Deep dive into consumer subscription
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This document discusses consumer subscription models from the perspective of both businesses and consumers. For businesses, subscriptions provide recurring revenue, more predictable cash flow, and higher valuations. However, for consumers, subscriptions can be problematic if the value proposition is unclear, cancellation is difficult, or the recurring cost is unnecessary. The document outlines different types of subscription models and provides benchmarks for key retention metrics. It emphasizes that while subscriptions may benefit businesses, products must drive recurrence rather than the other way around to avoid harming consumers.
Deep dive into consumer subscription
- 1. Deep Dive into Consumer Subscription For OnDeck Fellows By: Gautam Gupta
- 2. About Me ● Investor turned operator, then back to investor ● Started at GC when I was 18 yrs old ● Built nationally recognized brand from 0 to $50m in revenue ● Many mistakes made and lessons learned! ● Early stage (seed/Series A) consumer tech focused VC fund ● Investors in many great brands (Lyft, Rothy’s, Daily Harvest, Ring, etc.) ● Operators investing in entrepreneurs
- 3. Subscription: often good for the business, bad for the consumer For the business: ● Recurring revenue - more predictable / better return on marketing spend ● Higher valuation multiples ● Can lower barrier of entry for a product
- 4. Subscription: often good for the business, bad for the consumer For the consumer: ● What am I committing to? ● How hard will it be to cancel? ● Do I really need this every month? ● What value am I getting? For the business: ● Recurring revenue - more predictable / better return on marketing spend ● Higher valuation multiples ● Can lower barrier of entry for a product
- 5. Takeaway: While subscription models may be great for the business, without thinking through the value prop, it may be worse for the consumer than buying on an a la carte basis Product drives recurrence, not the other way around
- 6. Some of the world’s most valuable consumer businesses are subscription based
- 7. Subscription vs. Membership Subscription: usually single purpose recurring service - something you need / want on a regular basis. Explicit savings for being a subscriber. ● Example: Subscribe and save Membership: incorporates benefits beyond access. Generally has many benefits (not just monetary) including status, savings on other services, etc. ● Example: Amazon Prime, Costco
- 8. 5 types of consumer subscriptions What needs to be true: Watch outs: Examples Entertainment / Content Content changes often and subscription allows consumers to extract high value High early cost of content development Match, Netflix, Spotify Tools Frequent (near daily) usage Risk of price compression through free/bundled tools Grammarly, Lastpass, Dropbox Curation / Discovery Lots of products/brands, need for filter Novelty wears off / too much product relative to category purchase freq Ipsy, Stitch Fix Access Truly unique product / unable to buy elsewhere More likely to go in/out Audible, ClassPass, MealPal Replenishment Recurring behavior where subscription drives convenience or better consumer behavior Without unique product, can lead to price competition Dollar Shave Club, Subscribe and Save
- 9. Subscription Seesaw CAC/SAC - Offer - Channels - Pricing LTV - Cost to serve / Margin dollars per month - Retention
- 10. Subscription Seesaw Increase in CVR driven by new offer Decrease in LTV caused by lower M1 retention
- 11. Subscription Seesaw Decrease in CVR driven by premium tier Increase in gross margin dollars / LTV
- 12. Takeaway: In a subscription model, how you acquire the customer, serve the customer, and customer value are highly intertwined. Changing one lever often results in changes to other parts of the business.
- 13. Characteristics of truly great subscription businesses ● Use an offer to incentivize trial or freemium ○ Free is a powerful lever - can be hard to move away from so need to be confident in LTV ● Constant optimization of non-member experience ● Either low churn or fast payback (driven by low CAC or faster cash collection) ● Often, trade off margin/SAC to get higher retention - pays off in the long term ● Obsessed with measurement / analytics (customer cost / value)
- 14. Figuring out retention often helps on acquisition Better WoM, stronger value prop, less work / capital to drive net new sub growth More content > higher retention + more reasons to sign up Wider assortment > higher freq + more eating occasions to market
- 15. Takeaway Engagement is a leading indicator for retention. The more engagement the better. Often what drives engagement will also drive acquisition. Don't thrive off breakage or consumers who forget to cancel.
- 16. Retention: the basic KPIs M1 - of users that signed up on day 1, how many remain at day 30 ● Good proxy for longer term retention ● Very sensitive to offer or channel M12 - of users that signed up on day 1, how many remain at day 365 Average Churn - users who churn during the month / beginning of month subscribers + new sign ups ● Influenced by subscriber tenure but helpful from a comparison perspective ● Highly influenced by acquisition channel and offer ● Churn includes voluntary (cancels) and involuntary (declines/billing failure) cancelation - highly correlated Shape of the churn curve - when does m/m churn flatten such that incremental churn is asymptotic ● Ideally it flattens sooner vs later, if still seeing high churn after 3-6 months, could be indicative of service issues or fundamental product / value prop issues
- 17. Benchmarks ● Hard to find great benchmarks - exceptional companies often exceed benchmark ● M1: 65-85% retention ● M12: 25-40% retention ● Major components that impact churn: ○ Acquisition offer ○ Pricing ○ Billing period (monthly vs annual) ○ Digital vs. physical goods ● Watch outs: ○ Skip vs Cancel ○ Demographics
- 18. LTV/CAC Watch Outs Calculating LTV, most common mistakes: ● Confuse LTR (revenue) with LTV (on a gross margin basis) ● Not using fully burdened COGS (cost to ship/service) or CAC (agency fees, etc) In early days, resist the VC urge to diversify your paid marketing mix. The benefits of going deep in one channel are usually greater than trying to have a highly diversified mix. Additionally, don't be highly dependent on paid - virality and organic a prerequisite to be successful (goes back to product) Early adopters may be the easiest to acquire and have the best retention. Don't be overly discouraged by atrophy of later cohorts
- 19. Counter intuitive tactics Make it really easy to cancel Why: drives higher conversion and due to simplicity of cancellation process, subscribers are more likely to re-join
- 20. Counter intuitive tactics Drive perceived value Why: makes the 6 month option even more attractive, increases take rate of 6 mo which drives better cash collection
- 21. Counter intuitive tactics 30 trial / 90 day replenishment Why: lower barrier to trial but maintain faster payback
- 22. Counter intuitive tactics Anchor / Decoy Pricing Why: anchor the consumer in high monthly price, save +60% by taking annual upsell
- 23. Counter intuitive tactics Leverage a la carte to drive subscription Why: anchor perceived value at the a la carte price
- 24. Key Takeaways ● Design your subscription with consumer value prop top of mind ● Measure and optimize but be careful of the seesaw effect ● Win on retention / engagement ● Test the acquisition flow and retention, even seemingly counterintuitive ideas
- 25. Connect Email: gautam@m13.co Twitter: @gRamblings Subscription Reading: ● Prof Peter Fader ● Michael Mauboussin And thanks to Leo Polovets for the design inspiration from his Risk Assessment deck