The new mobile economy runs on subscriptions. How do you optimize them?

Subscriptions are the new revenue.

The new economy runs on subscriptions. News, games, videos … transportation … homes … meals … almost everything is or can be a subscription. Which means: if you want to win in the new economy, you’d better get good at driving subscription revenue.

In this episode of Retention Masterclass, Peggy Anne Salz and John Koetsier interview Vitaly Davydov, CEO and co-founder of Adapty.

Scroll down for full video, audio … and a complete transcript.

Listen: optimizing subscriptions in the mobile economy


Watch: Adapty CEO Vitaly Davydov on mobile subscriptions

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Read: optimizing the most valuable part of the mobile economy: subscriptions

(This transcript has been lightly edited for length and clarity).

John Koetsier: How do you win the new mobile economy? Hello and welcome to Retention Masterclass. My name is John Koetsier.

Peggy Anne Salz: Great John. And of course, I’m Peggy Anne Salz. We’re your co-hosts for today’s show. 

John Koetsier: The new economy runs on subscriptions, right? News. Games. Videos. Transportation — Uber, Lyft. Homes — where you live, your rent maybe, other things like that, and newer ways of having a home and living in a place. Meals as well — Meals on Wheels and lots of different services, right? Almost everything is or can be a subscription. 

Peggy Anne Salz: And to your point, John, it’s interesting, I’ve been doing some research into this, right? And they’re calling it the “coronavirus bump” actually. And this is a huge time for subscriptions — not just streaming, that’s the biggest one — but they are huge. They’re part of our new economy in our new normal, our next normal. And awesomely interesting as well, the absolute monetization model everyone’s excited about, because what’s better than cash flow, right? 

John Koetsier: Research, hey? I don’t think that’s what your husband calls it when he keeps getting those packages every month, but hey [laughter]… whatever you’ve got to tell him to make it work, not a problem. Anyways today, you’re right, Peggy, subscription is driving so much revenue. Today, we’re chatting with an expert, right? 

Peggy Anne Salz: Absolutely. So we’re going to be talking to someone who’s looking at the subscription model, going to give us some cool data, some great ideas around it. Welcome to Retention Masterclass, Vitaly Davydov, CEO, co-founder of Adapty. Great to have you! 

Vitaly Davydov: Hi. Hi Peggy. Hi John. It’s nice to meet you. 

John Koetsier: Excellent. Great to meet you, great to have you as well. Let’s start off right here, right in the middle: what’s so critical about subscriptions that you started a whole company focused on optimizing them?

Vitaly Davydov: Yeah. So, you know, we work with mobile subscriptions especially, and what really caught my attention is that if you pick a random app in the App Store, Google Play, and if it’s not a game, it will have a subscription. So I can certainly say that most applications monetize with an app subscription. And the point is only a tiny percent of users, like 3% of users become paid subscribers, and this number is decreasing. And, you know, 80% of subscribers unsubscribe pretty quickly in just three months or four months. So that’s what really caught my attention. And either, most applications have subscription, but tools for making — for working with them effectively, does not exist yet. I mean, you can work with Amplitude or you can work with Appsflyer, but if you went to your own BI or an analytical system, you need to build it in-house. And in general, just believe that it’s the future. 

John Koetsier: I took a look at your product really quick. I took a look at your site really quick, and it really made me think this is kind of CRM for the mobile subscription economy. Is that an accurate description? 

Vitaly Davydov: So, when I tell about Adapty, I say it’s a one-stop solution for in-app subscriptions. So basically we give everything to deploy, analyze, and optimize subscriptions. But you also have, yeah, kind of a CRM for mobile subscribers, that’s true. 

John Koetsier: That was a polite, no, Peggy. [laughter]

Peggy Anne Salz: I looked at it. I thought it was a little bit more about like AI for LTV, in a way, is what I was looking at it. Am I a little closer?

Vitaly Davydov: Yeahhh. 

Peggy Anne Salz: A little closer. Okay.

John Koetsier: C’mon … [laughter]

Peggy Anne Salz: So let’s do it. Let’s jump just back a little bit because you come from a physics background and I’m trying to think … physics to pricing … not the usual jump. Sounds a little bit sort of along the way, something bumped and connected in a very different way. So I’d love to hear a little bit more about your background, you know, founding Adapty, looking at AI for LTV, or maybe it’s CRM for subscription apps, whichever it is … how’d you get there?

Vitaly Davydov: Well, yeah, it’s a great question. I mean, physics is really cool. I really like physics, and I did my bachelor in physics with a good mix of computer science and data science. And you know, more than physics is really about numbers rather than doing these experiments in life. So you work with data. And as a hobby, I’ve been developing mobile applications since iOS 4, so since 2011 or something like that…

John Koetsier: Wow!

Vitaly Davydov: Yeah. So for a pretty long time, and you know, I’ve even passed a Stanford course about iOS. And back in that time, it was a big success course, a pretty cool course. And I was working as a research engineer at the University College London. And so we would’ve been doing things related to computer vision, related to data structures and analysis. But, you know, I’m really more about production rather than research, and that’s why my first full-time job was at a company called Easy Ten. So back in time, it was in 2016, Easy Ten was a leading mobile application for language learning in Europe. And I joined as a data analyst and data scientist, and pretty quickly switched to marketing. And so I was really solving tasks about how do we make sure that we are ROI positive when we buy traffic? How do we optimize our apps, our funnels etc.? And then after two years, we, me and my co-founder, have left Easy Ten and founded our own mobile studio that helped mobile developers to integrate machine learning solutions into the app. And surprisingly, most of our customers asked to build a BI system for them — not more machine learning solutions, but BI systems, so they can measure their mobile economy. And after a year, after 15 successful cases, we realized we probably, we can do something out of it. And then iOS 13 was released with this small prompt, when you uninstall an app with [an] active subscription you’re asked to unsubscribe. And with seeing the churn rate just jumped 10 times, and you know, we started thinking that maybe we can do something out of it. And that’s how we started.

John Koetsier: Cool. So, at its core, the challenge is pricing, right? I mean, where do you price things? How do you configure your prices? Are you pricing too high? Are you pricing too low? Do you not have the right range? What are some of the factors that determine the right price range for a subscription?

Vitaly Davydov: First of all, it’s individually based on each app, individually. But when we talk about optimal pricing, I really want to tell about subscription retention. So the first question you need to answer is maybe you’re already in the optimal position, and you don’t need to change anything right now. So the first thing you need to do is compare yourself to your market. Probably ask some, find some statistics on App Annie or Adjust, you know, they publicly announce a lot of benchmarks. And so take a look at your sales funnel: how people convert from install to trial, from trial to first purchases and etc. Maybe already good. And take a look at your billing issue. So answer the question: why people cancel subscription? Either they had a billing issue or they cancel it just because if they don’t like a product. And that’s two primary tools that you need to consider before optimizing subscriptions. So again, start from measuring what you have right now. And then, if we’re talking about optimization, the first thing is definitely take a look at location data. I mean, people in different countries, they experience differently with your product. For example, in CIS countries, people are willing to pay more, but without subscription. So they are fine to buy a lifetime license for $100, $200, but they don’t want to pay $10 per month. It’s a really very—

John Koetsier: Which countries was that again? 

Vitaly Davydov: In CIS, like in Russia, for example. 

John Koetsier: Yes. 

Peggy Anne Salz: Mm-hmm.

Vitaly Davydov: So it’s a kind of mentality. 

John Koetsier: Interesting. Cool. So I interrupted you there, please continue. 

Vitaly Davydov: Yeah. And the next thing you can take a look, which is, you know, the data you can take from [a] device without access to IDFA or some sensitive info about [the] user, is the device model itself. So if you collect this data and if you link it to a chain of transactions, you can pretty quickly understand how people from different devices — and again, countries — spend in your app, and you can use it to price them better. So this is the easiest thing you can do just right out of the box.

John Koetsier: Cool. 

Peggy Anne Salz: Yeah. Location, that would make a lot of sense. I mean, I did some looking into this because I did have to do some research, John, for real, into the philosophy of subscriptions. It turns out that there’s the fallacy of … I believe it’s cost or … don’t quote me. But anyway, the whole idea is that you have committed, and therefore, because you’ve committed you will never say, ‘I made a real mistake.’

John Koetsier: Sunk cost fallacy. 

Peggy Anne Salz: Sunk cost, there you go. You did the same research, John [laughter]. So much in common — but the sunk cost fallacy. In any case, the idea is that there are levels of commitment that people are willing to make. And oftentimes what happens is that the app developer, the app company is actually underpricing what they offer, which I thought was fascinating. I thought that’s interesting. A big mistake is that marketers underprice their services in a very volatile market. But what would you say are the biggest mistakes? What I’m hearing here is that they should pay attention to location data. What are some others? 

Vitaly Davydov: Do you have any ideas why people underprice their product? I have an answer. 

Peggy Anne Salz: Yeah. I’d love to hear it. 

John Koetsier: Shoot. Now we have to answer this … this is not how it works Vitaly. [laughter & crosstalk]

Peggy Anne Salz: I have a thought that they underestimate the value, but I won’t go there. I have some thoughts, but it’s a…

John Koetsier:  I’ll shoot a guess out. I’m not afraid of making a fool of myself … happens all the time. I have a lot of experience with it. It’s all good. I’ll shoot, I’ll hazard a guess. I think that sometimes marketers underprice their offering because they undervalue it, because they’re so close to it that they don’t actually see the value that it has in somebody’s life, potentially. I’m sure the opposite happens as well, but, Vitaly, please tell us the data.

Peggy Anne Salz: Yeah. 

Vitaly Davydov: So, as far as I can see, when you launch an app, the first question is what price do I need to set? So you have two primary answers for it. So the first one, you take your closer competitors and you make it a little bit less. But the next thing, you take Apple Music price … and you set it as a price in your product, you know. And, for example, in many countries, Apple Music is pretty cheap. 

John Koetsier: Yes.

Vitaly Davydov: I mean, it can be $2 per month, $3 per month and no more. And that’s why lots of products are cheap. In many countries, I mean, if we don’t take Tier 1 countries, marketers really undervalue products in non-dollar countries. 

John Koetsier: In other words, they’re setting their pricing based on what they think people are used to paying for a subscription service, rather than the value they think that they’re delivering.

Vitaly Davydov: Exactly. So they say, okay, Apple Music is $9.99 per month. Probably people are okay to pay this price, let’s set it. 

John Koetsier: Now what’s the solution to that? How do you fix that? 

Vitaly Davydov: Well, what we did is you need to test. Again, you want to understand what the— the dependency between the price and a subscription retention rate. So you take, for example, 10% of your audience, you make a price 20% higher and then you test. Which metrics do we have? How many billing issues? How many cancellations you’ll have? And this you will have a dependency. You know, you’ll have some curve that probably if you increased 20% nothing will happen at all. If you increased two times, maybe you will see a churn rate up to 30%, but not two times. And it’s really about this curve. And the best marketers I know, they know this curve pretty perfectly among different segmentations, among different countries, different  devices, different platforms even on Android and iOS. And it’s really cool … and if you know this elasticity. 

John Koetsier: Wow. Very, very cool. Now, you said recently that 80% of all purchases are made during onboarding. I want to talk about that a little bit … what that means, what the significance is. Because often there’s a perception that … get them to use the product and upsell them over time, right? And Peggy and I have actually interviewed several people, including a former Google product manager, who said, ‘No, there’s a hard paywall.’ You pay to get in, then you’re in. And you’re saying 80% of those purchases happen during onboarding. Talk to us about what that means and what the significance is.

Vitaly Davydov: Yeah. So just in two words, onboarding is the first couple of screens before you dive into the main app. And our statistics show, if you sell during this couple of screens, you will have the most monetization out of your app. And I think that the big idea is, you make your sales funnel shorter, you know? So during these three screens you promise a lot to [the] user, and that’s why you have a lot of commitments. So if you have a great paywall where you clearly explain what the user will get if he’ll activate this pro account or premium account, it [will] work, but it doesn’t affect the long-term value for subscriptions. Yes, you can get more first-time purchases or trials, but it won’t affect your long-term value — probably not, if your app is not that good, it won’t affect in the long term. But still it works. And before iOS 13, with this little prompt of unsubscription, it was the main tool to monetize. You know, you just set the paywall as the first screen in the app, and then you just buy traffic. And TechCrunch, for example, they didn’t like it, and a lot of media didn’t like it, and a lot of users didn’t like it; and that’s why Apple is now fighting with it. And so, two years ago it worked, but now it doesn’t work as good as it used to be. So, it’s still important, but Apple really is pushing the development community to switching to more classical ways of marketing, like you’ve said. 

John Koetsier: Okay, interesting. So it’s not working as well anymore, and Apple is pushing people to offer some value in the app and then a paid tier of service? Is that what you’re saying? 

Vitaly Davydov: Yeah. 

John Koetsier: Okay. Okay. 

Peggy Anne Salz: So you talk about it being during onboarding, right? And then there are like micro-steps in that. It’s all about getting them those first few minutes, but it’s all about placement as well, you know, where in that journey — even how perhaps, maybe in how you’re doing the experiments. I’d like to hear, first of all, what types you can do, but also what can you experiment with? Is this something like with mobile ad creatives that I can change the color, or change the placement, change the creative? So tell me how you’re looking at the experimentation to get that placement right. 

Vitaly Davydov: Well… let’s see. So, I think it’s still worth it to optimize the first couple of steps. So what you can do is first, you can experiment with different onboardings. But if you take a closer look on your paywall, you can generally change two things. The first thing is, are things related to pricing, those to SKUs and Apple or Google products. And with it you can experiment with many things: so like a trial or non-trial subscriptions, you can increase and decrease price, change periods, or you can do upselling, for example. So Apple released, I think a year ago, a new tool called “Subscription Offers.” Again, they clearly showed that they’re doing steps towards more classical marketing ways to monetize. Or you can try different introductory promotional offers, or you can even do, again, targeting — like different locations, devices, etc. And it’s all just about pricing and SKUs. But you can also change texts, you can test images, you can test media, you can test the layout — how it appears to the user, right? 

Peggy Anne Salz: Mm-hmm.

Vitaly Davydov: And you can change order. So if we have three onboarding screens and then you have a paywall, you can do a test where you put your paywall on a second or third screen, or on the fourth screen. Or you can even check, hard versus soft paywall, those affects conversions. 

Peggy Anne Salz: Mm-hmm. Any rules of thumb there, I’m just wondering? Because if you think about it, you’re saying, okay, you could have like X number of screens and then you get to the offer. You can change your wording around. I mean, I’m sure some people in our audience would say, ‘Great! So what’s the killer pitch?’

John Koetsier: [laughter & crosstalk] And Vitaly’s way is different for every app. 

Peggy Anne Salz: Yeah, there you go. It’s not going to be “Buy Now.” 

John Koetsier: There’s no magic word. There’s no magic formula.

Peggy Anne Salz: Or magic placement, you know. It may be that two screens in and then boom, you get it on the third, and then it has to maybe have this or that word. I’m just curious. You’ve seen enough with your clients … share a little. 

Vitaly Davydov: Well, what I think is the biggest mistake is to hide paywall on their login screen. So again, just think about it as a sales funnel. You make your sales funnel longer. You just put it before your login screen is, I think it’s crucially important. I see two primary strategy for first paywall. So the first one is when you quickly show onboarding, just the sliding cards, you know, three cards. And the second one is when you ask users to fill a form. Like, you know, it’s commonly in fitness apps when you’re asked, like, enter your weight, or your height, your age, and etc. Well, what I think is, the first strategy works best and it’s faster to implement. So you just need to change pictures. It’s pretty fast and you can do it remotely without new app releases. What I also see now is, selling yearly subscriptions now works better than selling monthly or weekly subscriptions, because people can’t measure it. You know, you get a lot of money up front and it’s less risky than asking a user to pay each week. And so we see now a rise of yearly subscriptions.

John Koetsier:  It’s also nice as a consumer, because I can make one decision for the entire year. I don’t have to make a decision every week or every month or anything like that — that’s just annoying — and I can feel like I’m paying a lump sum and I’m getting a significant term of service. And I feel good about that, and I don’t feel like I’m paying out every single month. I mean, I have that, Peggy, I don’t know — we do car insurance, right? I do car insurance on an annual basis. Some people do it on a monthly. I like to get that payment out of the way. I wanted to bring up a question here that somebody on YouTube asked … Thomas: “Did consumers or developers get smarter?” That was when you were talking, Vitaly, about subscriptions, and not working as well to have them immediately as you enter the app, right? Do you have an answer for that? 

Vitaly Davydov: Well, I think just Apple made it smarter for iOS users. I mean, you know, with [the] iOS 13 release, made it really clear how you unsubscribe. So I cannot tell about all users or all developers, but Apple is really protecting you from subscribing to the wrong product. 

John Koetsier: Agree. And we have to mention, as we’re talking about subscriptions, that there have been people who have totally abused the system and abused consumers here, right? You’ve got like the flashlight app, or the app that does nothing, and you subscribe, and it’s like a hundred dollars a month or a hundred dollars a week or something like that. And there’s people who literally made millions of dollars scamming people on that stuff, and so there had to be some protections put in place. Vitaly, I want to talk about metrics for a little bit. Do the metrics change? If you’re moving to a subscription-based app and you previously were in perhaps in-app purchase, do the metrics that you use change? Do the metrics that you pay attention to change? Talk to us a little bit about that. 

Vitaly Davydov: Yeah. Can I just briefly tell about yearly subscriptions? There are two really important things here. Yeah, so the first thing is, most developers don’t care about second and third conversions. I mean, it’s fine, you grab your hundred dollars right now, but what about the next year? You know, a user’s card can expire and there’s a lot of risks for second charges. And if you’re using Apple ecosystem, you can unsubscribe during these 364 days and return the money back. 

John Koetsier: Ohhhh, that’s dangerous as a publisher. 

Vitaly Davydov: Yeah.

John Koetsier: Wow! 

Vitaly Davydov: You know, you can use a product for three months, then forget about it. Then again after three months, you can write to Apple Support and say, ‘Hey, you know, I really don’t like this product anymore. I’ve been using it just three months out of the whole year.’ 

John Koetsier: Vitaly, you’re giving millions of people a big idea right now. Did you know that? Wow! I did not realize that that was a risk factor. Interesting, Peggy. 

Peggy Anne Salz: I didn’t realize that either. And if you think about it, what that does then to the model, because the whole idea was, oh, I’ll just look at this one price. So it’s telling us that actually in the A/B testing, it has to be elastic. If people think they can just ask for annual and get away with it … it’s not a slam dunk, as you would say, John.

John Koetsier: Yeah, exactly. Well, Vitaly, then I’ll ask you the question I was going to ask you, which is just around the metrics. If you move to a subscription model — which many apps are doing from an in-app purchase model, perhaps from an ad monetization model — what does that change in the metrics that you care about and look? Anything? 

Vitaly Davydov: Yeah, of course. So it’s my favourite question here, because it’s basically what we’re focusing on right now. So when we talk about one-time purchases, you really have simple mathematics, you really have a simple economy, right? You know whether a user converted or not, and you have a single dot. But when we tell about subscriptions, what they’ll — the primary metric here is LTV and ARPPU. The whole thing is around these two words. 

John Koetsier: Yes. 

Vitaly Davydov: And so you really need to somehow predict or calculate those two metrics. And if you can calculate them in a clever way, in an accurate way, you can do more risky things. So, for example, you can do more expensive weekly subscriptions rather than doing yearly subscriptions, you know? So, if you know then in three months, in four months, or even in half a year you will be ROI positive — just because you know your numbers in unit economy; you know what’s the customer acquisition cost; you know how people convert for these weekly subscriptions — you can calculate whether you will be profitable or not. So, that’s the key here, is to know about your LTV. I believe so. 

John Koetsier: Okay. Okay, cool. Thank you. 

Peggy Anne Salz: And of course, drilling down into that … it’s also knowing about your audience. And this is of course, Retention Masterclass. We talk about audience; we talk about engagement marketing, you know, getting their attention, and then getting them to come back — keeping them loyal. A big part of this is what I’m hearing, is customization. So John, for example, he wants to get his car insurance out of the way in one shot. And other people might say, ‘Oh, I’m more of a monthly person.’ Or you even talked about weekly subscriptions, which is something I haven’t seen a lot of. So, how do you go about that customization? I’m hearing A/B testing, but how granular can this get? Does John get a different price offer because John is different from me? I mean, are we going to get down to not just the— 

John Koetsier: Ohhh, airline pricing models. [laughter & crosstalk]

Peggy Anne Salz: Yeah, for a segment of one we’re going to get down to the price of one. I mean, this is exciting stuff. Where, how far can I go?

Vitaly Davydov: Well, it depends on the platform that we’re talking about. Because we are talking about Apple ecosystem, it’s really hard to go really deep into granularity … because sharing the data, personal user data is kind of hard inside Apple ecosystem. And when iOS 14 releases, it will be even harder. I believe much more harder. And, so again, what you can do now, it depends on your marketing team and size. If you’re only one or two marketing guys in the team, you’re probably enough with the device and location segmentation. It will be just fine … and you’ll grab most of your users effectively. So, for example, you can even distribute pricing based on cities. So we can do in capitals more pricing than in side areas. So that’s it. But if somebody shared the price with you — no, sorry, data, like gender, for example, it’s really common to segment by gender. You can use it as your flag to do the same kind of analysis. So try to calculate your sales funnel for different age groups. And again, try to target them and try to find elasticity for them.

John Koetsier: Cool. 

Peggy Anne Salz: So, very interesting. So finding that right price for the right audience, right? Right price, right user, right time, right place, right context. It’s another one of those points to keep in mind. Real quick question, in a sentence … what can’t I do? Is there a no-go here? 

Vitaly Davydov: Don’t hide your paywall. [laughter

Peggy Anne Salz: There you go.

Vitaly Davydov: Really. I mean, for the last couple of months I’ve seen around 50 apps, or even more, and half of them just hide monetization somewhere far in the settings. I mean, how can you monetize your app if I can’t find a place where I need to pay? 

John Koetsier: Mm-hmm.

Peggy Anne Salz: Okay. Well, that’s good. That’s definitely a good motto, even a t-shirt. Vitaly, it was great having you here on Retention Masterclass.

John Koetsier: It was great having you. Thank you so much. 

Peggy Anne Salz: A lot of great lessons.

Vitaly Davydov: Thank you so much.

John Koetsier: That was very, very insightful. For everybody else who joined us, whatever platform you’re on, hey, like, subscribe, share, comment, all of the above. If you love the podcast, listening to the podcast later on, please rate and review it. That would be a massive help. 

Peggy Anne Salz: Absolutely. And until next time, of course it’s a wrap for today, but we keep coming back. In the meantime … keep well, keep safe. This is Peggy Anne Salz, signing off with Retention Masterclass. 

John Koetsier: And I’m John Koetsier. See you soon.