Within the last ten years, there has been a lot of focus on companies with recurring revenue or using a subscription model. In tech, early in the conversation about a company’s financials, someone is going to ask what the MRR (Monthly Recurring Revenue) or the ARR (Annual Recurring Revenue) is.
The subscription model has always been around but has become especially popular in the last decade. John Warrillow wrote The Automatic Customer in 2015, so he was near the front of the current popularity. The subtitle to the book is, Creating a Subscription Business in Any Industry.
The attractiveness of this model is obvious. With most business models you start from zero sales every month and have to go out and make revenue happen. With the subscription model, you’ve got a base of MRR that is predictable. Yes, there are those customers who drop their subscription every month, called churn, but it is typically a small and fairly constant percentage of the base.
Thus, the push to try and create a subscription model, no matter what business you’re in. Warrillow lays out nine variations on the theme:
- The Membership Website Model.
- The All-You-Can-Eat Library Model.
- The Private Club Model.
- The Front-of-the-Line Model.
- The Consumables Model.
- The Surprise Box Model.
- The Simplifier Model.
- The Network Model.
- The Peace-of-Mind Model.
There are probably others but that’s plenty for me. Each chapter goes into how the Model works and gives multiple examples of companies using that particular model. This is all good and interesting, although it is amazing how many of the companies used as examples in 2015 are already gone.
The next part of the book is my favorite. This gets into the math in the subscription model. The most helpful, I found, is the ratio of Lifetime Value (LTV) to Customer Acquisition Cost (CAC). LTV is the monthly gross profit from a customer multiplied by the average number of months a customer stays with you. The CAC is the average cost to acquire a customer. This should be broadly calculated to be realistic.
A viable subscription-based model requires the ratio of 3 to 1 or greater. That is, the Lifetime Value of the customer must be three or more times the Cost to Acquire the Customer. That ratio will typically predict the viability of a subscription-based company. There are more metrics in the book, a section on the psychology of selling a subscription, and scaling up a subscription business.
But my second favorite section of the book is a chapter on resistance to the subscription model. This is my second favorite because, well, the subscription model has really pissed me off. I hate the fact that QuickBooks won’t sell me software any longer—everything is a subscription–and costs more. Worse is the HP printer model. They used to just sell me a printer, then I’d buy paper and toner. I guess that isn’t enough. With my latest printer, I had to download HP’s app to use it. Then I had to sign up for a monthly number of copies. If I go over the amount I picked I have to pay more! This is my damn printer, with supplies I pay for! If I go over the limit I set, I have to pay more! While they monitor my behavior! After 30 years, I think the next time I buy a printer, it will be a different brand. Plus, when I look at my business credit card every month, I get mad about how many monthly charges are on it.
And as I write this, BMW has reintroduced, only in Korea and the UK for now, a subscription model for use of heated seats and heated steering wheels! Yes, the heating elements are already on the car. But the owner of the car can choose to rent these features monthly, annually or buy them outright! For the price of a BMW, they ought to be standard and work! But BMW loves this idea of selling the car plus having a recurring annuity off the same car. Although this feature has not been announced for North America, it has generated a huge amount of negative publicity in the U.S. Dumb.
Back to the book. Give the author his due. He’s anticipated this resistance to the subscription model, and he’s provided means and methods to break through this resistance. Looks like no respite for my credit card. But if you’re looking to create a subscription model within your business, this book is a good place to start.
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