John Warrillow runs Value Builder System, a company that helps entrepreneurs improve the value of their customers over time. He specializes in increasing lifetime customer value and has written a couple books on the subject, one of them being Built to Sell (2011) and most recently, The Automatic Customer (2015).
A Quick Preview of the Podcast:
- How to apply a standard business practice in a non-standard industry
- How to create a subscription model to increase lifetime value of a customer
- How lifetime value of a customer impacts your business
To See These Tactics In Action:
To See The Transcript:
Tim: Subscription models are often thought of as an option reserved for SAAS or media companies and that’s often what compels many entrepreneurs to get into those business models. But what if you could apply the subscription models to other businesses like the flower business? What could that do for the lifetime value of your customers? John Warillow, the creator of the Value Builder System, shares a case study from his new book, The Automatic Customer which demonstrates how applying a standard business practice in a nonstandard field, can massively increase the lifetime value of a customer and offer new customer acquisition opportunities as well. I’m Tim Page, the conversion educator here at LeadPages and this is ConversionCast.
Hey John, thanks so much for coming on Conversion Cast. I’m excited to have you here.
John: Hey thanks for having me Tim.
Tim: Absolutely. So we’ve got an interesting one and this is a case study from your book and I’m pretty excited to talk about it. So can you share with us the results that this particular person was able to get?
John: Sure. So they were able to convert the typical lifetime value in their industry for lifetime value of the customer at around $29 to flip that on its ear and create a lifetime value of the customer of over $4000.
Tim: That’s pretty ridiculous so I’m excited and one thing that I love that a lot of people don’t know when it comes to Conversion Cast is a lot of times I don’t know what it was that was done to get the results, in this case you know I just know the results. So I’m pretty excited to get into it. But before we do that, I would love to hear a little bit about you and kind of what your company is all about.
John: Yeah. Sure. I run a company called the Value Builder System where we work with entrepreneurs to help improve the value of their company over time. And we’ve written a couple of books on the subject. Build to Sell to was published in 2011 and more recently the Automatic Customer: Creating a Subscription Business in Any Industry was released in 2015.
Tim: This case study is from the automatic customer is that right?
John: That’s right yeah.
Tim: Okay. Tell us a little bit about the person in question.
John: Yeah. Well it’s [[0:02:07]] [indiscernible] runs a company called HBloom and they got into the business of selling flowers. But they took a really unique approach to the typical industry standard way of selling flowers.
Tim: Cool. I love it. Alright, so you know this is a pretty big jump in lifetime value of a customer and I think a lot of people probably hear that and go I think that that is probably impossible but clearly there’s a way to do it and you know, [[0:02:33]] [indiscernible] was able to do it. So can you kind of share with us exactly what was done?
John: Yeah. He’s focused on creating a subscription model in the flower business. So the traditional way that people sell flowers in America is you have a flower store, right? You try to intercept customers that are going home at night, may be on a wedding anniversary to buy flowers. So you have very expensive real estates and very costly to win a customer and they very rarely come back.
So you compare and contrast that to what Panda did which is he took the business of selling flowers and he adopted the subscription model. So we focused in on the cohort of customers. These are restaurants, spas, hotels, who buy flowers on a regular case because they always want the professional look of having flowers in the reception table. They said we’re going to sell you flowers every two weeks. We’re going to come and deliver a new bouquet of flowers. We’re going to get rid of the old ones so you can get back to the business of selling hotel rooms and spas and you don’t have to worry about the flowers being fresh.
Well by doing that he was able to get his customers when they buy they buy now on a subscription basis and the lifetime value of the subscriber for Panda is now more than $4000.
Tim: Oh for sure and it creates a whole lot of confidence in the business’ ability to generate revenue because you know, they’ve got these subscribers that are coming back month after month. It’s not oh you know here comes mother’s day, here comes Valentine ’s Day, here’s comes the anniversary. It is it’s on a consistent basis, which is really cool.
You know, I think there are a lot of ways that other businesses that traditionally wouldn’t be looked at as a subscription model to be able to implement something like this. I know that you talk a lot about that. Can you share with us a couple of ideas for how somebody could come up with opportunities to have a subscription model in their business?
John: Yeah because subscriptions are typically thought of as the domain of software companies, right, media companies.
John: But the book is all about how do you create recurring revenue in mostly any industry. So I think that what you want to do is just imagine if you could reach inside the head of your ideal customer and reprogram it to think of how – to get them to buy from you in the way that you would ideally like them to buy from you.
Plot that on a white board. So imagine what the ideal relationship would look like with a customer and then start to formulate a subscription offering based on what’s on the whiteboard.
So I’ll give you a good example. So let’s say you install swimming pools and that’s your business installing swimming pools, and that’s your business installing swimming pools, selling the chemicals and so forth. Well that’s your business. The recurring, you know, what you would really like customers to do is not only buy the installation package from you but you would also like them to come to you to to open the pool in the spring, deal with the chemicals throughout the summer and then close in the fall.
So you polo that ideal relationship out on a whiteboard. You imagine that you get hired to do the opening you know, rebalancing the chemicals every two weeks and you get hired to do the closing and you say that’s our subscription. You know a do it for you, hassle free, annual pool maintenance contract and that’s going to cost you Mr. Customer, $99 a month. You can get back the business of enjoying your swimming pool rather than worrying about whether you got enough chlorine in it.
So you’ve taken the ideal customer relationship, what you would ideally like your customers to do with you, hire you to install, rebalance the chemicals and so forth and creating a subscription offering. Again that’s a silly example from the swimming pool business but you could take that in virtually any industry and imagine what does it look like in an ideal scenario to buy from us as a company and then program that or create that as a subscription.
Tim: Yeah that’s really fascinating. I’m curious have you –you know, in working with folks and you know, kind of advising different folks to go out and become consultants and go out and help folks do this, have you found any major mistakes that folks are doing as they’re trying to I guess subscriptinize their business if you will?
John: Yeah. The biggest mistake is people don’t spend enough on sales and marketing because imagine for a second that you take the typical way we sell the customers is transactional. Right? So in the old days when you bought a box of Microsoft Office, you went into Staples and you spent whatever $400, $500 bucks and you got the CDs right and loaded them up.
Now when you buy Office, you spend $99 a year right.
John: So Microsoft’s revenue is instead of getting that nice $400/$500 check upfront now they’re getting it in $99 installments over the lifetime of the value of the customer.
John: As a small business, a lot of small businesses say oh all we’re getting and revenue is $99 now. You know we can’t afford to market to these customers anymore because we’re getting such a small check every month or every year. What you really need to do is think about your business in terms of the customer’s lifetime value. Because it’s only when you look at the life of the subscription do you start to realize how much you can spend to acquire a customer. So in the case of [[0:07:40]] [indiscernible] Panda at HBloom for example when you’re getting $4000 of lifetime value from a subscriber, it’s not unreasonable to spend you know, $800, $900, $1000 to acquire a single subscriber. There’s a ratio that you want to remember in this world of subscriptions which is your LT [[0:08:00]] [indiscernible] ratio. What you’re looking for is at least a 3:1 meaning there’s at least 3 times the amount of lifetime value that it cost you to win a customer.
So in the case of Panda if he’s got $4000 of lifetime value, he can spend $1200 or $1300 to acquire a subscriber and still meet that threshold of 3:1. So that’s really the number you’re looking to try to get to 3:1.
Tim: Interesting and even if you have a kind of higher dollar amount for that initial sale if the lifetime value for the customer is you know, is much lower than you have less money to spend on acquiring a customer which would be the time that you will be afraid to actually go out and invest that money in acquiring that customer.
John: Right. So I mean at ConstantContact for example subscription based email provider, you know their lifetime value of the subscriber the last time I looked at it was around $1200 or $1300 lifetime value. Their cost to acquire a subscriber again the last time I looked at it was around $400. So they’re just almost getting that 3:1 ratio. At HubSpot one of their competitors, you know, the all in one marketing platform competes with InfusionSoft they’re more like again the last time I looked at it around lifetime value about $25000 and their cost top win a subscriber is in the neighborhood of 7 grand.
So even though it cost them $7000 to acquire a subscriber it’s a huge amount of money they’re okay because they’re way north of the 3:1 on the [[0:09:34]] [indiscernible] ratio.
Tim: Very interesting.
John: So you know, your cost to acquire a customer in isolation is not that interesting. It’s really interesting when you look at it in context to what the lifetime value of the subscriber is. Again most professional investors, most venture capitalists, private equity investors, they’re looking for a minimum of a 3:1 [[0:09:52]] [indiscernible] ratio.
Tim: Yeah. Fantastic and a great way to do that is to figure out a subscription model that makes sense for your business that is how you would like to customers to actually – how you would like them to be customers and what method you would like them to I guess be involved and then a way that makes sense also for them as well. Put that together and make it happen. So I love that John. Thanks so much for sharing this on Conversion Cast. This is a really interesting case study and a few extra tidbits. So again thanks for coming on the show.
John: Thanks for having me Tim.
Tim: Alright, what an awesome episode. I love that because you can apply this in so many different business models and see some entirely new revenue streams for your business along with increase in lifetime value of your customer. Give you more opportunities to actually acquire a new customer and not to worry about how much money you’re spending as much. I just love this.
Now I’ve got a quick question for you. How long has it been since you’ve been at ConversionCast.com? No, really, how long has it been? If you haven’t been in a while, you may not realize that every episode we’ve started posting a nice little PDF guide to that episode. So right now, if you head to ConversionCast.com and you check out this episode with John Warillow, you’re going to see a little guide that you just click a little link and the opt-in form will appear. You enter your information and LeadPages will send you off a guide to the episode that you can use to help you implement that episode in your business. You’ll see the same thing for just about every other episode that we’ve ever posted. So head over there right now, ConversionCast.com. Check it out. Download the episode guide and of course, we’ll see you next week on Conversion Cast.
Listen To Discover The Exact Lifetime Value Strategy That John Used For HBloom