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Renewal rates

Renewal rates are an obsession for most publishers, but great care should be taken over their calculation and interpretation. Misreading the analysis can lead to incorrect conclusions, and harmful action plans drawn up for non-existent problems. Greg Harris talks us through compiling and using renewal rates.

By Greg Harris

Renewal rates have long been a bit of a mysterious element of magazine publishing, which seems a bit odd for a statistic that’s rather easily calculated.

Generally, most publishing people decline to talk about their renewal rates, seemingly out of a duty of care to protect privileged information. And, in the United States, for instance, the inclusion of renewal rates on ABC statements has been hotly debated. But, I think the main reason for the reluctance to share renewal rates is a general queasiness amongst publishers that the information will be misunderstood, and possibly misused, by competitors and advertisers.

Over the years, editors and circulation managers have regularly been pilloried by management for static or declining renewal rates, often with uninitiated publishers (and some editors for that matter) quite shocked that often half of their active subscribing customers are choosing not to renew their subscriptions. This reasonably normal retention rate is often viewed as a failure of the editor’s judgement or the marketing team’s know-how.

The fact of the matter is that a publication’s overall renewal rate is a fairly useless bit of trivia that does not really say much about the health of the publication, or even about the loyalty of its customers.

If this sounds like circulation heresy, consider this. Many fast growing and universally well regarded ‘hot’ publications will have overall renewal rates that are lower than those publications that can be generously said to be in the final gasps of their life cycles.

The reality is that renewal rates are more a reflection of what’s happened in the months and years before, than about what’s going on currently, in the way that viewing a rising river on a sunny day may indicate that there have been storms further upstream. How new customers have been recruited, and how many have been recruited, will have a much greater impact on the rate than most anything else.

So, what are we to make of renewal rates, and of what use can they be in running our businesses? And, how do we determine if our renewal rates are good or bad in relation to our peers?

Importance of segmentation

The first thing to consider is what makes up an overall renewal rate. Basically, all renewal rates consist of segments that can be taken all the way back to individual customers. For instance, an overall renewal rate of say 50 per cent can be divided into a group of newer customers, renewing at 30%, and longer-termed more committed customers, renewing at 70%. If you’re bringing in more new customers, the overall rate will decrease in the future, as these people shift the average time customers have been with you downward. Using the same logic, a decrease in new customer acquisition will have the opposite impact. But which situation reflects the healthier publication?

Just as the ratio of new and longer termed customers can impact on the renewal rate, the same can be said of the mix of media and sources. I often compare the recruiting of new customers to fishing, in that you can widely cast your net to bring in as many trials as possible, knowing that many of the customers aren’t exactly right for the product, and will no doubt leave at some point. This trawling approach, by the way, can be achieved by using tactics such as discounts, free gifts, and free issue offers. Or, conversely, you can be more selective up front, which generally will increase your initial recruitment costs but will likely bring in more qualified customers who will stay with you longer. Tactics for doing this include requiring cash with order offers, and higher prices.

Both methods can be equally useful in achieving your circulation objectives, but will have an impact on renewal rates, with the more liberal approach providing continuation rates of anywhere from 20 to 40 per cent, and the other possibly topping 50 to 60 per cent. To determine which makes sense for you, you will need to test both approaches and determine what your initial recruitment costs are, and how the new customers renew, over time.

In all cases, you will need to use a quality life-time value calculator to ensure you’re choosing the correct option, and a good circulation model to make sure you know the long-term impact, avoiding future surprises. And, whatever you do, don’t be afraid to take on customers that may cause a decrease in renewal rates, as the life time value calculations may just surprise you. And, this also holds true for the use of direct debit, which may not always be the best option.

Whilst what I’m saying may sound obvious, many publishers neglect to look at their rates in this way, with many I’ve visited only able to show you an overall renewal rate. It’s important that you segment your customers and know how the various segments are behaving. In addition, this segmentation strategy will also highlight opportunities for tailoring your sales message and offerings to customer groups, for example treating new and existing customers differently.

How to calculate renewal rates

The second issue to consider, in pondering renewal rates, is just how they’re being calculated. While the calculation is straight forward enough (the number of people renewing divided by the number of people available to renew), there are potential pitfalls, and you must know what these are to interpret your figures correctly. One such item is gross versus net renewals, or paid versus credit renewals. If you are offering a credit option for renewing customers (and you really should be, as this will boost your response rates, particularly amongst your best customers), many fulfilment houses will treat a credit renewal the same as a non-credit one, regardless of whether the customer eventually pays or not. Another is that direct debits and continuous service can also cause distortion, with cancellation rates for these customers often not showing up in your renewal rates, inflating the figures and giving you a false sense of security. So, it is important to make sure you know how your renewal rates are being calculated.

How to use renewal rates

So, if renewal rates are so dodgy, how should they be used? In terms of projecting circulation levels and revenues, it is vitally important to segment as finely as makes sense. Again, you can segment all the way down to each customer. When modelling subscriptions, it is advisable to at least segment by recruitment source for first time renewals. Over time, as customers renew, you can combine sources, but it is advisable to maintain segmentation for second, third, fourth, etc renewals (ie. not just stick them all in one bucket).

As previously noted, recruitment sources will provide varying renewal rates, depending on how the customers were promoted and where the prospects were sourced. For instance, a list you’ve purchased from a broker, that contains very few of your existing customers (which it won’t after you’ve de-duped against your active subscriber file) will renew at a rate substantially lower than sales generated from off-the-page and insert cards in your retail copies, where you’re picking up subscribers who are already your readers. And, the length of time subscribing is usually the best predictor of renewal response, with people renewing for the third time, for instance, almost always renewing at a higher rate than those renewing for the first and second times. A fairly typical progression for a robustly sold publication would be as follows: 35%, 50%, 65%, 75%, 85% and so on.

For determining customer satisfaction, renewal rates can be useful, provided you’re honest about changes in marketing approaches that have the potential for distorting the figures. I tend to prefer looking at a variety of new business sources, tracking these over time, to determine trends. This is a much more informative method than looking at any absolute rate, at any given time. Likewise, it is a good idea to do the same for your long-term customers, particularly if you are undertaking changes to the editorial product that may potentially have an impact on the customers’ loyalty to the product.

While monitoring your renewal rates to determine customer satisfaction is certainly a good idea, you may also want to implement other techniques. One good method is the use of issue reading studies to track customer satisfaction for each issue, letting you gauge their sentiments before they are up for renewal. A particularly good question is ‘how likely are you to renew your subscription?’ If you are selecting a similar sample each issue, and you see a lowering trend-line on this question, you may need to take action.

Need to invest

While renewal rates, and renewals in general, can often be a bit of a baffling area and are often viewed as one of the less glamorous of subscription marketing jobs, it is truly the backbone of any subscription strategy. Small increases in renewal rates can add thousands to your bottom line, and make your upfront investment in new customers much more appealing. But, it is essential that you and your team understand how renewals work and how best to go about developing promotions that will work. Many circulation managers fail to allocate the proper resources, in terms of financial, talent and system resources to get the job done, often opting to do it on the cheap. And, in many cases, assuming retention marketing is easy and therefore can be allocated to junior members of the team. But beware, there’s money to be made, but only if you’re prepared to invest a bit.