Recurring Revenues
Subscriptions are an integral part of our daily life as consumers. From newspapers to Netflix, subscriptions inform, educate and entertain. In a world of change, they are a constant. Our recurring payments create a predictable revenue stream for brands. While the idea of “recurring revenue” is what is now also powering the growth of SaaS (software as a service) in enterprises, our focus in this series will be the consumer side of subscriptions – the B2C and D2C world. In some industries like media and OTT, the subscription is the product. In others like ecommerce, subscriptions help businesses offer lower prices on products in return for the repeatability of membership fees. Subscriptions are now making a comeback in the digital world, and require a rethink of the brand-customer relationship. We will explore this new world of subscriptions, and also how brands can use martech to improve customer retention and drive exponential forever profitable growth.
Subscriptions are a welcome alternative for the one-off transactions. Singleton selling means that the brand needs to persuade the customer continuously for the next purchase. A subscription means that once the commitment is there, the customer is likely to stick for months and years, thus ensuring high lifetime value. This is also the reason why subscription companies with low churn can command premium valuations. B2B SaaS companies with net revenue retention of greater than 120% can trade at upward of 10X multiples on revenues. Similar is the case with B2C and D2C companies. Once churn is controlled to not more than a few percent each year, renewals combined with the new customer additions each year create a monotonically increasing revenue stream which is what investors love.
There are three key challenges that brands have to conquer to build high growth and profitable subscription businesses. First, keeping the cost of acquisition under control. This must be a fraction of the lifetime value. If a customer is likely to stay for 36 months, then spending 6 months of monthly revenue on acquisition is justified. But if most customers will churn in 12-18 months, then the spend on new acquisition may need to be much lower. Second, how to ensure retention to keep the churn rate low. A monthly subscription means that the customer is at most 30 days away from ending the relationship. This means the brand has to offer “daily delight” and become a utility in the life of the customer. Retention is also linked to usage – the more the customers use the product, the more likely they are to continue. Third, brands need to be able to drive referrals from their existing customers – this ensures new customer acquisition costs are lowered. This will only happen with happy customers. Therefore, the retention and referral elements in the customer journey need the creation of a deep relationship – which is where martech comes in. While the core product is of course the primary factor, opening a parallel communications channel with customers can also drive improved mental availability of the brand and ensure renewals.
As we will see, subscriptions are here to stay and on the rise. A subscriptions business has to be run differently from the one-off transactions business. In this series, we will dig deeper into the world of subscriptions and see how the coming martech era can make the business even better.
