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Leveraging a subscription system to retain customers and stay on top of payments

When you think about your monthly outgoings, how many are a result of various subscriptions – magazines, gym memberships, phone bills, etc? Real Business has spoken with two companies to find out just how they’ve leveraged the payment model to acquire customers.
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Although the subscription payments service is traditionally found in consumer-facing sectors, Donavan Whyte, CEO of full service agency mad4digital, was keen to harness the approach to meet the needs of small businesses.

Mad4digital has been running for two years and is focused on helping clients understand what a digital strategy means to their operations, Whyte explained.

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He noted that the firm serves everything from sole traders right up to companies with 500 employees, though the “sweet spot” is young firms with between 20 and 150 staff.

Given that growing SMEs account for the majority of his clients, Whyte knows many won’t always have sufficient marketing resources. “There are so many things in digital that people are being bombarded with that you need to be an expert,” he said.

Of course, in addition to resources, another common problem for SMEs is late payments. As an SME itself, mad4digital is aware of the issue – the lengthiest delay on a payment for work has been four months.

“We’ve waited 120 days for someone to pay before. Smaller companies are pretty efficient, they get it, they’re in the same boat. For example, we can send out invoices on Friday and they can be paid on Monday,” said Whyte.

“Bigger companies need to be chased. Generally, if people do pay us late, it’s a hard thing to overcome, especially if you’re a growing business and you don’t have leverage to force them to pay on time.”

His advice to avoid late payments is to have watertight legal contracts in place, as well as a senior contact within the company to speed up the process and ensure the 15 to 30-day window is met.

Working with businesses in financial technology, automotive, health and beauty, manufacturing and hospitality and leisure means that client needs are vast. As such, with a view of delivering flexibility, mad4digital introduced a new payment model at the end of 2015 – subscriptions.

Whyte said: “Some companies don’t have big enough marketing budgets. And rather than them being required to make a large investment outlay in one go, we use a subscription model, which of course is traditionally more common for consumers than in business.

“For example, if someone wants to build a website or needs other tactical digital solutions, we charge for the amount over 12 months to 18 months. By doing that, it means we have a vested partner and we learn more about their business.”

This approach offers choice and a solid experience for the customer, while mad4digital can bank on an ongoing stream of capital to be paid in on a monthly basis. “We’re suggesting that, to make it easier for them, we want to offer the subscription model. With the advancement of tech, monthly payments are the norm,” Whyte said.

Models such as direct debit services allow businesses to introduce a subscription service and not have to worry about getting paid on time. A business like mad4digital doesn’t have to worry about being paid on time and the client won’t miss invoice deadlines.

“Plus, as the agenda and priorities can change, they can adopt a payment model that allows them to react. Sometimes it’s difficult to agree everything you need to do.”

Interestingly, the subscription model offered by mad4digital doesn’t come with any added fees, so the agency isn’t making any additional profit from the monthly payments.

“There’s no added interest at all. We take a hit on that and we split payment across the desired period. We felt that it would allow customers to feel comfortable that they weren’t being penalised, and that it was the fair and right approach that can give us a competitive advantage over someone else,” said Whyte.

As it stands, payments are processed manually given that the relatively new payment model has just 15 users. But once that grows to around 40 to 50, Whyte will be keen to consider automated tech.

The automated nature will be crucial as Whyte and the company continue to on-board new customers. Missed or late payments often occur when a small business expands and has less time for tasks such as chasing payments.

“The subscription process gives us stickiness with clients and builds a strong relationship to help them see ROI. If they pay you and go away, it can be a lot more difficult to prove our worth, so we wanted to really have a much closer conversation with clients,” he concluded.

But what about the consumer market where subscriptions are rife? For confectionery firm Candy Kittens, which was founded in 2014 by Made in Chelsea star Jamie Laing and business partner Ed Williams, the payment area is a growing, but lucrative, process.

Bags of sweets aren’t too costly and can usually be picked up at £1 or less. But Candy Kittens prides itself on creating a luxury alternative to the artificial, sugar-rich offerings on the market at present, producing “gourmet” gluten-free products that are made from natural ingredients and real fruit juices.

“We’re trying to sell our sweets as a premium product to style-conscious consumers – something that hasn’t been done before, a premium gummy sweet,” Williams said.

“Generally gummy sweets start at the low end of the confectionery market, the cheap bags of Haribo and things like that and we’re providing a premium in that sector.”

That means that bags are priced at between £1.80 and £3, depending on the size. In the grand scheme of things, selling one bag won’t generate a huge return, so it’s very much a volume play for the company to thrive – that’s where its subscription service comes in.

Of course, food-based subscription packages are increasingly commonplace today, with the likes of fresh ingredient delivery service Gousto demonstrating how powerful the market can be – Gousto raised £9m in last 2015.

Whitney Davies, Candy Kittens’ operations executive, noted that, unlike mad4digital, the payment process at the sweet business is very much automated.

“We use a direct debit service that automatically takes payment from customers on the day that they signed up each month. If the transaction fails, our provider will try again the following day. If it fails again, it tries three days after the previous attempt and then another five days after that. If it still can’t be taken, the customer becomes ‘unpaid’,” she said.

It’s at that point that things become slightly tricky for Davies. Once a customer is marked as unpaid, outreach is then required to determine whether they would like to remain signed up to the service. If so, she needs to cancel their existing subscription and create a new one. Davies also wants to introduce the option for customers to edit their own details independently if an account needs altering.

But the fact that Candy Kittens has embraced a direct debit system for its subscription payments means it is much less likely to encounter payment problems. Industry wide, credit cards have an expiry/cancellation rate of 17 per cent while for direct debit it is less than one per cent.

Davies added: “This is something we are trying to change, so that if a customer still wants to be a part of the subscription service then I can easily change their status back to active.”

But Davies noted that packages are not sent out from the warehouse if payments haven’t been made. The service has been running for a year now. It has been revised during that time to trim the fat and improve, reducing the option of three subscriptions to choose from to just one at £10 a month.

With fairness in mind, customers can make cancellations to their plans whenever they like without getting tied down. And while sales from tangible locations remain the key driver of transactions, subscriptions are the online breadwinner.

“The subscription service is not our largest area of sales, this is generated from in-store sales from Tesco, Sainsbury’s, Waitrose, Topshop, etc. However, you can buy sweets, merchandise and the subscription service from our website and the latter is the most popular for customers to buy,” Davies said.

Given that, we should expect to see that area of the business given an overhaul yet again. “We would love to grow our subscribers. We’re actively working on improving the service so that we can increase our numbers at present.”

Whether it’s a business or consumer you’re selling to, a customer is a customer. The subscription payment method could well be the answer to your current sales woes.

Payment pains for growing businesses inevitable – but missed payments can be avoided

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About Author

Zen Terrelonge

Zen Terrelonge is the deputy editor of Real Business, specialising in media, innovation, technology and the digital sector. A media professional with eight years worth of experience he has worked for both startup and established publications.

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