Recurring revenue versus lifetime value

I enjoyed a conversation in Slack recently where plugin authors were discussing the difference between recurring revenue and lifetime value. I think it's worth restating for the newsletter, as it's a common question.

In recent years, there have been several iterations of extending revenue opportunities for folks that sell access to support and updates for WordPress products.

For ages, most products had what were essentially lifetime licenses: buy once, get support and updates forever, on however many websites. Over time, folks started to realize this could not sustain itself. So the standard became a one year license, with tiers for receiving additional features and the ability to get support for more sites.

More recently, folks are going one step further, and enabling automatic renewals. So, if the customer purchases, twelve months later, they'll be auto-billed again.

The difference in renewal rates can be staggering. Common ranges I've heard over the years for manual renewal rates are between 15-30%. Whereas, some folks are reporting renewal rates with auto-renewals set as 60-70%+. So, people are seeing doubled or tripled renewal rates, thanks to creating a subscription style renewal system.

So, it surprised a couple of folks to learn that sometimes a lifetime license can actually be a good thing still. After all, aren't we past that?

Well, that's where lifetime value comes in. If your average customer keeps a $100 license for two years, then you can establish average lifetime value (LTV) to be $200. So, you may consider creating a lifetime license for the price of 3-4 years of normal pricing. Let's say you make it $350. Now, your lifetime license is priced $150 more than your prior LTV for customers. So every person that opts into the $350 lifetime plan is giving your $150 (75%) more than the average customer.

That's a good deal, right? Of course it is!

Furthermore, you get $350 right now, not over the course of three or four years. The same amount of cash is worth more today than a year from now. Theoretically, you invest that money (into your business or otherwise), and make a return on those dollars.

Considerations for auto renewals

I see little reason why folks should not enable auto renewals versus manual renewals. If you have the capability to do it, you should consider it. But also consider your implementation.

In my opinion, it's good practice to send a warning email that the product is about to renew. While that will definitely cost you some renewals (I think my renewal rate would be at least 5% higher on Post Status without them), you'll get fewer angry emails from folks saying they didn't want to renew. And you'll have fewer refund requests and chargebacks to deal with. And in my opinion, it makes customers feel better — even the ones that choose not to raise a stink.

Even with a reminder email, you'll still get refund requests and the occasional chargeback. Refunds are pretty easy, but some payment gateways are pretty stringent about chargebacks. I've heard that Stripe will mark your account high risk pretty quickly, for instance; so be aware.

Even once you build in these things though, auto renewals will probably improve your renewal rate by a good margin. It has for everyone I know who has enabled them.

Considerations for lifetime plans

This should be obvious, but if you have an existing product and know your LTV for an average customer, make sure your lifetime plan is priced considerably higher than that! If you offer a lifetime plan, you should make more money than you would without it.

Easy calculus for this is to consider your average support cost per customer per year, then make sure your lifetime cost is at minimum 4 or 5 times that. Four to five years is pretty well beyond the amount of time your average lifetime customer will truly be a customer. But the small percent who do take a lot of support can really cost you, so consider your lifetime price carefully, especially in context with the overall support burdens of your product, which you know better than anyone else.

Also, ensure that your terms and conditions state that a lifetime plan is for the lifetime of the product. Lifetime doesn't mean the company lifetime, or your lifetime, or the customer's lifetime. It means the lifetime of the product. Make sure you state that, at least in the fine print. It's obvious when you consider it (nothing lasts forever) but should exist in your language.

Another benefit of lifetime plans is for bracketing. Take our $100 product again. Say you have a free version, a $100 pro version, and a $350 lifetime version. Just listing something for $350 right next to the $100 item makes the $100 feel more appropriate to the buyer. This is classic price bracketing (also known as anchoring).

ConversionXL has a post I still remember about common pricing techniques, including this one.

People were offered 2 kinds of beer: premium beer for $2.50 and bargain beer for $1.80. Around 80% chose the more expensive beer.

Now a third beer was introduced, a super bargain beer for $1.60 in addition to the previous two. Now 80% bought the $1.80 beer and the rest $2.50 beer. Nobody bought the cheapest option.

Third time around, they removed the $1.60 beer and replaced with a super premium $3.40 beer. Most people chose the $2.50 beer, a small number $1.80 beer and around 10% opted for the most expensive $3.40 beer. Some people will always buy the most expensive option, no matter the price.

You can influence people’s choice by offering different options. Old school sales people also say that offering different price point options will make people choose between your plans, instead of choosing whether to buy your product or not.

The lifetime option can be part of your bracketing strategy, and like in the beer example, some people will always buy it.

So, next time someone repeats a mantra of: lifetime plans are terrible! Remember, that depends. If done right, lifetime plans can be great. But you need to be smart about it.