Sunday, November 4, 2012

Subscription Business Models: Evolution or Fad?

Subscription Business Models: Evolution or Fad?
We will debate the merits and flaws of the increasing proliferation of companies (not just cloud software+services) adopting a subscription-business model (i.e. subscriptions, usage, metering, etc.). For example, what consumer behaviors are driving this change? Or is the drive coming more from the investor community rewarding recurring business models with higher valuations? What are the challenges with this type of business model, specifically for each of the panelists and how it impacts their future strategy.

Paul Maeder, General Partner, Highland Capital Partners

Daniel Freeman, VP or Product Marketing, Atlassian
Hope Neiman, Chief Marketing Officer, EMN8
Shawn Puddester, Director, Polycom
Sam Clemens, InsightSquared
Brent Chudoba, VP, SurveyMonkey

Q. You work for VC companies, which means you have a high cost of capital. A lot of people have a lower cost of capital than you do. Why rent instead of selling?
  • VCs value the monthly recurring revenue stream than getting cash upfront and capturing a percentage of the LTV. If I have 30 days or a year to sell them more products and services because they are a subscriber, we can get more value.
  • The predictability is good.
  • There is an alignment between the pricing system and the type of thing you're building. 
  • We price for market share. 
  • With competition in market place with open source technologies, etc., our goal is to have massive adoption. This allows us to have
  • Upsell is really the magic on the consumer side. What are we acquiring a customer for? We have extremely robust models for that. Our cost for acquisition has to be less than half the cost of the lifetime value of the customer.
Q. Churn is the ugly underbelly of subscription business models. What are the dynamics of churn and how it changes over time?
  • We segment churn of those who are active vs. those who are passive.
  • At my prior two companies, less than a 10% churn rate for active customers. I don't know very many less than 5%
  • There is a natural floor for churn, like the natural unemployment rate
  • Another thing is how do we calculate LTV? If you have a 5% churn rate for each month. So your customers are lasting for 20 months (1 month divided by 5%). So that means that your customers last for 20 months. If your subscription is $1000, then your LTV is $20,000.
  • What happens if a customer comes back? They quit in 1 month, but come back in month 4. If you hold the data, that can be really valuable.
Q. When is a freemium model appropriate?
  • SurveyMonkey: When you have a fairly low-priced service, it's a good way to let people test your product. Whether that's a free trial or freemium depends. But we are most successful in pockets like nonprofits and small firms, where they may not want to get a budget for a subscription until they know it works. So freemium allows them to do some things, but if they want to export data or add more questions, they need to move to the paid model.
  • Beach Body: We tried to get people to engage with a friend
  • I like free trial, but I'm not a fan of freemium for startups. It's too easy to build something that people can use but not pay for. So go build something that people are willing to write you a check for.
  • Freemium can be a cop out. Business doesn't start until you get paid for it.
Q. After I've subscribed to your product for 5, 8, 10 years, should I get a Buy It Now option so I can buy the license for life?
  •  It's hard because we can shift new stuff and change prices and change currencies. We may want to reserve the right to have price increases. We may also want to change the subscription itself, such as moving from a monthly to a 3-month subscription.
Q. CPA - cost per acquisition. Can you talk between relationship between LTV and CPA?
  • If you're running a subscription model, cost acquisition per customer divided by lifetime value is the most important ration. If CAC / LTV < 1, you probably don't have a value.
  • In consumer it's a bit different, because you can grow the LTV because you have a lot more products you can upsell.
Audience Questions

Q. For consumer companies, where you've already had a basic business model, what is the incentive to switch to subscription?

Shoedazzle actually got rid of the subscription model. At Little Black Bag, lots of new and trial items. At Rent The Runway, looking to do partnerships that become a secondary cash flow basis that is on the subscription model. Otherwise, you get a problem like Gilt and Rue La La where it gets tiring and people are sick of opening your email.

Q. What about customer support policies?
  • In a consumer business, you have to have free returns today. In reality, people don't generally cash in as often as you think. At Beach Body, there was a less than 2% return rate.
  • Just give people their money back. If it's $20 or $100, it's not worth upsetting them and having the customer yell on Twitter. Give it back, and give it back fast.
Q. Does too low a churn mean you're not charging enough for your product? Are you leaving money on the table?
  •  Sure, but we don't want to upset our original user base.
Thanks panelists for coming out today!

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