Half the battle in growing a subscription product is figuring out the business model's strengths and weaknesses. Part of the reason that I started this blog was to try to contextualize the "generic" start-up growth advice and filter what I think works for subscription products. I have seen multiple subscription companies go out of business when they try to use a growth playbook from another model (typically e-commerce) and apply it to consumer subscriptions. Like the coach of a new team, if you want to win the championship, you need to figure out your strengths and weaknesses before you commit to any plans. The Product “Sells Itself” The Product “Sells Itself” Most subscription products, whether B2B or B2C, make their money through a self-service sign-up flow. This means that people can find the product and buy it without needing to talk to a salesperson. The Good: You Don’t Need Salespeople The Good: You Don’t Need Salespeople The good part of this is that you, as the operator of the business, don’t need to find, hire, and train teams of salespeople before you can start selling your product. This (might) mean that you have to spend less money on salaries and can get to market faster without the delay of staffing up a team. This also means that you can support lower price points because you don’t have to factor in the high salaries of salespeople into your customer acquisition costs. This, in turn, will lower some of your other costs (such as office space), which increase when you have a larger team. The initial team also doesn’t have to spend as much time hiring and managing people, which is time that can be redeployed into product development. The Bad: You Don’t Have Salespeople The Bad: You Don’t Have Salespeople While you don’t have a sales team to manage, you also don’t have a sales team that can bring customer feedback back to the product team and adjust messaging on the fly to see what works with different customers. You will see users who reach your site and then leave without buying, and it will be very, very hard to figure out why. This probably means hiring other expensive employees (engineers, designers, product managers, growth marketers, etc.) who can help you become proficient at selling the product via self-service. I would argue that in the last 5 years, these roles have been harder to fill than salespeople because there are fewer of them, and big tech will pay them a lot if they are experienced. Recurring Cash Flows Recurring Cash Flows Arguably, the best part of subscriptions is the recurring revenue. You get to keep earning money from your customers as long as they keep using the product. The Good: Predictable Revenue + High Valuations The Good: Predictable Revenue + High Valuations Maybe the best part of a subscription business is that you have recurring cash flows that make the business easier to manage and predict. This puts less pressure on acquisition every month to acquire more revenue and keep the lights on. You don’t have to keep re-acquiring your customers to make enough money to survive. If you can keep users around for a long time and find effective acquisition channels, you can trigger compounding growth, allowing you to build a large user base and a valuable business. Historically, subscription businesses have received high valuations relative to their revenue, which is great for employees and investors when they are bought. Amazon bought ​Pillpack​ for $​753M​ in 2018, reportedly doing around $100M in revenue the year before, getting a 7-8x multiple. Codecademy made around ​$50M annually in 2021​ and was bought for ​525M later that year​, getting around a 10x multiple. ​Pillpack​ ​753M​ ​$50M annually in 2021​ ​525M later that year​ The Bad: LTV Unpredictability & Ceilings The Bad: LTV Unpredictability & Ceilings When you are in your growth stage as a company, you are still changing core aspects of your model, such as the price, feature set, aquistion channels, etc. All of these are going to impact the LTV of your user base, but these changes can't be "known" until that group of users reaches the end of their lifecycle.  This means it becomes ​very hard​ to forecast revenue and budget how much money to spend on aquistion costs. ​very hard​ Additionally, depending on your product's use case, you have a “natural” cap on how long your users will stay.  All products are built to solve problems, and it will be very, very hard to keep your users around longer than they have the problem you are solving for them. If you sell a product that helps me lose weight via dieting, after 4 months, most of your users will either have lost the weight or have given up. There isn’t a lot you can do to extend them past that. Humans fundamentally only do a few behaviors for longer than a year, and there are already giant businesses in those spaces (cell phone contracts, utility companies, rent, insurance, etc.). The common use cases of internet products, such as dating, exercise, weight loss, education, and dating, are all things users will eventually complete or abandon. The Revenue Base is Very Durable The Revenue Base is Very Durable Subscription businesses are classically durable, meaning they can withstand both good and bad market pressures. The Good: Can Survive Bad Markets Well The Good: Can Survive Bad Markets Well Because your revenue base consists of many small transactions, this makes the business more durable over the long term. This differs from B2B companies, which might earn 40% of their revenue from 3 large clients. If these clients leave for any reason, you are in serious trouble. Because of this, subscription businesses can weather bad economies relatively well. Their revenue base is diversified across potentially millions of small transactions. The biggest “billion dollar” start-up failures are always B2B companies. This is because, while a company might be making 10 million dollars, if their average customer pays them 250k to use the service, they only have 40 customers. If their margins are 30%, it would only take 12 customers to leave them for them to start losing money. This can happen, especially in a bad economy, and if cheaper alternatives exist. For example, you can read this ​very depressing list​. ​very depressing list​ The Bad: Much Slower to Scale Revenue The Bad: Much Slower to Scale Revenue Subscription products take longer to scale up revenue than other business models for two core reasons: The average contract value is much, much lower than that of B2B products. If you are currently launching a AI copilot tool for mechanical engineers, and the average contract value is 20k per month, then you are only 5 customers away from $100k ARR. If you’re selling a $9.99 per month product, you’d need slightly more than 10,000 customers to reach the same revenue numbers. This just takes more time. The average contract value is much, much lower than that of B2B products. If you are currently launching a AI copilot tool for mechanical engineers, and the average contract value is 20k per month, then you are only 5 customers away from $100k ARR. If you’re selling a $9.99 per month product, you’d need slightly more than 10,000 customers to reach the same revenue numbers. This just takes more time. It is harder to use paid acquisition to grow revenue. It's not impossible, but it's harder. The money you earn back from users is spread across their lifecycle, so it will take you longer to recover your acquisition cost and reinvest it in acquiring more users. Contrast this with e-commerce, where the LTV of “most” of their users is captured in a single order, which allows those companies to recycle that money back into acquisition faster. Additionally, the total lifetime value of subscription products tends to be less than that of other products, so you have less to spend to compete in those channels. It is harder to use paid acquisition to grow revenue. It's not impossible, but it's harder. The money you earn back from users is spread across their lifecycle, so it will take you longer to recover your acquisition cost and reinvest it in acquiring more users. Contrast this with e-commerce, where the LTV of “most” of their users is captured in a single order, which allows those companies to recycle that money back into acquisition faster. Additionally, the total lifetime value of subscription products tends to be less than that of other products, so you have less to spend to compete in those channels. If your user is worth $115 in LTV, you’ll struggle to compete for audiences with other products whose users might be worth thousands of dollars and, therefore, might be able to spend 5x the budget in the same ad channels. So What Do You Do With This Information? So What Do You Do With This Information? 99% of the great subscription products were created by systematically improving the core product and acquisition channels.  You live in the land of compounding small wins. You are very, very unlikely to find a silver bullet that is going to accelerate your growth and lean into your strengths and try to mitigate some of the weaknesses of the subscription model. You won't (and shouldn't plan to) remove these weaknesses, but you might be able to improve them slightly.

The is an opinion piece based on the author’s POV and does not necessarily reflect the views of HackerNoon.

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