Many subscription businesses offer a discount prepaid option in addition to standard monthly billing. But is this a good business strategy? We looked at data on over a million subscription box transactions through Cratejoy and found that it is.
Prepay Customers Are More Valuable
At Cratejoy, sellers can offer a variety of prepaid options. The most common are 3-month, 6-month, and 12-month prepaid subscriptions.
It makes sense that prepaid customers are more valuable. These are customers that commit to at least three shipments, as opposed to a monthly subscription customer who may cancel after the first box.
Although it’s difficult to know if a prepaid customer would have renewed for as many cycles if a prepaid option wasn’t available, the data is clear that these prepaying customers are the type of subscribers you want.
| Prepay Term | Lifetime Value |
|---|---|
| Standard (month to month) | Baseline |
| 3 months | +37% |
| 6 months | +82% |
| 12 months | +94% |
Prepaid Subscriptions Make Good Gifts
Prepaid subscription boxes are excellent gifts. On average, prepaid transactions are about 20% of sales at Cratejoy. But in December, when gifting reaches its peak, prepaid sales jump to nearly 30%.
Also, when a customer purchases a gift for someone else, they tend to commit to a longer term than they would for themselves. Subscription commerce businesses that don’t offer a prepaid option over the holidays are likely leaving money on the table.
Business Stability
A prepaid commitment from customers helps with budgeting and logistics for the business. If 6 months of revenue can be collected upfront, investments in inventory and other fixed costs are less risky.
On the flipside, an owner needs to be more vigilant about budgeting and product spend with prepays. Although 6 months of prepaid revenue will be available immediately for the business to spend, it still needs to cover all the costs for that customer (including product sourcing and shipping). If the revenue gets tied up in longer-term investments – or worse, taken as profit – it has the potential to sink the business.
Conclusions
Prepaid options make a lot of sense for subscription commerce, especially as it relates to gifting, customer churn, and investment. However, business owners do need to be aware of the budgeting risk and properly manage a less even payment cycle.
Hi Devin. I do not offer prepay. I am afraid that if a customer wants to cancel in the middle of a six month prepay or a 12 month prepay I have to fork over the refund!
Hi Charice. We haven’t really noticed issues around this. Unless a merchant fails to ship their box on time, it’s rare for a customer to request a refund on a prepay.