FitTech brands, beware the false positives in your conversion funnel.

TLDR: You may think that a sunk-cost keeps your software subscription revenues and LTVs high. In reality, you are only converting customers who very high conviction of using your product in the long run.

A refrain, I have now heard a few times (and one I’m sure has crossed the mind of every C-Suite exec in the FitTech industry) goes along the following (paraphrased) lines:

“We sell our physical [products] at a high price. This has the effect of keeping customers paying for their membership subscription long into the future which is where our margins and valuation really come from. If we did rentals or subscriptions, customers would be able to send their product back and we wouldn’t be able to monetise their full LTV”.

To paraphrase this sentiment: “if we can convince a customer to spend lots on our product then the sunk cost of doing so will keep them paying their monthly software subscription even if they stop using our product”.

Beware this line of thinking.

Firstly, is that really the business you want to build? Surely you don’t want to monetise customers in that way?

Secondly, consumers are fickle. They will not buy an expensive product unless they have serious conviction around using it for a very long period of time. BNPL be damned. This strategy may have worked during COVID. It will not work now.

The consumers you may think have been ‘sunk-cost-ed’ into paying their membership are actually consumers who had high conviction that they would use your product for all its worth. These are consumers who thought hard about the cost of your monthly software membership fees and determined that they would get enough long term use to justify both the high product cost and the ongoing monthly cost.

Consumers are very familiar with the idea of paying for subscriptions. They know that they often fail to cancel subscriptions they no longer need. They understand that if they buy a product that they don’t use, they may end up paying through the nose for a membership subscription they stopped needing long ago.

Consumers understand the sunk-cost fallacy and it puts them off ever trying your product in the first place.

No, Buy Now Pay Later (BNPL) does not solve this problem. Yes, it spreads out the cost and this is helpful to many consumers but paying £1,500 over 30 months is still the same total cost as paying £1,500 up front. If consumers are even slightly on the fence, they will not convert. And no, consumers do not view a long BNPL agreement to be comparable to subscribing for a physical product. They view BNPL for what it is. A loan.

30 day returns are good but do not offer consumers enough time to meaningfully try your product before committing to it. Streaming (to coin a phrase) gives consumers the confidence to give your product a chance knowing they can send it back at any point after their minimum subscription period.

If high LTV consumers are mixed in randomly into a given population, with subscriptions you may come across a couple of low LTV consumers before landing on a high LTV consumer but the total LTV generated from your asset is higher and you will find those higher LTV consumers more quickly.

With BNPL and normal retail, you can ramp up marketing spend, even cut your pricing, but in reality you risk never converting high LTV consumers in the first place; all whilst hurting your margins. Worse still, you could end up converting a customer who then stops using your product, cancels their monthly subscription and tries to sell your product on eBay or Gumtree. Not a good look for your brand and a really sour taste in your customer’s mouth.

Here’s a thought. Why not give consumers total flexibility to choose? De-risk the descison for them. Let them send the product back after several months (which is monetised). Chances are, they will love your product and keep it. If they send it back, then they probably haven’t used it much (it won’t cost much to refurbish) and, at the very least, they will have enjoyed a great customer experience.

The world is shifting towards subscription models. Physical products will be next. Being the first mover is advantageous in a world where FitTech is once again competing with gyms. Or you could keep pumping money into marketing spend…?

If you want to find out more about how we can help you, feel free to put in time directly into my calendar.

Dillon Harindiran: calendly (dot) com (slash) dillon