by Tiffani Bova
As a matter of fact, nearly four million people in the United States still subscribe to Netflix DVDs by mail. Even though the DVD service has lost nearly ten million subscribers over the past five and a half years, Netflix keeps it around because it remains tremendously profitable. The company makes an operating profit of roughly 50 percent on DVD subscriptions alone and doesn’t even have a marketing budget dedicated to this business. In many ways, the DVD business has funded Netflix growth, both with international (Market Acceleration) and original content (Product Expansion). Unfortunately, there is no way to know how many of those ten million DVD subscribers that churned are now Netflix streaming customers. That puts pressure on Netflix to continue adding good content, including licensed Hollywood content and original shows, to keep subscribers happy. It will be the right mix of original programming and popular licensed content that will be critical for Netflix’s growth strategy, both for top-line revenue and the reduction of churn.
NETFLIX
KEY TAKEAWAYS
Price hikes don’t always increase churn if the perceived customer value remains intact. You must be very careful not to use price increases to mitigate revenue loss because of churn. Otherwise you will find yourself creating an even greater trigger for churn.
Offensive and defensive ways to mitigate churn: In any (monthly) subscription service, each new month gives Netflix subscribers a chance to cancel the service. The best thing Netflix can do to proactively keep customers and make them reluctant to leave or “switch” is to offer great content that people are willing to pay for. It does that by offering both licensed (via Partnerships) and original content.
Netflix’s churn playbook: Incentivize customer to commit to longer subscriptions with price breaks, always give your subscribers something they can’t get anywhere else, leverage viewer data to provide a more personalized experience, and focus on your active subscribers—don’t just chase new ones.
When you pursue a Product Expansion growth strategy, you may in fact disrupt your current product with the new product. As Netflix expanded its offerings from DVD in the mail to online streaming, the latter absolutely disrupted the former. But as the context of the market changed, and customer entertainment habits shifted to mobile, Netflix was willing to lose 10 million subscribers in order to build a base of 104 million subscribers.
Although it wasn’t covered in this story, Netflix uses subscriber insights and preferences to help it shape which products and services to offer next. Its recommendation engine rivals Amazon’s. It would be safe to say that its most powerful and competitive weapons are the insights delivered by big data to help it achieve greater customer engagement and retention. Without the data, the Optimize Sales, Customer Base Penetration, Market Acceleration, Churn, and Customer and Product Diversification paths all become much less effective.
STORY
3
BLUE APRON
TOO MUCH ON THE PLATE
Consumer preferences for food have changed . . . changed radically. I call them seismic shifts.
—DENISE MORRISON, CEO of Campbell Soup Company
HOME-DELIVERED “MEAL KITS” ARE FORECASTED to have an annual growth rate of 25 to 30 percent over the next five years and become a $2.2 billion business—but that’s still just a rounding error in the multitrillion-dollar food industry. Blue Apron didn’t invent the ingredient-and-recipe meal kit service industry, but it drove it into the public’s consciousness and took off on an impressive growth run. Unfortunately, that initial success masked a problem with customer defection—churn—that unexpectedly tripped up the company just as it was celebrating early victory.
Blue Apron was founded in August 2012 from a commercial kitchen in Long Island, New York. Working from the notion that the market context was shifting due to the nexus of the Web; fast, modern delivery infrastructure; and a growing population of consumers wanting gourmet food at home, the company’s three founders (CEO Matt Salzberg, Ilia Papas, and Matt Wadiak) devised, packaged, and shipped bundles of ingredients and suggested recipes that consumers could cook by hand to create superior meals.
Blue Apron took off like wildfire—and within four years the company had shipped eight million meals. By that point, Blue Apron had grown sufficiently large to open its own fulfillment centers in Richmond, California (to serve the West Coast), Jersey City, New Jersey (the East), and Arlington, Texas (the rest of the United States). A fourth center, in Linden, New Jersey, was announced in early 2017.
In November 2014, in a quick shift (and in hindsight, maybe a premature move) to a new growth path, Blue Apron also began to pursue a classic Customer and Product Diversification strategy—opening Blue Apron Market, a cookware, merchandise, and cookbook store, and Blue Apron Wine, a subscription service that delivered to users six bottles of wine per month—to maximize customer acquisition cost by offering its existing base of subscribers more products to purchase. But was it too much too fast? As might be expected, there were setbacks: some health and safety violations at the Richmond plant reduced customer (experience) satisfaction because delivery times weren’t met as promised, which could be blamed on the rush of such rapid growth. But all in all, Blue Apron seemed unstoppable.
It came as no surprise that on June 29, 2017, Blue Apron went public—thirty million shares that opened at $10 per share were sold. That made it the first public company dedicated to meal kit delivery—and worth an estimated $3 billion. The future seemed bright indeed.
That’s when the dark clouds appeared. The first cloud came in the company’s first IPO quarterly financials. The company reported revenues of $238.1 million, better than market expectations—yes, but it also suffered a loss of $0.47 a share, versus the Street’s prediction of a gain of $0.30 a share.
Clearly something was wrong. By September, the stock price was off nearly 50 percent and hovering around $5 per share. Why the plunge? Two reasons: competition and churn. In the words of Techcrunch, investors were “concerned about customer retention and the looming threat of Amazon.” Suddenly Blue Apron found itself hit by a class-action “stock drop” lawsuit—making three main claims:
The company had cut its advertising just before the IPO, damaging revenues;
Problems with the Linden, New Jersey, center had slowed deliveries; and the big one—
The company was suffering diminishing customer retention—that is, greater churn—due to orders arriving late or incomplete.
The first two could either be explained or fixed. But for many, the last was the kiss of death for a subscription-based business. If you lose more customers than you gain each month, you don’t have much of a business at all.
According to an analysis, the company could lose 72 percent of its customers within six months, which puts a tremendous strain on the cost of acquiring new customers (CAC) fast enough and at an appropriate cost, especially in light of number 1 on that list above. As it stands, for Q4 2017, it reported 746,000 customers, down 15 percent versus a year earlier, and 13 percent from the prior quarter. In Q1 2018, customers decreased 24 percent YoY.
With revenues falling, the company was forced to institute a hiring freeze and, aggravating #1 in the class-action suit, further cut back on marketing, customer acquisition, and spending. As of August 2017, it announced that it was cutting over twelve hundred jobs at its New Jersey facility, which represented nearly a quarter of its total staff. In its latest earning, its marketing as a percentage of net revenue decreased as it continues to pull back on marketing. This is a vicious cycle when churn gets out of control. You end up cutting spending in areas such as marketing, sales, and customer service to save on costs, but those decisions will impact the company’s top-line growth and put even further pressure on its stock price.
Going back to the premise of Growth IQ—it is never just one thing. Diversifying and expanding a portfolio of products is
a calculated risk, but as is the case in many other examples you have seen thus far, often companies forget about the interconnectedness of the decisions they make to other parts of the business. In Blue Apron’s case, the good news was that it was growing—the bad news was that it was growing so fast that it wasn’t able to ensure that the rest of the company could keep pace. An example was when it announced the rollout of its expanded plan and menu options at the Linden facility it was opening.
At the time, it was only able to offer those new products to half of its customers, which negatively impacted the value of the monthly subscription. Since then, Blue Apron has completed the rollout, and now 100 percent of its customers have access to the expanded product offering. In its Q3 2017 earnings call, CEO Matt Salzberg said, “Our initial indications, although early, show improvements in both order rate and retention when comparing customers who received the product expansion to those who had not yet received it.” If products aren’t consistent, if you don’t meet and exceed customer expectations in a subscription business month after month, you will lose customers.
The fact that it had acquired so many customers so quickly should have been a huge competitive advantage. Why? It now had a base of customers that it could learn from. It could use purchasing habits, average sales price and “basket size,” recipe choices, and average revenue per customer to help it design future products. Anticipating what your customers may want next has helped Netflix and Spotify stay ahead of churn and offensively mitigate customer defection. Blue Apron could have done the same thing, but didn’t.
Meanwhile, attracted by Blue Apron’s early success, the market was being flooded with other meal kit companies, including Chef’d, Hello Fresh, and Plated—while giants such as Unilever, Anheuser-Busch, and Coca-Cola were making investments in food-delivery service companies. Then, in the midst of all of this uproar, the biggest hit of all came: Amazon announced its purchase of Whole Foods.
Had Blue Apron used its early advantage to focus its attention on retaining its current customers, that is, reduced churn by developing a reputation for personalized, prompt, and quality service, instead of capturing new ones as quickly as possible, it might have found itself in a much more defensible position. In another move from Blue Apron as it tries to navigate its way back to profitability and growth, it replaced its CEO in December 2017, after reporting its third-quarter earnings.
BLUE APRON
KEY TAKEAWAYS
Churn is the effect of decisions the company makes as it relates to product, product quality, customer service, customer experience, marketing, sales, and so on; it isn’t just one thing. Blue Apron may have gotten too far ahead of itself. When it chose to move to a new highly automated facility, it caused the company’s “On-Time, In-Full” (OTIF) rates to decline. That resulted in a cutback on marketing, so it wasn’t onboarding more customers than it could handle, which resulted in slower new-customer growth. Put those two things together and you will find yourself in a growth stall, one because you aren’t getting new customers, and two because customers you have are getting poor service and leaving. Now it has a brand perception problem and its competitors can market to Blue Apron’s base and entice them to “switch.”
Instead of expanding its own distribution and taking on all of the associated expense to handle more customers, maybe it could have explored partnerships to outsource the fulfillment business. With tight quality controls in place, this may have given it the best of both worlds, allowing it to focus on what it did best—acquiring new customers, marketing, and selling—and letting someone else take over the logistics, which has proven to be challenging for it.
With all of the expansion, Blue Apron left its core business exposed. Remember, Growth IQ has three components: context, combination, and sequence. Blue Apron was right on context and launched a product that the market and customers wanted. It could have done a better job on combination by ensuring that the internal infrastructure (people, systems, processes) could handle its rapid expansion, especially as it doubled down on Product Expansion and Customer and Product Diversification. Sequence is where it missed the mark completely. Timing is everything, and its push into new categories, new customer segments, new facilities, and new products for a new business proved too much to handle.
As competition heats up in the meal delivery industry, the cost to keep customers loyal naturally is increasing, as is the cost of running the business. A company should take a bit more time to nurture its base, grow the average revenue per customer, and use customer purchasing patterns to learn what it should do next. Pulling back on expansion and focusing on what it currently has should be the focus. As you learned in Customer Base Penetration, it costs less to sell more to existing customers than to recruit new ones.
PUTTING IT ALL TOGETHER
The bitterness of poor quality remains long after the sweetness of low price is forgotten.
—ALDO GUCCI
IT MAY SOUND OBVIOUS, BUT the best way to beat churn is to never create it at all . . . if only it were that easy. Many struggle with figuring out how to acquire new customers while keeping current customers happy in order to minimize churn.
Over time, successfully navigating the Churn path can open the door to diversifying customer and product lines—as long as you don’t do it to the detriment of service and Customer Experience, as was the case with Blue Apron. Measured moves are important in a subscription business. Churn can sneak up on you, forcing you to cut spending in areas you can’t afford to cut.
The real power comes when companies begin to consider the long-term value of an acquired customer (LTV, CLV), not just the onetime sale. Successful companies combine a focus on churn with a focus on LTV. As big brands such as Adidas, with its Avenue A, Starbucks and its Reserve Roastery, and Procter & Gamble’s Gillette on Demand continue to enter the new membership economy, there will be more and more focus on this particular path as another way to improve growth. Before a business can fight churn, it’s important to know why churn happens.
The most basic cause is that the product isn’t attractive, becomes less attractive over time, or loses value for the consumer. When consumers open their boxes and are underwhelmed by the product selection, are faced with lackluster quality, or discover that the price isn’t worth the experience, logical subscribers will leave.
Another potential issue involves trial offers. We’ve all seen onetime trial subscription enticements offered for free or a steeply reduced price. The first order is a no-brainer for the customer and gets people to take the plunge. But is the actual product valuable enough, over time, to persuade customers to keep paying for future shipments at full price? About 80 percent of consumers should stay past the initial shipment. If the number dips significantly lower, the trial isn’t inspiring members to remain for the next shipment. If you can’t retain acquired customers, it puts an incredible strain on your sales and marketing efforts, especially the CAC.
Focusing on retaining existing customers offers the double benefit of lower costs and higher returns. The probability of converting a new customer falls in the 5–20 percent range; for existing customers, it’s between 60 and 70 percent. Yet even with those numbers, 44 percent of companies still have a dominant focus on customer acquisition.
WHAT WORKS—AND POTENTIAL PITFALLS
An often-overlooked cause of churn is a company’s inability to keep subscribers active when something goes wrong with their payment sources. Long-standing customers’ credit cards can expire or be declined for multiple reasons, but that issue alone should not automatically make them miss a shipment or indicate that they don’t want to continue the relationship. Sometimes bad things happen to good credit cards. Ultimately, churn is costly.
An unusually high churn rate will kill return on investment (ROI), making it tough for a company to recover losses from potentially higher acquisition costs. At the same time, when you experie
nce a reasonable churn rate and the membership base stabilizes, you can expect significant cash flow from long-term subscribers. There will be recurring revenue and no acquisition cost against these cohorts.
If Netflix, Spotify, or another company with such a large customer base didn’t spend any money to acquire more customers, reduced churn to 1 to 2 percent, and raised prices as custom content was targeted, while at the same time getting more free customers to upgrade, it would have a very profitable business. That is why recurring revenue businesses cost more to acquire (Dollar Shave Club: $1 billion), have higher valuations (recent IPO put StitchFix at a $1.4 billion valuation after only six years), and attract more investment. There is a point where additional sales and marketing spend is more of a science than an art.
COMBINATION: PATH 7—
Churn (Minimize Defection) + Path 6—Optimize Sales Strategy
Reducing churn is, strictly speaking, less of an offensive growth strategy than a defensive one. You are working to preserve your current gains, not fighting to make future gains. Thus, it is an introverted strategy, not an aggressive one. It stands to reason that you can’t just jump from reducing churn to, say, Co-opetition with your competitors. You need an intermediate step. And that is to once again turn your perspective outward, which means that you have to improve your sales operation.