from earned. And then, what's number three? You have offer, traffic channel...
05:01 RR: I think source and offer are the two largest, and then, time.
05:04 SW: Time.
05:05 RR: So if your... Or volume that you're spending. So Facebook, if you're spending 10,000 a week now, and you go to 100,000 next week, that's going to affect where you're showing up. So it isn't like Facebook is this... At 10,000 and 100,000 will look the same. So you need to be looking at how that turns over time.
05:23 SW: And also, I assume ads. You could even separate the ads that...
05:26 RR: The creative, yup.
05:26 SW: Yeah, creative from... Add that in the cohort. So I guess, big picture, what you do is you... The first way to calculate LTV is number one, start splitting off your data into different categories.
05:38 RR: Right, yup. And it's that approach of getting all those lowest level of detail numbers in; looking at it by all those different cuts and cohorts. And by doing that, you can also run scenarios. So what will this look like in the future if my return rate jumped in half? Or if my churn rate, I was able to make improvements to the customer, what... Experience, and customers stuck around longer.
06:05 SW: Okay, so let me digest this. Number two, you wanna understand, you wanna start looking at churn rate by cohort, or by...
06:18 RR: Whatever level you can.
06:19 SW: Yep. And then, number two is just looking at the churn rate by cohort. And then, number three, based on now this lower level data, this churn rate, now, what you're trying to do is you're trying to do some form of predictive model. You're trying to predict based on...
06:34 RR: Exactly, based on the data you have, and with making little tweaks on things you know will change like my shipping rate. My shipping costs are going up, so you can tweak that in the future. Or whatever tweaks you need to make for the future. Or if you're in Q4, your media costs are going up because advertising goes up in Q4. So you can make little tweaks on that. So it's figuring out those parts so you know what you can spend on a customer at whatever level of detail you can get to.
07:02 SW: And then, number four is obviously action. So your churn rate, you got your cohorts. Now, you have a baseline LTV data, and then, there's action.
07:13 RR: Yep. And getting that information into the hands of the people who need it, the media buyers, at the point where they're returning to buy more media.
07:21 SW: What technologies do you use to do all this work? 'Cause obviously, doing this work, just myself, I don't think it's possible to do this work by hand.
07:31 RR: A lot of it's Excel.[laughter]
07:33 SW: Really?
07:33 RR: Yeah, yup
.07:34 SW: Tell me about some tricks. I'm an Excel guy too, but tell me about some tricks of the trade when it comes to doing some of these pivot tables, some of these really granular...
07:42 RR: Yeah, it's what you would expect. So the pivot tables. It's not... It's less about the... Excel is an amazing tool. So it can do a lot of things that people don't use it for. It's less about the tool, and more about the approach and the recommendations. So how are you using... It's like a pen and paper you could use to do many different things. You could draw with it, you can write words, but it's Excel; kind of the same thing. It's, "What are you using this tool to create recommendations?" That's applying it.
08:08 SW: Okay. So tell us how if you were tasked with... Here's a box company, here's all their data. You're gonna go, you're gonna, obviously, do exactly what you just said: You're gonna put all that in Excel, you'll create pivot tables, and then, you're gonna make recommendations. What are some of the recommendations that right off the bat, usually, from your time at Guthy-Renker, from your time at the Book of the Month Club what are some of the things almost consistent that you recommend almost every subscription biz will help to lower churn.
08:36 RR: Oh, sure. Oh, to lower churn, okay.
08:38 SW: Well, lower churn, increase LTV.
08:40 RR: Okay, alright. Well again, 'cause it could be... Lowering churn always helps, but sometimes, you always wanna do that, but then, there's all those other things you could do. So consistently, a better customer experience where people are happy with the program, keeping things fresh in the box. And so, you're... The difference is when you're selling in a subscription business, you're talking to the same customers all the time, and you have to remember that. You're not always talking to new customers like in a retail business. So by the simple fact that you are talking to the same 100,000 customers, you need to keep it fresh to them so that that new box that they're getting... BarkBox does a great job of this, where there's themed boxes coming out each month, and there's different toys in there, and that keeps it fresh and new.
09:28 SW: How at Guthy did you pick products to put in the boxes? What was your model of figuring out which products should go in the box?
09:36 RR: Great question. So with Proactiv, you were getting the same product every two months or every three months, whatever your frequency was, but that was a replenishment model. So this is someone who has acne, they wanna keep getting Proactiv, they love it. And we were able to keep it fresh by having new bonus items in there, coming up with new accessory types of items like moisturizers and things of that sort. So that did keep it new and fresh, especially, very important on the acquisition part. And maybe one person wants to get that rotating brush, and somebody else wants the green tea moisturizer. So that helps a lot with your cost per order. And then, for the average customer, they just want that product every two to three months. And that will work for some products, but if for other products, you need to keep it fresh and new, like a Blue Apron or...
10:30 SW: And do you always lead... One of the strategies that we've always suggested is always lead with... If you have a plethora of different boxes, always lead with your best box; get someone in with your best box.
10:41 RR: Right.
10:43 SW: Let's talk acquisition for a second. And we talked LTV, that's really interesting, I'm sure we'll go into that later, but talk acquisition for a second. What have been some of the strategies that you've seen, obviously, leading with your best box, taking the best ingredients out. What have been some of the strategies that you've used at Guthy and at the book club to really bring this full-fledged user who's excited to get the product?
11:06 RR: Well, so the book clubs are a lot easier 'cause you had new books coming out. So the new Stephen King book comes out, everyone wants that. And the trick there is it's commodity, and you want them to buy it from you. You don't want them to go to Costco and buy the Stephen King book. So that was always the trick there. On Proactiv, it's a challenge if you're sending out the same item every month, it's challenging; you have to think of ways to keep it fresh for the customer. That's...
11:39 SW: Interesting. So two interesting thoughts: Number one, one of the biggest things is on Facebook, one of our strategies is whenever you're on subscriptions, we always exclude our current customers from our ads.
11:51 RR: Oh, definitely.[laughter]
11:52 RR: Yeah.
11:53 SW: And tell us how important it is to really not badger your current subscription clients with ads or with emails or... Just let them...
12:00 RR: Well, so ads get lots of really... So a few points here. If you're hitting up your existing customers with ads on Facebook, and they're seeing free shipping, and they're seeing all these new bonuses that they could get, that gets dangerous because you may get churn from that simple reason. It's also getting... Another part would be getting your subscription kits to the right size so that they're not... You wanna size it the right way so that they don't have a lot of extra product sitting around. And like for Dollar Shave Club. So they're really good at telling you, "Replace that razor every week." Or they want you to replace these things so that you're getting rid of that and moving on to the next one, so you're ready when that new box comes. You're not looking at a bunch of five razors still, and you'll be like, "Oh, I'll use the first one, and I don't need anymore, I'm gonna cancel." So that's their challenge. So if you're in a replacement type of kit, you wanna get them to replace those right away.
12:57 SW: Replace those. Yeah, and you can predict it.
13:00 RR: Compliance.
13:00 SW: You can almost predict... If you have a product where there needs to be replenishment... And I know you guys did an amazing job of predicting when the user will need another box or need more Proactiv, et cetera, et cetera.
13:11 RR: Yup, that's a big part of it.
13:13 SW: From a call center perspective, I always find this interesting 'cause I have a call center background. Where can a call center rep... Or let's say you have an outsource sales team, what can they do when someone calls up and says, "Hey I'm thinking about cancelling my subscription." What are some of the ways to really keep that person in by offering 'em something for free, or a surprise in their next box?
13:35 RR: Yeah, it's start with why they want to cancel. So ask them, don't... I've seen it where... And there are ways to do this creatively online, but you don't want them to just say, "I wanna cancel," and you say, "Fine, I'm gonna process that." You wanna follow that up with, "I can do that today, that's not a problem, but can I ask you why you want to cancel?" And you should have scripted responses for the top six reasons or so of why people are cancelling. And there shouldn't... If you're getting it to the 15-ish reasons, that might get a little bit too difficult for a rep to memorize those, but you wanna get reps who are specialized in cancels... We call it cancel save. And you want to just address what those issues are.
14:21 RR: So if they say they have too much product at home, their compliance is often maybe it's working fine for them. If you're not complying on Proactiv, and you don't have acne, that's okay, you don't need it as often, and you can set up a new frequency, shipment frequency for them. So you tell them, "Hey, you know what? That's okay. What if we ship this to you, instead of once every three months, once every six months? Would you be interested in that?" And a lot of people just say, "Yeah, that sounds fine. I love the product, I just have too much."
14:50 SW: So really, if you're crushing subscription business, and you really wanna scale, whether it's ads, whether it's scaling, selling more products, the key is, is making that backend of a funnel, that call center person have multiple rebuttals to getting... So you need to have six, seven, eight rebuttals to keep someone in. And really, I see so many companies we work with that don't invest the amount of time into the backend of the call center to really keep people in. They're really good at... We were working with one company, I'm not gonna mention, about four years ago. And on the acquisition side, we thought we were doing great. We sold over 100,000 subscription boxes over a six-month period.
15:32 RR: That's great.
15:33 SW: But they didn't have any process in the backend. So I would actually have to go in there and try and help their call center reps, give them some ideas on how retain these users. I'd have different rebuttals. That's what I knew coming from the lead generation world. I think that's a part that no one talks about, and...
15:50 RR: It's huge, right.
15:51 SW: And tell me more. When does it make sense to have your customer service in-house versus outsourcing to a third party?
16:00 RR: I've seen both, and they can both work. If it's outsourced, you just need to be watching it. You should have someone in-house who's managing that; that is their entire job and they're on it, and it's about the reporting. Whether it's internal or external, I think it's about reporting and listening to calls. You need someone in charge who is listening to these calls, making sure that whether that rep is outsourced or in-house, that they're following the scripts, they're treating customers with respect and listening to them. 'Cause very often, these are the customers that you want to save, or that you can get back at some... Even if do go away right now, win-back campaigns are huge, unless you're... I don't think it's that popular, but they were huge for every place that I've been. [chuckle] They're a huge part of the business.
16:51 SW: Oh, win-back campaigns are... They're huge for every business. Segmenting all the people who churn, having specific Facebook ads, specific emails...
17:00 RR: And seeing why they cancelled.
17:01 SW: And why they cancelled, yeah, right.
17:01 RR: Having that as part of their cohort, so you wanna record why they cancelled. And so that, when you approach them again, you can address that. If they say, "The product was too harsh," or something, and you come up with a new formula that's more gentle, you can approach them with that messaging.
17:16 SW: So I used to have my marketers... So I ran a lead-generation company, I had a call center. And one of the biggest keys was I always would have my team, my marketing team listen to the calls. I'm just saying, "Just listen to the pain points of the customer, and then, integrate that back into the ad." So highly recommend that strategy. If you do have a subscription business, and you are getting churns, start integrating your marketing team with the call center. Start having... And listen to the calls 'cause they could then apply that to their ads, they could apply that with their win-back ads, their retention emails. I feel like there's this disconnect between both sides.
17:55 RR: Well, it's work.
17:58 RR: And don't be lazy and you should be listening to the calls. These are your customers. You're hearing direct feedback from them if they're not happy with your product or if they wanna cancel. It also could lead to finding issues with your product. So if you have some QA issue that you're not aware of yet, the first chance that you have of finding out about that is probably social media 'cause there... People are gonna tell you, "Hey, your bottle's leaking, what's going on guys?" Or they're gonna be calling and telling you that your bottles are leaking, and you need to be on that, by the way.
18:26 SW: So being a big data guy, Rob, you're one of the experts in my network and friends who do big data, tell us how much of an impact, 5% reduction of churn can have on your business?
18:39 RR: It's gigantic.
18:41 RR: That's like it's...
18:41 SW: Just how important this is?
18:44 RR: If your customer is worth a hundred bucks, at 5%... Now, I'm trying to do the math in my head, I'm not going to. It's huge. A 5% improvement in churn is gigantic, whether it's per month or over the life of that customer. That by having more, a higher LTV, where also, you're gonna make up that and increase your LTV. So you could do cost reductions, but then, you could be sacrificing your product. So it only can come from a few places, and churn is the probably the best place, and where you should really be focusing.
19:19 SW: Yep. And I think one of the biggest, I would say mistakes that the subscription box companies make, especially ones that raise a lot of money, don't understand their data that, you know. I see out there is that they spend a lot of money to get that first consumer, to get that first purchase. They're focusing more on... And I guess it's the nature of the beast, it's the venture capital, ecosystem where there, you have to grow, grow, grow, grow. And now, you've cannibalized your market, you're spending a lot of money to get that first customer. And in most cases, from being a data guy, can you back that out? How do you understand what you could pay? What's the most you could possibly pay to get a customer at scale?
20:00 RR: Oh, it completely depends on the business and what product you're selling. And I thought you're going... It's the like, "Why do companies do that?" So why would you focus so much on acquisition? Acquisition, of course, is very important; that is where our customers come from. And the better of a CPO you can get, the better or the more profit you think you can get. But you can chase after that last customer; it's all that like incrementality. So if you're chasing that last thousand customers on the 20,000 you already have, they could be below water. And you need to know what your cost per order is on that extra, that last thousand customers that you had. 'Cause if you're... Let's say your CPO allowable, what you can afford to spend on a customer is $50. Your average might be $25 on all 20,000, 21,000 customers you bring in, but that last thousand could be $60, which means you're losing 10 bucks on every customer, or it's 10 bucks above where your level is.
21:00 SW: And so, I was curious with Guthy 'cause they're really good with data. How do you calculate the gross cost of a box of like, "What did this specific box of Proactiv... "
21:11 RR: Like cogs, or?
21:12 SW: Yeah, cogs.
21:13 RR: Oh! Well, we knew what our cogs were.
21:16 SW: Well, did you guys have... Once you hit certain volume numbers, the cogs went down, or...
21:21 RR: Sure, yeah, absolutely. So we knew what the break points were if... And for growing for Guthy-Renker, we were at scale for many things that we did. So it really wasn't an issue. But on startups I see, where if you could just get to 5,000 of producing an item, you're at a dollar a cog. If you're at 10,000, you're at ¢50. But so, if that's the case, you're spending the same amount of money, you should just order the 10,000 at ¢50. It's like some of those cost savings, really start to come in.
21:53 SW: 'Cause we work with a lot of box companies that have multiple stuff in their boxes, and they have new boxes. And a lot of companies we work with, they have new stuff coming in the box every month. So the question is, is understanding the cog source, there's a game of sourcing the products, and then, figuring out from listening to their customers. And I had this grand idea a while back that I gave. I was like, "Why don't you ask your customers in the call center what they wanna see in the box the next month?" Or, "Why don't you use the call center to dictate the product development?" And I think if you could do that, and I'm a big believer that what you're looking for, not only what you should of how to build your product, is within your customers.
22:31 RR: Oh, absolutely! Every company I worked at has done customer surveys; whether it was quarterly, and annual, larger like health of the brand surveys, where you're... On a more ongoing basis, you can ask them, "Hey, how did you like this kit? What would you like to see next month?" And you just keep getting that feedback ongoing. And then, on a more annual basis, you could do the health of the brand and ask them lots of questions of where else did they buy product, and... 'Cause maybe, like in the case of the book clubs, they're also buying books everywhere else. These are heavy book readers. That's who was joining these book clubs.
23:11 SW: So really...
23:11 RR: So that's knowing your customer.
23:13 SW: Yeah, and that's why I just keep coming back to thinking that eventually, to scale a subscription business, you need to have customer service in-house. I don't know how... I'm sure... Did Guthy-Renker have it in-house?
23:25 RR: We had both. And so, we had probably... It is all about being able to scale, and then, fluctuate. So the benefit of having it in-house, some, we had maybe half. Let's say we had half in-house and half outside. The half in-house, you put a lot of training in. They're specialized in areas like cancel-save, or things like that. And then, the outsourced guys, during times of the year where we were getting a lot more calls, that part would fluctuate.
23:50 SW: Got it.
23:50 RR: So you could maybe... Sometimes, it's 10% additional, and sometimes, it's half of the reps that we had. And they would handle just a lot of the other calls that we were getting like, "Where's my package?" and things like that. So they were trained on other specific things. But having it in-house, there are certainly advantages. It's the being able to scale up and down quickly 'cause if you have 50 reps in-house, and they're not busy enough, that's where you have staffing issues.
24:22 SW: Interesting. Yeah, that's... I always just keep thinking just from a data perspective, the amount of insight you can get from having the call center on the other side office.
24:33 RR: Oh yeah.
24:33 SW: There's some great outsourcing companies. Nothing against them, but just having that insight, being as close to them as possible, I think.
24:39 RR: Yep. When I was at 1-800-FLOWERS, this is back in the '90s when they were still a startup, considered a startup before they were public, we were on the same... I was in marketing. We were on the same floor as the call center, and we were... They did a really good job of getting their employees, even if you were in marketing working at a store one or two days a year, working in the tele center one or two days a year.
25:01 SW: That's amazing.
25:01 RR: So yes, so you knew what customers were talking about, and you had a good appreciation for the reps, and...
25:07 SW: Cool. Next topic I wanna talk to you about, man, is price testing. I think price testing for a subscription company is nine-tenths of the game. And when do you bill someone? Do you bill them monthly? Do you bill them every three months? And how much product do you send them? So I think... Tell us some of your strategies around price testing and how much product you send people.
25:29 RR: Sure. So I would start off by saying it's gonna be different for every company, and for every product. So there's... And you need to test. You need to test what will work for you. So if you're able to do a cadence of every month, and a Dollar Shave Club or something like BarkBoxes every month. So you have these coming out every month, and you're able to do that, and you're able to bill every month, that's great. In some companies that I've worked at, it's we would do every two months or three months, but the billing, sometimes, was once every three months, which gets to be a little high. Or you can space it out to be every month. But as all things, you just have to test into it 'cause I've seen it work all different ways in terms of what frequency, what works for that product in terms of shipping. And then, for billing, what do customers want? Is it the price tag high enough that you should be breaking it out every month?
26:24 SW: And what are some of the testing strategies? Obviously, you have what you have that you know works?
26:31 RR: Yeah.
26:32 SW: And then, you have some of the stuff that you wanna test as far as pricing. We always say, "Let's split that off into a new funnel. Let's really target a specific segment of Facebook, or some specific segment of one of our other traffic channels to really testing it out." What has been your... Do you have a system for testing that you had, or?
26:50 RR: Yeah, we built a system to track source and offer at Guthy-Renker, and built a similar system at Bookspan, where... All the book clubs. So that was tracked. That internal system was tracking where all these orders were coming from and what offer they were taking. And you could put all of these additional notes on there that was telling you which test cohort they were in. So if you had... Okay, these are... All these guys are free shipping, and you wanna read... Or all of these guys got this one premium that incentivized them to join. So you wanna see that across brands, or on a brand over time, across different sources. And it's just being able to slice and dice all of these customers that are coming in into these cohorts so you can get a good test read six months later. 'Cause you can't get that test read right away, and that was always the challenge with marketing. It's like, "Hey, we ran this test last week. How does it look?" And we're like, "It's only a week later, we need to wait six months."
27:54 SW: So there's a huge nugget. Everyone wants data right now.
27:57 RR: Yeah, right.
27:57 SW: Everyone wants data...
27:58 RR: Well, we have the data, but you can't... [chuckle] We don't have the results.
28:01 SW: Yeah, and I think you hit the nail on the head. There's a maturity aspect to the data and subscription businesses. You can't make snap call judgments off a week of data, three weeks of data, a month of data. You need six months. And that's what makes subscription businesses a lot more complex, am I right?
28:17 RR: Yes, absolutely. And that's why you wanna put a few irons in the fire also. So don't run one test, and then, have to wait six months hoping that it worked. Run three, and then, see after six months; hopefully, one of those does work, and just keep always being in a testing mindset.
28:34 SW: That's great advice. I think a lot... I wish a lot of people would really understand that this is... You need to see how these consumers, or how these customers really behave under the rules of your subscription over X period of time.
28:47 RR: Yeah, right.
28:49 SW: Interesting. So before we wrap things up, this is just... I've learned a lot. I say, selfishly, I do these podcasts, so I learn a lot from other people 'cause I've never built a subscription business myself from scale. I've always seen it from the marketing side of the guy who's driving the ads, and driving and the new customers, and trying to put the whole piece of the puzzle together. But for all the listeners to our podcast who are struggling with subscription... They have a subscription business, they're really trying to scale it, they're just starting out, what advice do you give them? What should they be doing? What's one or two things that's actionable, they could walk away from this podcast?
29:24 RR: That's good. The most important would be to know your LTV, and be very careful with what you do with that. So know what your customer lifetime value is, apply it to your cost per order. You could be growing your business and losing money if you're not... If you don't know what your customer is worth, and you're overspending to bring in those new customers. And then, another part would be to know if you don't... You can talk to me, but no cash flow. So subscription businesses are very expensive in the beginning. So if you're driving to scale, and if you know your customer lifetime value, you can spend at a loss for the first few months, because you're gonna make up that money over time. So a subscription business, you should be thinking of this customer over the course of two or three years. And after six months, maybe you're at break-even. You've just made back your media CPO, and that's how you can scale faster. So you should be spending... Many companies I've seen should be spending more money on media. They've undervalued their LTV. And there are the companies that are overspending on their LTV or on their CPO 'cause they're not clear on what their LTV is.
30:38 SW: That right there is really interesting 'cause I actually agree with you that companies are scared... They're in a scared mentality or mindset that, "Oh my God!" They've just seen the CPO rise and they've seen all these variables that don't have any effect on their...
30:52 RR: They're looking at the frontend.
30:53 SW: Yeah.
30:54 RR: And they're like, "Well, our... Why did you spend that much money this week?" "Well, my goal was to bring in 2,000 customers, so that's what I had to spend to get that." That's not a good answer, right?
31:02 SW: Yeah.
31:03 RR: And then, you could... And I've seen... I've had clients where they've moved to a subscription business from one shots, and after six months, they're like, "We're losing money. Our P&L looks awful." And when I dig into it with their finance guys, I go, "Yeah, this is exactly what... What did you guys expect? Because you're collecting $10 a month now, over the course of, let's say, year-and-a-half. So you would get $180. But you're only six months in, so you've only collected 60 bucks. Previously, your one-shot was 80 bucks, so you think you're short $20 after six months. You're like, 'Oh my God! We're down! We're losing money! This is awful! Stop what we're doing!'"[laughter]
31:41 SW: Just 'cause you haven't collected that money yet.
31:43 RR: Yeah, you have to wait. It's you have to know the business. You have to know your cash flow. That cash flow is a huge part of subscription business.
31:51 SW: Yeah, it makes so much sense. I think understanding the LTV... LTV, LTV...
31:56 RR: LTV is... Yep.
31:57 SW: You're the guy, so if anyone has questions about LTV, just reach out to you directly.
32:01 RR: Yep.
32:01 SW: Rob, tell everyone how to get ahold of you if they wanna really understand their data.
32:05 RR: Yep, rob@directade, D-I-R-E-C-T-A-D-E, like lemonade, dot-com.
32:12 SW: Cool! Thanks so much for coming on.
32:15 RR: Thanks for having me!
32:16 SW: I've learned a lot. I think you'll probably get a lot of people reaching out to you asking questions about how to calculate this magnificent LTV number. And another awesome podcast! Thanks, everyone, for listening!
32:27 RR: Thanks![music]