How to Win the Game of Consumer Subscriptions with Michael Hurnaus

0:01Boom! Shake the room, Fire Nation. JLD here and welcome to Entrepreneurs on Fire. brought to you by the HubSpot Podcast Network, the audio destination for business professionals with great shows like I Digress. Today, we'll be breaking down how to win the game of consumer subscriptions. To drop these value bombs, I brought Michael Hernoes and the EO Fire Studios. Michael previously worked at Microsoft and Amazon before founding Tractive, the market leader in GPS tracking and health and wellness monitoring for cats and dogs. And Michael also angel invests in B2C subscription businesses. And today, Fire Nation, we'll talk about the key piece in subscriptions that most people get wrong.

0:42We'll talk about churn, how to avoid it. We'll talk about the hardware business when it comes to subscriptions and so much more. And a big thank you for sponsoring today's episode goes to Michael and our sponsors. The Hustle Daily Show, hosted by Juliet Bennett-Ryla, Rob Litters, Ben Berkley, and Mark Dent, is brought to you by the HubSpot Podcast Network, the audio destination for business professionals. The Hustle Daily Show brings you a healthy dose of irreverent, offbeat, informative takes on business and tech news, like a recent episode on hackers versus casinos, where the hosts talk about MGM Resorts and Caesars Entertainment and the devastating potential of cyber attacks.

1:18Listen to The Hustle Daily wherever you get your podcasts. Many EO Fire listeners have launched non-food franchises, and Fran Bridge Consulting has guided them. Fran Bridges founder and frequent EO Fire guest, John Ostenson, has done more placements than any other in the country and his service is free. Sign up for a consultation with John or get a free copy of his book, Non-Food Franchising, at FranBridgeConsulting.com. Michael, say what's up to Fire Nation and share something that you believe about becoming successful that most people disagree with. What's up, Fire Nation? Glad to be here. Well, one thing that a lot of people disagree with is what I often hear people say when I talk of what I have done in the past or what my company is about, that they also had this idea or if they just had this idea in the past, that would have been amazing.

2:09And it's really not about the idea. I very much disagree on this. I think it's 95 % is execution of any idea or any startup. I think it's 5 % is the idea and the The biggest chunk really is execution and the team, of course. Michael, today we're talking about how to win the game of consumer subscriptions. In Fire Nation, you're about to find out why Michael is the guy to chat about this with. Because you have a passion, Michael, for subscriptions and specifically the recurring revenue model. How did this passion come about? Well, I worked at Amazon about 10, 12 years ago. And that's where I first came in touch really with a subscription business.

2:53This was in the very early days of Amazon Prime. Obviously, back then also Netflix started. And when I worked at Amazon, I worked on Kindle Fire, which not really is a subscription business. But at the end of the day, you buy the hardware, you buy some content, and it's kind of a subscription component. You have the hardware login. And that really what I loved. And I love this fact that you can lock somebody in with their hardware and then regularly sell the content. And fast forward a few years in 2012, I founded or co-founded my business, Tractive, where we sell GPS tracking devices for cats and dogs.

3:35And from the beginning, I wanted to really look into this business model of subscriptions. So to this day, we've manufactured various products for pet tracking. and you typically buy one piece of hardware for around 50 bucks and then there is a monthly required subscription. And we've really worked on this very hard over the last 10 years and have become the global market leader in that space. Fire Nation, you need to get excited about recurring revenue models. And we're going to talk about how and why, but I really want to specifically start with pricing, Michael, because that is such a key piece in subscriptions.

4:14And frankly, you've seen it, I've seen it. So many people get that piece wrong. What advice can you share with Fire Nation on this topic? Yeah, as you say, pricing is probably the most important, one of the most important things when you look at subscriptions. For me, we have tried a lot in our own business. I'm an angel investor in several subscription businesses as well. So I've seen a lot of those things. And the one book that I recommend to everyone is called the choice factory. It talks a lot about how people actually choose different pricing options, why they choose different pricing options.

4:52And I think that the one example that a lot of people out there probably know is some of the things when you give the customer options between different subscription types, always provide them in threes, give them three variants. And people typically tend to look to the center one. So give them a monthly, a yearly and a two-year option. most people will choose the annual one give them three different pricing tiers most people will choose the center one so nobody goes for the most expensive one nobody goes for the cheapest one or a lot less people and so that's that's one of the very easy things in terms of pricing and then I think you have to have in your subscription business a way to test different prices and to actually see how you get people into different pricing tiers.

5:40Sometimes it's just a very minor change on one of those options that will completely change the permutations of customers of what pricing model the people will actually choose. So it's really about you in the way you present it. We all typically know this most popular option, but it's really about the dollar up or dollar down stay just below the critical pricing tiers that below$100, stay below the$10, depending on really what subscription you have. Those are very much the easy ones. And I think one also very much relevant one is if you're an early stage company, or if your company needs cash, or you want to avoid the financing round, try to get people into the pricing tiers where you sell longer subscription terms.

6:32So if you have customers sign up instead of monthly, they pay annually or for two years ahead of time, even if they pay you less per month. But this cash advantage has at least us at Tractive helped so that we never needed a financing round and that we were able to grow the business for the first eight years completely bootstrapped. So those are probably the most important things that I look at when I discuss pricing. Now you can look at pricing and apply what you just shared, Michael, and still have problems because churn can just happen at an obnoxious rate when you're not doing things correctly for your clients.

7:11It's such a pain point for businesses when they do all the work to get the leads, to convert them, to get the clients, and then to lose them. How can we reduce churn to the smallest amount possible? Exactly, JLD. Churn is, after pricing, probably the second most important thing, if not the most important thing. And when some of my startups ask me what's the most important thing to reduce churn, I always say make a great product. If people use your product, they like your product. in the Netflix scenario, for instance, if people use it, if people are engaged with it and they watch the movies, they will actually continue to pay for it and don't have a problem for it.

7:53So that's the key point is that you have a great product. Another important thing is to look at the sleaky bucket very early on in the life cycle. When you start getting your first subscriptions out, monitor churn very closely. I always say make it very easy to sign up to get the customer into the subscription, but also make it easy for your customers to cancel. That might be counterintuitive, but if people have a nice offboarding experience, it will be a lot easier for them to come back as well. They believe that or they understand that you're a serious business and that it's easy to come on.

8:32And if it's easy to get off as well, they will much easier come back and that will also solve a lot of the churn. I think one thing that's often overlooked by subscription companies is that there are actually two kinds of customer churns. There is involuntary churn and voluntary churn. So voluntary churn, it's clear the customer says, I don't want this service anymore. I want to cancel my subscription. And then involuntary churn is things like credit card expired, insufficient funds in the bank account. And those are typically one to two thirds of the churn. So I tell my startups all the time, work on both.

9:10Understand what percentage of your churn is actually involuntary. What is coming from credit cards? What is coming from PayPal? What is coming from insufficient funds in bank accounts or other technical reasons? And suddenly you have two things to optimize. And churn naturally goes back if you increase engagement, if your customers actually use your product and like your product. Obviously, that makes it easy. And maybe another point that is extremely important is when your customers decide to churn or to cancel, ask them why they want to churn. And we used to in the early days, we used to first let the customer cancel or churn and then ask them why they churn.

9:55We have for a long time now turned that around and we ask the question first. We ask the customer, why do they actually want to leave us? We give them several different options, and depending on what option they choose, we always give them another way out that keeps them in the subscription. Somebody says, I have lost my attractive GPS tracker. We offer them a free replacement device because we want to keep them in the subscription. If they had a problem with customer service, we try to give them an immediate callback. If they lost an accessory, we give them a free accessory. So we really try to keep the customer at that point.

10:31And you'd be surprised how many people you actually can get back at that very point. And maybe one last thing also at the very end, when customers really say, okay, no, but I want to turn now or I want to cancel now, we allow it. And then on the cancel confirmation screen, we even give them an option and say, automatically start my subscription again and let them pick a date because some customers might just want to use this seasonally or when they have money again. And that's also where you can recover one or 2 % of your churned customers. So there's a lot to talk about churn, but I feel like those are kind of like the key points I would highlight.

11:13Oh, that was so much gold. And Fire Nation, if you can improve 1 % to 2 % on all those points, that really starts to add up massively over time. One thing I want to double back on that I really agree with was making it easy as possible to cancel. I mean, again, that sounds counterintuitive, like Michael mentioned, but you've got to realize, I mean, man, when you're the person that's trying to cancel, if you find it frustrating to cancel or hard to cancel, and a lot of companies make it as sneaky and hard as possible, all that does is frustrate the crap out of the person, make them hate or very much dislike the company, they'll never come back.

11:48If you make it super simple, super intuitive, then when people are like, you know what, I kind of missed that product, that service, they'll come back because they know that if they ever want to cancel again, it's super easy and that you honor that. You don't try to make it sneaky or conniving or trickster. I mean, I will not touch companies with a 10-foot poll because of that very reason. And we have a lot more to talk about around this topic when we get back from thanking our sponsors. The fourth quarter is here. It's time to hit your revenue targets, finish strong and win the quarter. But before you can win Q4, you have to close deals.

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14:46They represent every type of non-food franchise, from healthcare to dumpsters, youth sports to business services, specialized senior care to pet grooming to insulation and floor coatings. John has served as an Inc. 500 franchiser, a multi-brand franchisee, and he does more placements than any other in the country. Sign up for a free consultation call with John today or get a free copy of his book, Non-Food Franchising, at FranBridgeConsulting.com. That's FranBridgeConsulting.com. Michael, we're back and I want to talk about the hardware business. Can hardware businesses add or change to a subscription business?

15:26And if so, let's talk about some good ways to do that and some examples that you've seen. Yeah, I think not every hardware business really lends itself to a subscription, but there's quite a few that have done very well on it. And in our very case with Tractive, our customers understand why there is a subscription component because our device technically is a smartphone. It comes with an integrated SIM card. So it's an easier sell for us. Also an easier explanation because there's monthly cost behind it for us as a company. So that's why people, when they buy the hardware, are willing to also or understand why there is a subscription.

16:07And there's some businesses that really don't lend themselves when there's hardware. I have one example of, and it happens to be an Austrian company as well, They used to develop very amazing microphones for audio recordings, podcast recordings. And their business model was, or they wanted to desperately switch to this business model where there's also a subscription. So they built this best microphone out there in the market. And people have just bought microphones for 50 years. And they just used to buy this upfront and no additional cost afterwards. So it was just impossible for them to sell it.

16:47And unfortunately, that company is not around any longer. But there is a lot of companies, I think, that have shown fantastic results with subscriptions. I think Peloton is a great example with a hardware piece, fairly expensive compared to the product world that I live in or we live in. But it's still they have a very, very high sign up rate for their content piece and for the software. and people understand and very low churn rates. I think Blink cameras is also another example that you might know from Amazon. They have a good reason because they say, hey, you pay for the storage. So as long as you can explain and not artificially, just find something to squeeze out a subscription, I think it's possible.

17:33And of course, the other amazing ones that I keep looking at is the Whoop or the Auras of this world. So the fitness bands that often now have the model where they just sell you the subscription and you get the hardware for free. So without an upfront cost on the hardware, slightly different model. But here people feel like it's a lot cheaper for them and to a certain degree actually financing for them. So those are the models where I see it work. Clearly also when there's like a food subscriptions, when you get something shipped regularly. but in cases where you artificially just try to attach a subscription desperately that can often lead to failures as well.

18:19One of the reasons why I believe that Peloton works so well and I actually have a Peloton so I'm speaking from experience is the fact that it's a high upfront product that you're paying. For me it was like$2 ,500. I think it's come down a little bit since then but now I'm paying like$50 a month for the service And I almost feel like if I stop paying that monthly service, I've almost like wasted that 2 ,500 bucks that I spent. So I have like a deep sunk cost kind of mindset with that. So that can be something to think about for people that are like, well, you know, in the business that I'm in or the hardware business that I'm in, it is a pretty high upfront product charge.

19:00Well, guess what? Like that can actually be a benefit as well. Whereas if I bought something for$50 and it's a$35 a month subscription and I decide to cancel it, I'm not going to really feel like I've really wasted that much money because it's just an initial$50 up front. Now, if we, and by we, Michael, I mean Fire Nation, we're looking to invest our time, our money, or both, into a subscription business, what are the key metrics we need to look at? Yeah, there's a ton of different ones. Maybe let's start with the very obvious ones. Depending on what kind of subscription you have, you want to clearly monitor the sign-up rate.

19:41How many people get to the screen where they see the different subscriptions and what percentage actually signs up? Sounds very easy, right? And then which plan do they actually choose? And then, as mentioned before, churn rate is a very important one. fix the leaky bucket early, fix it at the beginning, and so you don't lose more customers than you get in your funnel. So churn rate would be a very important one. And then split it up between involuntary churn, voluntary churn. And what I always look at too is look at growth rates, month-over-month growth rates, year-over-year growth rates, and look at the different permutations and how the different cohorts work.

20:27So if you think about getting in the subscription business and you don't know what cohorts are or how to measure them or what to do with them, this is for me the first thing that you should actually do. Get yourself familiar with subscription models. Get yourself familiar with reading cohort charts and what they actually mean. There's something called the dollar churn or money churn and user churn. So definitely keep those separately too. There's often ways when you can upsell a customer in a subscription. You want to sell them more basically to get more money out of this customer by providing extra service, premium service, whatever your subscription business might be.

21:09And so it could be that you have less customers the next month, but your dollar retention is actually higher than 100%. So you actually make up for that churn as well. So measure the revenue that's coming in from a cohort, measure the users that stay on for this very cohort and make yourself familiar with some of those charts. And then the other ones are also all the information around upsells. Can you actually upsell a customer to a more premium subscription? What percentage of customers can you actually upsell? And there's also a lot of external metrics or things that people often don't look at when I talk to them is how do my subscriptions behave in different countries.

21:58We started out in Europe initially. Now we are Europe and North American predominantly. And especially in Europe, every country is different. Churn is much higher for pretty much any subscription business. People turn much higher in France, in Italy, in Spain. People in Germany start to get more and more used to subscriptions. That was always a hard sell in the past as well. UK is quite nice. So it really depends on which country you actually sell your subscription in. Some of the reasons here are, for instance, in France, a lot of customers use one-time credit cards. So they have the credit card number that's valid only for one purchase, and then they get the next one digitally in their banking app.

22:42So that means this customer is automatically going to churn for you and would manually have to reactivate or create a subscription again. A lot of people want that so they don't get into any sneaky subscriptions, but that's really what you have to know and understand as the one offering the subscription. And I think another key metric, especially when evaluating existing subscription businesses or businesses that I intend to invest to, I look at what percentage of the paying customers, especially on annual subscriptions, still use the product or engage with the product after the first month, after month six, after month 12.

23:24This is really a key piece of information because simply because somebody's paying doesn't necessarily mean that they're using the product. And if that's the case, eventually they will churn anyways. So that's really where, uh, where I try to look and where I try to optimize same in our business to make sure that people use the product are happy with the product comes really down. What I said at the beginning, it's all about having a good product and then people are more than willing to pay a monthly fee for it and yeah, have them engage and be happy. I think those are the key ones that I really look at and definitely compare with other subscription businesses.

24:04What do they do? Monitor when you sign up for Spotify or when you cancel your Audible. What do they do? Take notes of that and test a lot. It's a lot about AP testing for sure. Michael, you have been raining down value bombs on Fire Nation the whole day about how to win the game of consumer subscriptions and Fire Nation. If you don't have pages and pages of notes, then that either means you're driving or you're not paying attention. So definitely come back, give this one a listen. So many great takeaways. If Fire Nation wanted to connect with you, learn more from you, what is your call to action for us today?

24:44My call to action is follow me on LinkedIn. If you're interested in subscriptions or subscription businesses. I keep sharing interesting information around this and around our attractive business, of course, as well. So follow me, follow attractive. And thanks for having me, Fire Nation. Fire Nation, you're the average of the five people you spend the most time with. You've been hanging out with MH and JLD today, so keep up the heat. For links to everything we talked about, visit eofire.com, type Michael in the search bar, and the show notes page will pop right up. Michael, thank you for sharing your truth, knowledge, and value with Fire Nation.

25:20For that, we salute you and we'll catch you on the flip side. Thank you, Chad. Hey, Fire Nation, a huge thank you to our sponsors and Michael for sponsoring today's episode. And Fire Nation's successful entrepreneurs are great at three things, productivity, discipline, focus. That is why I created the Mastery Journal so that you can master productivity, discipline, and focus in 100 days. And we're talking step by step. So visit It's themasteryjournal.com. And I'll catch you there or on the flip side. The Hustle Daily Show, hosted by Juliet Bennett-Ryla, Rob Litters, Ben Berkley, and Mark Dent, is brought to you by the HubSpot Podcast Network, the audio destination for business professionals.

26:00The Hustle Daily Show brings you a healthy dose of irreverent, offbeat, informative takes on business and tech news, like a recent episode on hackers versus casinos, where the hosts talk about MGM Resorts and Caesars Entertainment and the devastating potential of cyber attacks. Listen to The Hustle Daily wherever you get your podcasts. Many EO Fire listeners have launched non-food franchises and Fran Bridge Consulting has guided them. Fran Bridge's founder and frequent EO Fire guest, John Ostenson, has done more placements than any other in the country and his service is free. Sign up for a consultation with John or get a free copy of his book, Non-Food Franchising at franbridgeconsulting.com.