In the startup world, subscription revenue is sexy. Entrepreneurs and investors love subscription revenue (also referred to as recurring revenue) because of its predictable nature. Startups with such revenue models essentially are striving to be annuity businesses: each customer signed up is an incremental lifetime monthly cash flow (with the caveat that churn rates are zero and renewal rates are 100% in this perfect world).
David Skok’s series of blogs on SaaS economics (Software-as-a-Service companies are inherently subscription businesses) contain several analyses on the high profit potential of startups with recurring monthly revenues. Apple/Google recently announced subscription-pricing capabilities for app developers as an alternative to ads-based or one-time transaction-based pricing models, we saw Rentjuice.com as an example of a startup that pivoted away from per-transaction pricing to subscription pricing. It seems that recurring revenue models are popping up everywhere in the digital world.
So is subscription revenue really the Holy Grail for profitability? Why don’t more startups join the party? Why aren’t all subscription startups wildly successful? A few thoughts...
Subscriptions require patience (and a leap of faith)
Imagine you could charge your customers $20 on a monthly base or charge them .50 cents per transaction. What would you choose? and why? I would choose both. My reason for this motion is
1) You would need to charge a transaction fee to cover your cost (If applicable to your business)
2) The monthly sub fee adds value to your service; by offering a purely transaction based model your actually de-valuing your business model. Same problem if you price your services to low nobody will take your business seriously. (view your competitions rev model, and also look at other successful sites in your market)
3) Transaction based models work great for payment services(Paypal), or high volume sales(Ebay). But if your relying only on transaction sales in todays market of innovation and competition your business could be in trouble at the worst time of your new company, right when your trying to grow. Reason for this amber alert, You are placing your entire business in the hands of transactions, and not sign ups. Lets say you have 100,000 users that hardly sell anything, chances are your business will not be around much longer unless your revenue includes advertising and you have a ton of traffic, but if you have 100,000 users that pay a monthly fee of $20, your a millionaire every month.
4) Subscription based models qualify your customers or users, if a potentially new user signs up for a trial and sees no value after the trial and will not pay $20/mth, this customer is classified as "low profile" and does not think they could make a big enough return to pay the $20/mth. (Possible other objectives, UX,UI problems).
Subscription pricing is tricky
Recurring revenue looks great in the Excel model, but the trick is determining the price for which customers are willing to subscribe for your product to create a frictionless sign up process. Ning, a web-based platform for building social websites, began as a traditional freemium model that let users access basic services for free and then have the option to upgrade services for $20 a month. The freemium model was not working so Ning got rid of the free product and introduced several pricing options ranging from $3 a month to $50 per month - resulting in doubling conversation rates and tripling the base of it paying users. Ning’s first attempt at a subscription business was not successful, but it had raised sufficient capital to survive this mistake and buy time to test different subscription price points that worked better.
I would choose both if I could, I am not a double dipper but high sales would essentually not cover the subscription fees causing us to absorb the trans fees. Again, if applicable to your model.
Subscriptions are relationships
When people subscribe to a product and agree to send money to a business on a recurring basis - a relationship is established (rather than just a transaction). There is a customer service element that requires higher touch of support for paid subscription relationships. Netflix is exemplary with its proactive approach: if there is an interruption in the Netflix feed when you stream content - customers automatically (and quickly) receive an apology email that informs them they will get a 2% credit on their next bill for the inconvenience. However, startups often have to skimp on post-sales support, considering higher priority is usually given to the product and sales teams.
I expect an increasing percentage of startups to adopt subscription revenue models though I suspect startups with ample funding will be more successful in executing these models given the resources needed to wait out the payback period, figure out pricing, and maintain good customer support.
David Skok’s series of blogs on SaaS economics (Software-as-a-Service companies are inherently subscription businesses) contain several analyses on the high profit potential of startups with recurring monthly revenues. Apple/Google recently announced subscription-pricing capabilities for app developers as an alternative to ads-based or one-time transaction-based pricing models, we saw Rentjuice.com as an example of a startup that pivoted away from per-transaction pricing to subscription pricing. It seems that recurring revenue models are popping up everywhere in the digital world.
So is subscription revenue really the Holy Grail for profitability? Why don’t more startups join the party? Why aren’t all subscription startups wildly successful? A few thoughts...
Subscriptions require patience (and a leap of faith)
Imagine you could charge your customers $20 on a monthly base or charge them .50 cents per transaction. What would you choose? and why? I would choose both. My reason for this motion is
1) You would need to charge a transaction fee to cover your cost (If applicable to your business)
2) The monthly sub fee adds value to your service; by offering a purely transaction based model your actually de-valuing your business model. Same problem if you price your services to low nobody will take your business seriously. (view your competitions rev model, and also look at other successful sites in your market)
3) Transaction based models work great for payment services(Paypal), or high volume sales(Ebay). But if your relying only on transaction sales in todays market of innovation and competition your business could be in trouble at the worst time of your new company, right when your trying to grow. Reason for this amber alert, You are placing your entire business in the hands of transactions, and not sign ups. Lets say you have 100,000 users that hardly sell anything, chances are your business will not be around much longer unless your revenue includes advertising and you have a ton of traffic, but if you have 100,000 users that pay a monthly fee of $20, your a millionaire every month.
4) Subscription based models qualify your customers or users, if a potentially new user signs up for a trial and sees no value after the trial and will not pay $20/mth, this customer is classified as "low profile" and does not think they could make a big enough return to pay the $20/mth. (Possible other objectives, UX,UI problems).
Subscription pricing is tricky
Recurring revenue looks great in the Excel model, but the trick is determining the price for which customers are willing to subscribe for your product to create a frictionless sign up process. Ning, a web-based platform for building social websites, began as a traditional freemium model that let users access basic services for free and then have the option to upgrade services for $20 a month. The freemium model was not working so Ning got rid of the free product and introduced several pricing options ranging from $3 a month to $50 per month - resulting in doubling conversation rates and tripling the base of it paying users. Ning’s first attempt at a subscription business was not successful, but it had raised sufficient capital to survive this mistake and buy time to test different subscription price points that worked better.
I would choose both if I could, I am not a double dipper but high sales would essentually not cover the subscription fees causing us to absorb the trans fees. Again, if applicable to your model.
Subscriptions are relationships
When people subscribe to a product and agree to send money to a business on a recurring basis - a relationship is established (rather than just a transaction). There is a customer service element that requires higher touch of support for paid subscription relationships. Netflix is exemplary with its proactive approach: if there is an interruption in the Netflix feed when you stream content - customers automatically (and quickly) receive an apology email that informs them they will get a 2% credit on their next bill for the inconvenience. However, startups often have to skimp on post-sales support, considering higher priority is usually given to the product and sales teams.
I expect an increasing percentage of startups to adopt subscription revenue models though I suspect startups with ample funding will be more successful in executing these models given the resources needed to wait out the payback period, figure out pricing, and maintain good customer support.
