Who should do this Project:

• Businesses considering offering a subscription discount
• Businesses unsure of the right subscription discount to offer and not currently offering a subscription discount*
• Businesses looking to boost their subscription profitability and not currently offering a subscription discount*

*If your business is already offering a subscription discount but you'd like to make sure it's the right one, reach out to your Ordergroove CSM for a personalized unit economics analysis. They'll work with you to find the best offer structure for your brand.

Higher discounts can lead to higher profitability

Brands offer a variety of incentives for subscribers, but the most common are % discounts on subscription orders and free shipping. A common but very understandable misconception is that offering a discount on subscriptions will hurt your business’s profitability. This misconception stems from a lack of awareness of factor variability. Rather than assuming a change only in your discount amount, we have to also take into account the higher discount’s impact to subscriber behavior - and thus, order repetition/retention and your business performance.

In our 12+ years of working with DTC brands offering subscriptions like Peet's Coffee, Walmart, L'Oreal, and Dollar Shave Club, brands offering strategic subscription discounts will almost always make a higher profit per customer; and thus overall. Whether you're just getting started with subscriptions or you're a subscription veteran looking to improve the health of your program and business, this project will teach you how to assess where your business margins stand for subscriptions and how to attract more subscribers to your program while still making an even greater profit. So let’s begin.

Step 1: Pick your product(s)

Which products should you run this exercise for? The unsurprising answer is all of them, in theory. But for brands with larger product catalogs, that may be difficult to do at scale. We recommend prioritizing products with one or multiple of the following attributes:

• High repeat purchase rate via one-time transactions
• "Refillable" qualities (ie actual product refills, routine products like evergreen coffee and teas, etc.)
• Products with higher profit margins OR lower ones - this project will teach you how to make the most out of either pool.
• Top-sellers via one-time purchasing
• (If already offering subscriptions) subscription-exclusive products
• (If already offering subscriptions) top subscription sellers

Step 2: Lay out your business economics

A business’ unit economics are essentially the breakdown of profit and spend from and for each customer that engages in commerce with your business. They’re ultimately what decide your business’s success. A business with poor unit economics will not be profitable, and thus successful. Unit economics include the following:

Customer Acquisition Cost (CAC): The cost that your business spends to acquire 1 customer; including all marketing spend.

Average Order Value (AOV): Average revenue per order.

Cost of Goods Sold (COGS): Product and fulfillment costs.

Gross Profit (GP): This is your AOV - COGs; essentially the actual profit your business generates post cost to produce and fulfill your product.

(Here’s a longer breakdown of unit economics, if you’re interested!)

You’ll want to find your AOV and COGS (then calculate your GP) on a per order basis for this Project, and also calculate Lifetime Orders.

Your COGS should include your shipping and fulfillment costs; so if you offer or plan to offer free shipping for subscriptions (which we highly recommend, as it can cause an up to 70% cart abandonment rate if you don't), you should include this cost per order shipment.

Lifetime Orders: The average number of orders a customer purchases with your brand. If you already have a subscription program, you should use your average subscriber lifetime orders. If you don’t and are net new to subscriptions, you can use your one-time purchases lifetime orders per average customer.

As a reminder, here are the metrics you should note in your free calculator. Once you input your baseline metrics, the necessary adjustments will reflect in the new discount column - all fields requiring you to input your personal metrics are highlighted in green.

Step 3: Find your current customer lifetime value (CLTV)

Let’s use these Order Economics and your Lifetime Orders to find your CLTV. Here’s the formula for CLTV:

CLTV = GP x Lifetime Orders

The reason we don’t use AOV to calculate CLTV is because Lifetime Value means your profit post COGS. So we use GP instead, to factor in these costs.

A lot of folks confuse CLTV with Customer Lifetime Revenue, which is AOV x Lifetime Orders, or your revenue before you factor in costs of fulfillment and production. 

Add your CLTV to your metric comparison table. As a reminder, you can download a simple template for this here.

Step 4: Apply research-backed data estimation

Recent consumer research from UPenn Wharton School of Business shows that subscribers on average made 1.15 more purchases from a brand per month than before subscribing to a product from that brand. Assuming the most common subscription cadence of monthly, this is 1.15 additional purchase for each order in your baseline Lifetime Orders metric once your customer becomes a subscriber.

Researchers also found that subscribers spent an average of $27.45 more per order than before they were subscribers. About 40% of the subscribers increased their purchases by $15 or less, and around 14% increased by $40 or more. However, as we can't apply this proportionately to your business (each product and brand has very different costs and proportions), we'll keep your adjusted AOV flat in this next step of our Project.

Let’s apply these learnings to your expected subscription offer model.

Step 5: Account for subscription impact to your metrics

Your baseline CLTV should be noted in your worksheet (template for that here) - we’ll compare this to your anticipated CLTV with an adjusted offer to see which is more profitable for your business.

Our research has shown that for every order a customer purchased from a brand before subscribing, they made an additional 1.15 orders post subscribing. So if your lifetime orders was 1 before subscribing, we could expect them to make an additional 1.15 orders post subscribing.

Take your number of Lifetime Orders; for each order in this number, you should add an additional 1.15 orders. So let's say your baseline customer lifetime orders was 1.8 orders. To get your adjusted lifetime orders post subscribing, we can expect to see an additional 1.15 orders per each of the 1.8 orders that was the average. So 1.8 + (1.15 x 1.8).

Here’s a full breakdown of the adjustments to your metrics our calculator will make:

And now, let’s test out a discount.

Step 6: Test out your new subscription offer

Most brands offer between 10 to 25% off all subscription orders. We recommend starting out with 10%, which is the average offer profile for some of our subscription-first brands. You should run this exercise regularly, making adjustments with your CSM to the anticipated impact to recurring Lifetime Orders based on the increase to your discount/offer. 

Here’s an example before and after to demonstrate the impact to a subscription program incorporating a 10% subscription offer. We've filled out the provided template with these mock numbers to demonstrate what yours should similarly look like with your personal business metrics. The calculator will already have pre-filled formulas to calculate your GP post offering an additional subscription discount, and all fields requiring your personal metrics are highlighted in green.

Step 7: Assess and analyze

Even with no calculated increase to the AOV post subscription (research has shown this can increase by an average of $27.45, but we kept it flat to be on the safe side), this example offer analysis generated a 1.75x Boost to total Customer Lifetime Value when offering a 10% discount. It might seem counterintuitive, but offering subscribers a higher discount can actually increase your profit margins.

What did your offer analysis output look like? What was the impact to your Lifetime Value? 

Step 8: Apply your learnings

Here’s how to apply a discount to your subscription offer natively in Ordergroove. As we mentioned, we recommend applying whichever discount you land on for a short period of time (we recommend at least 2 months to give your customers time to enroll) and then assessing your results. Don't forget to style your enrollment offer for maximum enrollment (more on that here)!

If you'd prefer to test this live in a true A/B testing format, our team is currently working on the ability to A/B test subscription offers out within our product, in early development. If your team is interested in early access to this feature, please reach out to your Ordergroove CSM for more details.

Step 9: Analyze and adjust continuously

Work with your Ordergroove CSM to continuously analyze your offer’s performance and make adjustments. You can extrapolate impact to your business’s performance using your initial offer performance. Here are the metrics you should be sure to capture:

• AOV before offer vs. after
• Lifetime orders before offer vs. after

Using these differentials, you can extrapolate and apply the estimated impact to your program proportional to the discount you offered. For instance, for an initial adjustment from 0% to 10% subscription discount, if your AOV increased by $15 and your lifetime orders increased by 2x, you can apply the logic that for every 5% increase to your discount, your AOV can expect to increase by $7.5 and your lifetime orders can expect to increase by 1.4x. Run different analyses to understand what mix of offer discount and output impact is the most profitable for your brand’s particular COGS and GP.

Suggested Modules

• How to style your enrollment offer