Growing a Subscription Business

Video Transcription

In this episode, we’re going to look at growing a subscription business (This article works best with the video).

Now in a couple of the other videos we’ve looked at, we’ve looked at customer lifetime value, so how to calculate it. We’ve looked at customer lifetime value and how to improve it and now we’re going to look at how to grow a Subscription business. If you haven’t seen the other two videos do check them out.

They’re a great precursor to this video.

We’ve looked at the value dynamics of a single customer, and ultimately, we drew out our T chart. Our T chart is time and money. Very simple. And starting at zero there.

In our improving customer value video, we looked at how much of an improvement you can make by just changing a few of the metrics that feed into customer value by a relatively small amount. We drew out on the single customer view by what that would look like comparing a business that was more maximized for customer value and one that wasn’t.

Higher Customer Acquisition Costs

Let’s start with a business where the Customer Lifetime Value is slightly more expensive to acquire.

The revenues are good but not great over a long period, and the churn is okay but not great over a long period of time. We get to a point where it takes us a while to get the customer payback and the kicker.

As it were, this little bit here where we’re in profitability, this kicker takes a while to come in.

Lower Acquisition Costs

So, let’s look at another business where we’ve optimized customer lifetime value and we’ve reduced the customer acquisition cost a little bit.

We’ve improved our margins and we’ve reduced our churn. So you can see here that the kicker comes in sooner and there’s a larger area here in example number one where we are in, in the green, as in we’re making money on our. individual customers.

So if that’s the individual customer, what does that look like when we go and acquire many customers under a subscription model? So let’s take a look at that for a minute. So we’re going to draw the same T chart, time, money, and we’re at zero here. So let’s look at, we take this and we multiply it by many customers.

It doesn’t really matter how many, but a lot of customers. What we’re going to find if we draw out number two first is that as an overall business, we are going to start to invest. So we’re investing in this customer acquisition cost all the time. So we are going to be investing, investing, investing, investing to grow our customers.

The Trough

And eventually we are going to start to pay back on those customers. And we’re going to come into profit as a business. So, this is the trough, as I like to call it, which is the cost of getting to a scaled subscription business.

So your trough is quite deep here. Over time, you eventually profit with single customer lifetime value number two in here.

So let’s call that number two. What would that look like if we applied the single customer metrics of customer number one?

Well, we’re spending less to get the customers. So, therefore, our trough is likely to be shallower and we’re making more money over time from each customer, so our kicker is likely to be steeper and sooner.

So that’s customer number one.

So why is the Trough Important for your Subscription Business?

Well, there’s a couple of reasons. The area under this curve here, if we just paint that in green, represents the total investment cost of growing your subscription business. At this point here, you’ve broken even with your business.

Even I is Making as much cash as it is spending on a monthly or yearly basis And after this point, we’re starting to make money. So for customer number one, you can see the size of that area there and we can actually calculate that for any individual business.

For customer number two, we’ve got an additional area in the trough that requires funding. It’s this area here. And as you can see, that area under the curve there is approximately three times or four times bigger in area terms than the green trough here.

So what that means is the subscription business will need a lot more fuel or cash in order to get to “break even” here.

Funding Impact

So, what does that mean for growing your subscription business? Well, one, it has an impact on funding. So, how much funding do you need to grow your subscription business?

To break even where you don’t need any future funding this area under the curve here is your funding requirement. If this is too heavy or the payback is too long, you may not secure funding at all. You may not get the opportunity to grow your subscription business.

Number two, your ROI if you like, of your subscription business will depend on the area to a large extent under this curve here.

So as you can see now what you’ve got in example number two is you’ve got a relatively small area under that curve at this time point. So remember we’re exiting the business maybe here. What does this look like? Well, there’s a little bit of area here which represents the value of the business at that time.

The area here in number one. It’s larger, and at the same point in time, this business, business one is going to be more valuable. It’s going to deliver better ROI on its investment compared to business number two.

And the difference between business number one and business number two. It’s millions and millions of pounds in a lot of subscription businesses, both in funding and in terms of ROI.

Be Number One

So you can literally make a huge difference and forecast the future of your growing subscription business if you understand these metrics and you can influence it into the future. That is how you’re going to grow a subscription business and add millions of pounds worth of ROI to it. So our top tip is to be number one.

Don’t be number two. We’ll see you next time