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May 24, 2004
How To

M&A Special Part II: Tips for Evaluating a Subscription Site's Potential

SUMMARY: Is your company considering buying a sub site? You'll find there are significant differences between buying an online pub and an offline one. Tips include:
- Evaluating renewal income
- Will tech costs be higher than you think?
- Potential areas to raise profits
In Part I of this special we discussed how to evaluate a traditional publication's potential for online growth (story at Now we're turning the equation around.

If you're considering purchasing a subscription site, here are some of the factors you should review in addition to the standard stuff you'd expect from any publication acquisition:

--> Subscriber acquisition costs per tactic

Don't be satisfied with a generic average for acquisition per new subscriber. The costs can vary enormously depending on media. Ask to see what costs and average conversion rates are for each of the marketing tactics the publisher has used. This may include search marketing, email campaigns, TV, radio, direct postal mail, co-registration, online ads, ads in third party email newsletters, etc.

Plus, be sure to get a breakdown of what percent of paid subscribers come from each major campaign source. If the majority are "white mail" (unknown source) the publisher either isn't tracking properly, or is relying heavily on fans finding the site on their own.

--> Digging into renewal rates

Most subscription sites only have a few years worth of renewal data, if that. And, except for high-ticket b-to-b sites, most run auto-renew recurring billing which has resulted in unusually high renewal rates. If you come from offline, you may be dazzled by initial numbers. Be sure to ask:

- What's the average lifetime for a month-to-month subscription? (Vast generalization: anything over six months is exceptional.)

- How does your first year annual renewal rate differ from an account's average second year renewal rate? (The second year should be higher because folks most likely to cancel already left the file; if it's not, there's a problem.)

- What's the chargeback percent on trials versus renewals? What percent of auto-renewed accounts refuse the charge and/or complain? (The number should be higher than "none" because invariably some buyers will forget they signed up for recurring billing.)

- What percent of non-renews are customers actually canceling versus credit card processing problems? (If processing problems are high, you may be able to raise profitability by attacking that.)

If the site doesn't have lengthy renewal records, you can estimate how successful renewals may be in future by asking:

- How often does the average paid site member access the members-only area? (If it's low, or a low percent of members use the site, renewals will be a problem.)

- How many members subscribed to get access to a one-off product, such as a special report or useful download? To renew these folks, you may have to come up with an equally motivating offer this time around.

Final note: If you're buying the subscriber base hoping to merge them into another pre-existing service, don't assume autorenew and chargeback rates will remain level. No matter how much explaining you do, some customers will freak when they see a company-name other than their old subscription on the credit card bill.

And, according to terms of service with the customer and merchant account processors, you may not have the right to charge those customers at all to fulfill a differently-named service. Research carefully before moving forward.

--> Cash or accrual basis

If the company is a small, bootstrapped operation, chances are they are operating on a cash basis. For month-to-month sales this is no big deal because you'll just take over the revenue stream and not worry about outstanding issues owed. However, if they are selling annual or longer-term subscriptions, you may be obligated to serve months of issues before you see a dime of subscription income from many current accounts.

If you yourself run a cash-based business, and are used to running renewal "specials" (special offers if someone renews regardless of expiration date) to get cash in the door when you need a hit, bear in mind that autorenew accounts only renew on schedule.

--> Potential for increased traffic

Once a subscription site has converted the low hanging fruit, it doesn't matter how big its existing fan base or email list is because new buyers generally come from new traffic.

So, you'll need to evaluate whether the site has really optimized every traffic stream already. If you invest in some quick basics, such as search engine optimization, will you get a traffic leap that could raise sales considerably?

Or has the site really worked hard at getting the word out, and now all sales improvements must come from long, hard hours of relentless testing?

How much traffic is "new" traffic versus old visitors currently anyway? (Bear in mind, most Web surfers wipe cookies on a regular basis -- up to 38.9% wipe weekly -- so no new versus old visitor traffic data is ever perfect.)

--> Potential for increased conversions

If the site is being run by editorial types without a strong marketing background, you may be able to get a quick income rise by simply optimizing the landing pages and order forms for higher conversions. Plus, many sites haven't tested a wide variety of premiums to see if any gift-with-order moves the conversion needle. Be sure to ask about these tests -- often things you'd assume any offline circulation department is handling have not reached online yet.

--> Staffing

Many sites rely at least partially on volunteers to manage community. Be forewarned that these volunteers may not want to follow a new corporate leader. And, even if they do, you are opening yourself up to compensation issues when volunteers become aware of what their work is worth (or what they perceive it's worth.) Check with an HR legal expert before taking another step.

If the site's current owners are responsible for content creation, and they plan to leave, be sure to ask about their training experience. They may be very willing to train a replacement, but willingness does not equal ability. Do you have in-house editorial managers who can take over and/or train replacements if the original owners can't hack it?

The same goes for tech staff. A techie may be a genius at creating software, but rotten at documenting and explaining it. Unless you're sure your in-house team can take over, be wary.

--> Scalability & potential uses of back-end technology

Many sites are run using a cobbled together group of ASPs along with a bit of home-grown programming. If you're buying a subscription site at least partially for its tech back-end, be sure to find out which technology the company owns and which it rents on an ASP basis.

Don't be too impressed by patents or unique programming. You need technology that works well, is simple for new staff to learn to operate, and that will scale easily should you decide to grow the site or launch additional products.

Many ASP contracts -- including Web analytics, email broadcasting, shopping carts, survey tools, and affiliate tracking services -- offer pricing based at least partially on volume. Costs may be low now, but won't be if you increase use dramatically.

If the site serves email in-house, assume you'll want to take that function out of house for optimum delivery. (Much like traditional printing, unless you spend millions on email, it's not worth handling it in-house. The headaches can be too massive.)

Also assume you'll need to upgrade the customer database. Very few subscription sites have customer account management and reporting databases an offline circulation manager would consider respectable.

Check that the content management system is search engine optimization-friendly. Most dynamically-generated sites require tech tweaks for search engine spiders to access pages easily. If you're buying a site at least partially for a strong home-grown tech back-end, consider have an optimization firm give you an estimate of how much it would take to bring the site up to snuff.

--> Potential to increase subscriber lifetime value

Offline publishers with experience selling content bring huge value to subscription sites in this area. You may be able to raise revenues immediately with a little price testing (something many subscription sites haven't done much of.)

You also may be able to expand back-end and ancillary sales considerably. This is one area where an existing email list of site fans who are not subscribers can pay off -- you may be able to sell them individual products even though they won't buy subscriptions (yet.)

The direct postal mail list marketplace is slowly recovering from the double hit of recession plus online marketing frenzies. So, you may be able to put the postal list of subscribers and expires on the market for additional income.

However, don't assume you can put the email list on the rental market unless it's already there, or you have a high steady stream of new email sign-ups who can be persuaded to check an additional box to be added to the rental file. (If you do have this steady stream, consider selling co-registrations as well.)

Otherwise, although it's legal to rent a US name out, if you do this unexpectedly, you can hurt the brand name and site reputation so much it cuts into income.

Useful link related to this article:

Secrets of M&A Success: The Newsletter Publisher's Guide to Mergers, Acquisitions, and Banking

See Also:

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