Tien Tzuo’s book “Subscribed” has a hypothetical income statement of a subscription company:
The key is to think ARR: annual recurring revenue. Subscription businesses have a predictable revenue stream. In the example above, the ending ARR ($120) = starting ARR ($100) – churn ($10) + new ARR added ($30). Cross-sell and upsell can also help drive ARR higher. The key is the “recurring” nature of the revenues. This is what makes the subscription business attractive. Also, by encouraging existing customers to refer their friends and family, the cost of sales and marketing for new customer acquisition can be brought down. Taken together, this can lay the foundation for a profitable growth flywheel.
In the enterprise world, B2B SaaS companies are doing just that. Salesforce pioneered software as a service with its CRM system offered not as an on-premise installation but via the cloud. In the past two decades, SaaS has become the preferred model for most enterprise software. My company, Netcore, also offers communications and martech solutions via the cloud as SaaS. Our North Star metric is NRR – Net Retention Rate, meaning the growth in revenues from the same cohort of customers over the past year. Anything over 120% is very good.
B2C and D2C companies need to also bring in this thinking. What products of theirs can be offered on a subscription basis? For products with a lower purchase frequency, is there a new line that can be created which offers subscriptions? By shifting the mindset from ownership to membership, from one-time to recurring, brands can reinvent their business economics.
For every business, subscriptions can be the new growth engines. Subscriptions enhanced with the “Plus” program (push microns, personalisation and Progency) can be a big driver for the coming martech era. The key is to shift thinking from just retention to subscription. Companies who execute well can be the disruptors, the new profipolies, benefiting from exponential forever profitable growth.
Subscription is yet another example of an old idea that is being reinvented for the digital age. Writes Adam Levinter in “The Subscription Boom”: “Subscription is experiencing a resurgence in the digital age. Yet the subscription model has been around for about 400 years, dating back to the sales of books and periodicals in the early seventeenth century. Perhaps the first known direct-mail subscription business is the Book of the Month Club, which was started in 1926 by entrepreneur Harry Scherman, who arguably set the template for the current subscription-box model we see today … It won’t be long before [subscription is] the norm rather than the exception for companies that want to thrive and compete.”