Improving customer acquisition rates and retention in subscription-based business models; the importance of Net Promoter Score

It is of little surprise that business models have become more subscription based. Companies benefit from a recurring revenue stream and greater revenue predictability. Consumers pay for time-bound access to goods and services, avoiding large capital expenditure when compared with buying the same access outright. However, as subscriptions become the dominant model, high customer loyalty and net promoter scores are needed to ensure consistent business growth. Given that customers are paying for access rather than ownership, it is easier to switch to competitive products at the end of contract terms. Crucially, this could be before customer lifetime value (LTV) has balanced customer acquisition costs, therefore yielding a negative gross customer margin.

Net Promoter Score

Net Promoter Score (NPS) defines the strength of relationship a company has with its customer base. Not only this, high NPS scores indicate the customer base is broadly willing to actively promote the particular product or service. Again, it is of little surprise that companies where this is the case tend to outgrow their industry peers. Provided the high NPS score is maintained, momentum economics can lead to exponential customer acquisition rates. Consider the situation where each promoter influences at least two further purchases. What follows, ceteris paribus, would be an exponential customer acquisition period.

NPS is a powerful indicator because it weights the scoring towards being classed as a ‘detractor’. What might initially be considered ‘good’ scores, seven and eight are counted as ‘indifference’ and do not skew the NPS calculation. Customers in this category are content, but their behaviour in terms of proactive promotion (e.g. referral rates) can be lower than those in the higher category.

Figure 1: Image Bain & Company

Customer scores of six or lower are counted as detractors, whilst only customers selecting a score of nine or ten are considered promoters. Detractors might even be profitable customers but offer potentially serious downside risk if they communicate their displeasure or indifference. By improving NPS we increase potential to acquire new clients whilst reducing the downside risk of customer churn.

Expectation of Value

If we are going to increase the chance of improving the NPS of a particular company, we need to consider closely the expectation of value of the prospective client and, as far as possible, consistently deliver value above and beyond that expectation. Simple examples from my personal experiences include noticing the first introductions of “Frustration Free” packaging from Amazon. I had received the items ordered, yet the shear ease of opening the box was instantly realisable. Secondly, I knew when I started a Spotify subscription that I was paying for access to a wide range of available songs. Yet on a regular basis I find myself thinking “ah I didn’t realise that <insert song name> was on Spotify!”, and a duly added it to one of my playlists. I’d be the first to admit my music taste is best described as ‘interesting’, but the point stands, in both occasions I experienced something that was above my expectations.

I have translated the above paragraph into the following diagram. It shows a simplified matrix between expectation of value and the value realised. Simply put, what was expected and how does it differ to what was received.

The line passing through the chart’s origin highlights equilibrium in expectation; what was expected was delivered. The yellow area in the top left-hand corner represents the greatest positive difference between what was expected and what was delivered. Conversely, the bottom right area indicates the greatest negative difference.

I have labelled the four zones produced in accordance with a subscription-based business model. I have also the colouration and indication from the Net Promoter Score diagram. Meeting or slightly exceeding expectation, worthy of a seven or eight selection on the NPS scale, results in a customer likely to renew. Yet it is where we comfortably exceed the customer’s expectation that we have the greatest chance of securing a referenceable customer and improving our NPS score.

How to Exceed Expectations?

This may seem a simple question, but the implications are far more nuanced than initial impressions. Consider the following scenario:

A head of department has previously used your product or service whilst in a different role at a similar company. Although not part of the decision-making process before, there is a clear requirement for this type of product at the current company. There is a selection of three competitive products, but the department head has been telling the team who have not used your product or service before, how particularly impressive it is.

It is clear at the beginning of the engagement that the head of department would currently score your product a 9 or 10 on the NPS scale. However, new circumstances mean that this is not continually assured. This ‘promoter’ position was achieved based on the previous experience. The risk with this individual is the “it’s not as good as I remember” reaction, either pre-contract or after delivery. As a result, any presentations of your product must be tightly relevant to the new company to ensure a chance of exceeding expectations once more. Take the time to clearly understand the situation, to understand the clear ways that your offering will add value to the company, but also to the individual team members. The largest opportunity to exceed expectations in this scenario sits with them and should be remembered during the service delivery.

In contrast, a new prospective client that has not used your product or service before might have different expectations, some of which might be easily exceeded. Concerns that your company might not have a large customer base could be dispelled by inviting the prospective client to your next customer event for example. Alternatively, a prospective client who might have bought smaller products from re-seller organisations, might not be aware of the full range of benefits available when purchasing direct from the supplier.

Of course, there are numerous other ways to exceed expectations. The point above was to illustrate that the individual situation will dictate the way and ease in which this can be achieved. Furthermore, whilst the above scenarios indicate point-in-time situations, if the following engagements or meetings do not meet expectations, the balance of power shifts out of favour. I will consider the impact of expectation vs. reality over time in another article.

In Conclusion

Companies offering a subscription-based product or service to need to ensure the continued retention of their customer base and increase customer acquisition. A clear way to do this is to try and improve the Net Promoter Score of the company, resulting in a higher number of active ‘promoter’ customers and reducing the reputational risk that ‘detractors’ can pose. Whilst there are a number of initiatives, this article argued the main mechanism for doing so was to always exceed expectations, substantially if possible.