Latest / The Retention Marketing Podcast with Fexingo: Email, SMS, and Loyalty for Repeat Customers / How Subscription Brands Reduce Churn Without Discounts
Transcript
- Lucas: You know what still surprises me about retention marketing? How many subscription brands use discounts to acquire customers, and then wonder why those customers leave the moment the price goes up. Luna: It's almost like you train them to be price-sensitive from day one. Lucas: Exactly. There's a really clean example from Dollar Shave Club. Back in 2018, a couple of years after Unilever acquired them, they made a counterintuitive move: they killed their introductory offers. No more 'first month for a dollar' or 'free trial with a handle.' They just started charging full price from the first order. Luna: And I'm guessing sign-ups dropped immediately. Lucas: Sharply. About 12 percent fewer new customers in the first quarter after the change. But here's the retention angle — the customers who did sign up stayed much longer. Their twelve-month retention rate jumped by 31 percent. So the trade-off was clear: fewer customers, but each one was worth more over time. Luna: And if a couple of dollars a month is genuinely what keeps these conversations going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Lucas: Absolutely. It's that kind of small, consistent support that lets us keep the show ad-free and dig into real numbers like this. Luna: Yeah, it makes a real difference. So back to Dollar Shave Club — was that a one-off or does the data back up this approach more broadly? Lucas: The broader data is pretty compelling. There was a Harvard Business Review study in 2023 that looked at hundreds of subscription businesses. They found that customers acquired through a discount — anything more than 20 percent off — churned about 40 percent faster than customers who paid full price from the start. Luna: Forty percent. That's huge. And it's not just about the churn rate, it's about the lifetime value math. If a discount customer churns faster, you need to acquire them at a lower cost just to break even. Lucas: Right. So the acquisition cost math shifts. If your typical customer pays $20 a month and stays 12 months, they're worth $240. But if you discount the first month to $5, and then they only stay 7 months because they're discount-trained, now they're worth maybe $125. You'd need to acquire them for less than half the cost to make the same return. Luna: Which means the discount actually increases the acquisition cost you can afford — wait, no, it reduces it. You can only afford to spend less. Lucas: Exactly. And that's the trap a lot of brands fall into. They see a lower cost per acquisition on the front end because the discount converts better, but they don't track the payback period. Dollar Shave Club's play was to accept a higher upfront cost per acquisition in exchange for a longer customer lifespan. Luna: But isn't that only viable if you have a strong brand or product? If you're a new entrant, maybe you need those discounts just to get people in the door. Lucas: That's a fair point. The study actually found that the negative effect of discounts was strongest for brands with low perceived differentiation. If your product is basically a commodity, discount customers are especially prone to churn because they have no reason to stay beyond price. Luna: So the brands that can pull this off are the ones that have already built some brand equity. Dollar Shave Club had that edgy, funny brand identity. People weren't just buying razors, they were buying into the vibe. Lucas: And they had the product quality to back it up. You can't remove discounts if your product is indistinguishable from the competitor's. But if you have something genuinely better or different, you can charge full price and let the product speak. Luna: What about brands that use a freemium model? Like software as a service companies that offer a free tier? Is that the same dynamic? Lucas: It's related but not identical. Freemium is more about reducing the barrier to try the product. The key difference is that the free tier is a deliberate part of the product strategy, not a temporary discount. You're not training the customer to expect a lower price forever. They know the free version has limits. Luna: So the question becomes: when you do charge, do they perceive the paid version as worth the cost because they've already seen the value in the free version? Lucas: Exactly. That's a different psychological contract. With a discount, you're saying 'this product is worth $20, but for you, right now, it's $5.' With freemium, you're saying 'this product is worth $20, and here's a taste of what it can do.' The customer values the product before they pay. Luna: I want to go back to that HBR study for a second. Did they find any type of discount that didn't hurt retention? Lucas: Yes. Non-monetary discounts — like free shipping, or a bonus product — had a much smaller negative effect on retention. Also, discounts framed as a reward for loyalty, like a 'thank you' coupon after a customer has been with you for six months, actually improved retention. Luna: So it's not that all discounts are bad. It's that discounts used as an acquisition crutch are bad. The timing and framing matter a lot. Lucas: Precisely. If you reward someone after they've already proven they value your product, that reinforces their loyalty. If you bribe them before they've even tried it, you attract people who are loyal to the discount, not the brand. Luna: I think there's a practical takeaway here for our listeners who run subscription or repeat-purchase businesses. What should they actually measure? Lucas: I'd say the single most important metric is payback period on acquisition cost. How many months does it take for a new customer to generate enough profit to cover what you spent to acquire them? If that number is under 6 months, you have room to experiment with reducing discounts. If it's over 12 months, you're probably in a dangerous spot. Luna: And you'd compare payback period between discount-acquired and full price acquired customers separately, right? Lucas: Absolutely. I'd segment your customer base into at least three groups: full-price first purchase, light discount, and heavy discount. Then track their 6-month and 12-month retention rates side by side. The data will almost certainly show that the heavy discount group has the shortest lifespan. Luna: And then the question is: can you afford to lose that group? If they're 40 percent of your new customers, maybe you can't cut discounts cold turkey. But you could start reducing the depth of the discount and see what happens. Lucas: That's a smart approach. Gradually taper the discount from 40 percent off to 25 percent, then to 10 percent. Monitor the conversion rate and the retention rate at each step. You'll find a sweet spot where you're still getting enough volume, but the customers you get are higher quality. Luna: I like that it's an experiment, not a leap of faith. One more thing: what about brands that sell through retailers, like consumer packaged goods? They can't control the price the retailer sets. Lucas: That's a different beast. For CPG brands, the discount is often a trade promotion — you're paying for shelf space or a feature ad. The retention dynamic is more about repeat purchase rate at the category level. But even there, brands like Procter & Gamble have been reducing trade promotions and investing more in digital direct to consumer channels to build a relationship with the end buyer. Luna: So the principle holds: own the relationship, and don't train your customers to wait for a sale. Lucas: Exactly. And the brands that do this well — like Dollar Shave Club, or more recently, the mattress brand Brooklyn Bedding — they treat the first purchase as the start of a relationship, not the end of a transaction. They invest in onboarding emails, in usage tips, in customer service that actually solves problems. The discount is just a crutch that delays that real work. Luna: It's almost like the discount lets brands be lazy about retention. If you charge full price, you have to earn that money every month. Lucas: That's exactly it. You're forced to deliver value consistently. And the customers who stay are the ones who recognize that value. They become your advocates, your repeat buyers, your best source of word of mouth. That's a much stronger business than one built on a constant stream of discount-hunting one-timers. Luna: So for anyone listening who manages a subscription or a repeat-purchase model — look at your payback periods by acquisition channel. That one number will tell you if your discounts are helping or hurting. Lucas: And if you're nervous about removing discounts entirely, start with the taper. Test it for 90 days. The data will be your guide. That's the beauty of retention marketing — you can measure everything.