Why is my product mix different in Acquisition and Retention?

This article discusses the evolution of the product mix over time in a subscription business. It is understood that we present a product offer of at least 3 Good/Better/Best type products

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Summary

Even if my KPIs are stable, my product mix changes due to product-specific retention rates and upgrade opportunities. As a result, even though I have an acquisition strategy focused on entry-level products, my overall product mix may be focused on mid- and high-end products.

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Long answer:

My subscription business involves acquiring and retaining customers while ensuring I lose fewer than I gain.

Consider the following situation. All my KPIs are stable, so everything is stable. My product offering, my prices, my retention rate, my number of subscribers. And let’s assume no major changes in trends.

Even with stable KPIs, I see a difference in product mix between acquisition and retention. This difference is much greater than my up-sell rate.

Initially, I mainly sell entry-level products. However, in the retention part of my business, I sell mostly high-end products.

How can such change occur despite strong stability? How can this change be more important than the upgrade rate?

Let’s look at the product mix at each stage of the customer journey.

1. Acquisition : advantage at low price

During acquisition, the product mix depends on convincing customers to commit to unfamiliar products. For this reason, the cheapest products are more chosen by customers since the financial risk is lower. The product mix will therefore favor entry-level products.

2. Retention : advantage at high price

In retention, we must encourage customers to keep using their product. We see that the more comprehensive the product, the greater the customer satisfaction and the greater retention. More comprehensive, and consequently more expensive, leads to higher retention.

In addition, customers, for whom the cost of the subscription is an issue, are eliminated during the first renewals. As a result, we observe higher renewal rates on more expensive products and among older customers. (“Older” = “with a longer tenure”)

Note: just because the price is high doesn’t mean the retention rate is higher. But it’s because customers are less price sensitive then, they renew more. On the other hand, there are more price-sensitive customers in the entry-level segments, therefore, the retention rate is lower there.

3. Upgrade : advantage to the next product

Of course, I work to increase my Average Revenue Per User (ARPU) by encouraging my subscribers to purchase a superior product. My ability to move my client from their current product to another will depend mainly on these factors:

• The price increment : the lower the price difference, the easier the upgrade,
• The service increment : the more basic the current product, the easier the upgrade,
• Customer engagement : the more customers use their product, the more likely they are to feel the need for more service.

As a result, the upgrade works better on entry-level products than on mid-range. Of course, on the product at the very top of the range, there is no possible upgrade.

4. Consequently, what is the impact on my product mix?

To summarize: I sell easily entry level products. I upgrade entry level products more easily. The higher the product level, the higher the retention rate. The upgrade moves my product mix towards mid- and high-end.

The evolution of my product mix depends on two KPIs: the retention rate and the upgrade rate (by product).

Still not convinced?

5. Example : the evolution of a sample

When my business is mature, Acquisition is only a small part of my total business. I cannot compare the product mix in Acquisition and in Retention since Acquisition is a snapshot of sales while Retention is the reflect of years of cumulated sales. To understand the evolution of the product mix, it’s better to take a sample at the time of acquisition and watch its evolution over the course of a few renewals. The observation is based on two parameters: retention rate and upgrade rate.

I sell a video streaming service:

• I offer my service in 3 offers Good, Better and Best.
• My initial product mix is ​​50% | 40% | 10%
• My Retention rates are 65% | 70% | 75%
• My upgrade rate is 15% from Good to Better and 5% from Better to Best

Table #1 : Product Mix calculation using Retention rate and upgrade rate

My sample moves towards Better and Best products at the expense of Good.

Now, using the same calculation method and the same values, let’s focus only on the evolution of the product mix over 6 renewals.

Table #2 : Product Mix by renewal

After only 2 renewals (Year #3), Better becomes the majority with 51% market share.

After 4 renewals (Year #5), Good becomes a minority.

Key takeaways

1. Each product has its own retention rate and upgrade rate ; my product mix will evolve no matter what.
2. I need to make sure my best products have the best retention rates, otherwise my ARPU will be down year over year. 💸
3. My initial product mix may not be ideal. It’s not big deal because product mix evolves. I can have an acquisition strategy based on entry-level products. And later, move my product mix upwards with an upgrade policy.