The subscription economy is booming.
Companies from florists, to furniture stores and even car manufacturers are adopting the subscription model and seeing tremendous growth.
Perhaps its success can be attributed to the optimal outcomes for both the business and the customer.
For customers, the greatest value is convenience. Subscription services take the thinking out of a repetitive buying decision, allowing people to shop on 'autopilot'. No more dreaded last minute trips to the store to pick up dog food or grab a pack of shavers. Buying on subscription gives you peace of mind that whatever you need will be there, hassle free and delivered to your door (or device).
For businesses, the overarching benefit of a subscription business model is the reliability and predictability of revenue and increased efficiencies. These factors are ideal when running business, and also one of the most compelling factors in boosting the value of your company.
Let's take a closer look at the advantages of a subscription-model...
Key Advantages of a Subscription-Based Model
1) Predictability and Sustainability
It's the best damn model in the world...it's got great predictability for planning, which helps you as an entrepreneur sleep at night."
2014, Mike McDerment, CEO and co-founder of subscription business freshbooks.com.
A business that's designed around repeat purchasing means that you can better forecast revenue and cash flow, it also allows you to better manage your inventory and waste, leading to improved cost savings and efficiency.
A great example is US based florist H Bloom. They were able to transform their business model and reduce wastage to just 2% of their inventory. This was almost unheard of in the florist industry when where waste could traditionally be close to 50%. This was because the owners of H Bloom set up a subscription-based business delivering flowers to hotels and spas who regularly needed fresh arrangements. By moving away from the one-off customer, the business was able to better understand their customer demands and develop a sustainable, long-term approach to revenue.
2) Driver of Company Value
Investors love predictability and visibility.
A recurring revenue model not only tells investors that there is a predictable stream of income in the business, but this contractual revenue is something they can base ambitious expansion plans around. When you know the money is coming in, you can invest in growth strategies.
According to John Warrilow, author of Built to Sell and The Automatic Customer, “The more guaranteed revenue you can offer a potential acquirer, the more valuable your business is going to be." He also states, "because a high percentage of the revenue of a subscription-based business is recurring, its value will be up to eight times that of a comparable business with very little recurring revenue.”
The predictability in a subscription model extends much further than income. Having predictable data and client usage metrics helps keep marketing spend lower and uncovers opportunities for cross-selling and up-selling. It also helps manage inventory, keeps pricing structures simpler and enables these businesses to measure the lifetime value of a customer.
Graphic design software business Canva is a great case example. They made the news recently after securing an additional $70M in their latest funding round, increasing their valuation to a cool $2.5B. Their recurring revenue product Canva Pro has been attributed to their growing valuation. Judging by the latest injection of funds, it continues to give investors’ confidence in the business.
3) Customer Insights
Some of the typical metrics for subscription based businesses include the churn rate, annual or monthly recurring revenue (ARR or MRR), customer lifetime value (CLV) and customer acquisition cost (CAC). These metrics provide clarity around the acquisition and retention of customers. Purchase behaviours and demographic data also provide further insights. As a result, these analytics can be used to continuosly strengthen, adjust and innovate.
The subscription model is no longer just for the magazine publishers or the SaaS industry. We've seen examples across a range of industries including professional services, health and medical and even earth moving equipment (Caterpillar's Cat Connect model is worth looking up). If you truly want to build a valuable company, then now is the time to inject recurring revenue into your business.
At Exit Advisory Group we help entrepreneurs maximise company value and exit at the top of their game.
We do this by giving business owners the tools and strategies to design more profitable, efficient and enjoyable businesses to own - that are also less dependent on them. When they choose to exit, they are in the best position to unlock the wealth in their business and be rewarded for their hard work.
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