What’s my favorite revenue model for your business?
Read on and see!
Today’s issue is a little bit of a different Mailbox Monday, as it didn’t actually come out of the ol’ mailbox. Rather, it came out of a conversation I was having. And I thought reflecting on the question that came up in conversation would be remarkably valuable for you. So that’s what we’re doing today!
Remember: Mailbox Monday thrives when you send in awesome questions! Get your questions about marketing, selling, copywriting, business-building, life, the universe, and everything answered by emailing me at [email protected].
On to today’s question…
Roy, why do you love subscriptions so much?! And if you love them, why don’t you marry them?!
I guess I’ve been hanging around my 2nd grader and Kindergartner too much if suddenly I’m writing “why don’t you marry it?” jokes… 🙂
Nonetheless, I DO love subscriptions as a business and revenue model, and you should too!
I’ve come to believe, in my first decade-plus really focused on learning as much as I can about businesses and how to grow them, that subscriptions are THE best option out there, both for customers and for business-builders.
Nearly every highly-successful business I’ve worked with has incorporated subscriptions into their business in a major way. In most, it’s a primary profit center.
Some have grown well into the $10s-of-millions. Others beyond $100 million. Some subscription-heavy businesses have grown into the $1-billion-plus range (including direct marketers).
And I want to share what I think are 5 major advantages of the subscription revenue model…
Subscription Advantage #1: Recurring revenue…
Back when I worked for the IT training company and before they implemented subscriptions in a big way, we started every month at zero. That is, on the first day of the month, we didn’t know how much revenue we’d bring in.
Now, at the time we had pretty good momentum. We had a good reputation, good website traffic, good offers, a decent email list, and so on. And so by the end of the month, we’d bring in about $200,000 — or about $2.4 million per year.
But every month it was painful when we started back over at zero.
During the time I was there, we grew the company 2X-3X (maybe a little more) and a HUGE part of that was subscriptions. By the time I left, we had more than $200,000 in predictable revenue coming in every month based on subscription renewals.
Now, I don’t know about you, but I’d much rather have a business where I can predict with reasonable certainty that I’m going to make a certain amount of cash every month.
Subscription Advantage #2: Compounding growth…
There’s another benefit to recurring revenue, assuming you are decent at marketing, and deliver a high-quality product that customers feel delivers a great value.
I’m going to use a super-conservative growth number here, and a very reasonable cancellation rate. Just to show the math.
Let’s say you start with 100 subscriptions. Every month, you add 5% in new subscribers to your total from the month before. But you also lose 2% per month, to regular attrition. That means your net gain per month is 3% more subscribers.
That doesn’t seem like a ton. But give it 12 months, and you have 42 more subscribers. 12 more months, and you’ve more than doubled your initial subscriber count. 10 years of very conservative 3% growth per month, and your 100 subscribers turns into 3471 subscribers.
While not every subscription business will grow like this, those that focus on consistent good (not even great) marketing and delivering a product worth renewing will find this a reasonable set of assumptions.
That IT training company I worked for that was making a bit over $2 million per year before we implemented a subscription is rumored to be doing about $30 million per year in revenue today. They’ve completely dropped individual products and instead have turned 100% of their focus to marketing their subscription option. Some back-of-napkin math tells me their subscription growth rate had to be much quicker than the above.
Subscription Advantage #3: They allow you to focus on what’s important…
I have a quote from Peter Drucker on my wall. “Business has only two functions — marketing and innovation.”
I like the simplicity of a subscription business, especially one where the subscription is your only offering. In part, because it allows you to focus on the two things Drucker says make up the only two functions of business.
First, marketing. Getting new subscribers in through the door. There’s a lot of ways to do this, and that’s beyond the scope of this particular article. However, when you have one product to focus on and build your marketing around, you have the focus you need to succeed at this.
Second, innovation. In the context of a subscription business, this is measured by attrition. How consistently do you deliver a high-quality customer experience? Are they feeling like they’re getting the value to maintain their subscription?
You can tell how well you’re succeeding at this by measuring net subscriber growth. That is, how many subscribers you added, minus how many you lost. As long as this number is positive, you’re headed in the right direction. The better you do at both marketing and innovation, the better this number will be.
Subscription Advantage #4: They lead to more value for the customer…
Most of us, as consumers, want to spend as little as possible to get the result we desire. It’s natural, and a healthy way to preserve your money.
However, with a lot of products, regular and consistent usage will provide you the most value.
If you leave it up to the customer to keep coming back and buying again for that regular and consistent usage, it’s not going to happen.
However, if you create a purchasing program where you continue to charge them in exchange for continuing to deliver the product or service, the regular and consistent usage becomes more automatic.
Continuing with the example of the IT training…
The way IT pros used to train was that they would cram to prep for a certification exam, and their training would stop when they got the cert. If they didn’t need another certification (usually to get a new job), they wouldn’t train.
However, IT pros are consistently installing and using new technologies, and their need for understanding doesn’t stop at what they needed to pass the last test. By having access to a broad subscription catalog of IT training, they can log in to get whatever training they need, on-demand, whenever they need it.
Take razors. The Dollar Shave Club has been a hit in its razor subscription plan. They deliver razors on a regular schedule, so you never have to worry about using a dull blade.
Or acne cream. Proactiv is a subscription product for a reason. It continues to provide benefit while it’s being used. When it’s gone, you need more to continue experiencing that benefit.
Or music. We love constantly being exposed to new music. Take a service like Pandora or Spotify. By paying on a regular basis, you have constant access to new and exciting music they couldn’t give you with a one-time charge.
Subscription Advantage #5: They lead to more value for you…
As a business, this model benefits you tremendously as well.
When you focus on making one-shot sales, each transaction leads to a certain amount of profit, and then it’s done. If you want to make more profit per customer, you have to go back and sell to them again.
If you’re in the subscription business, you make a sale today and keep adding profits for as long as the customer is happy to continue their subscription.
By the time we first implemented the IT training subscription, the business had managed to build its average customer lifetime value to around $600. The first year of the subscription was $1,200. This effectively doubled the value of every customer who took us up on the subscription offer. (We’d usually apply their past purchases to their first year’s subscription.)
But it gets even more interesting…
The renewal rate for a subscription there was about 85%. That’s pretty strong — a little less than a 2% monthly attrition rate.
So, for every $1,200 we brought in the first year, there was another $1,000 in revenue the second year. By the 5th year, assuming an 85% retention rate, each subscription customer was worth a total of $4,450 revenue.
In other words, for every $1,200 in subscription revenue we could bring in this year, we could reasonably expect another $3,300 over the first 5 years of that subscription.
And that’s just in the first 5 years. It almost doubles again in 10 years — to $6,425 total revenue — still assuming you’re losing 15% of subscribers every year.
Let me put that another way: over the first 10 years of subscription (assuming you lose a bunch along the way), you’ve increased customer lifetime value by 10X over non-subscribers.
That, my friend, is what makes subscriptions a breakthrough business model!
Yours for bigger breakthroughs,