Smart home subscription models depend on prediction

What will really seal the deal on these subscription offerings for any brand, though, is being able to identify and prioritize high-value leads.

Smart home subscription models depend on prediction

Subscription services are a popular revenue model across various business sectors, but have become particularly key for direct-to-consumer smart home brands as a means of driving customer lifetime value (CLV). Brands need to acquire customers who will stick around far past a trial period or first purchase to offset acquisition costs.

Many smart home brands are starting to change how their products and services are bundled and priced. For example, rather than offering a standalone security camera at the cost of $120, along with a month-long trial period of the security app — or a one-time purchase with little or no follow-up subscription — a smart home brand might give the camera to the customer for “free” with a $40/mo. app subscription.

Bundling hardware with a monthly subscription can lead not only to increased CLV, but it lowers the barrier to entry for many customers looking to make their homes more secure at a reasonable cost — a true win-win for both the customer and brand. Not to mention, though the customer ultimately may end up paying more than the $120 one-time fee of a standalone purchase, the psychological effect of a lower price at a monthly subscription rate makes the product appear more affordable.

Subscription models work... well

Arlo is one smart home brand that has shifted from its legacy standalone sale model to a new subscription model. Over the first two quarters of 2020 since offering a subscription service, Arlo has seen a 10x conversion rate increase for their new subscription model compared to the legacy model — from 5% to 50%, a rate that is expected to continue to rise and become the norm.

Source: Arlo Investor Presentation, Q2 2020

Forging a path to sustainable revenue that creates an acquisition cost lower than the customer lifetime value is the key here. As brand loyalty grows among its customer base, Arlo is finding that its customers are willing to stick around longer with the subscription model, not only increasing the brand’s recurrent revenue, but also future cross-selling opportunities.

Prediction will separate the best from the rest

What will really seal the deal on these subscription offerings for any brand, though, is being able to identify and prioritize high-value leads. But efficiently predicting which leads are have the potential to become high-value customers can be a challenge. This can often come from a lack of insight into who the leads are to begin with — customer data may be scarce, and many smaller brands looking to get off the ground with a solid subscription service don’t have the budget or bandwidth to make use of third-party data in-house.

The bottom line is that brands must be willing to not blanket-market to any and every lead for the sake of a low acquisition cost, because it may not pay off in the long run. Initially spending more on customers who will outperform those who are more likely to be one-time buyers and quickly churn is crucial. Even with a potentially higher CAC, brands that prioritize the quality of their leads are likely to find that, over time, that beats the quantity of customers as lifetime value grows.