If you can make subscription services part of your firm’s offer you can build additional value into your agency or practice, making it more appealing to potential investors and buyers – and more resilient.
Every year, Zuora, which sells enterprise software for subscription businesses, publishes its Subscription Economy Index. The most recent edition, released in September 2020, shows that firms with a subscription offer have done well in a challenging year:
“[Subscription] companies continue to outperform their product-based peers by wide margins, growing revenues approximately 6X faster than S&P 500 companies (17.8% versus 3.1%). Overall, subscription sign-ups are on the rise, and while the S&P 500 companies saw sales contract at an annualised rate of -10% in Q2, Zuora customers in our benchmark study actually expanded at a rate of 12%, demonstrating that subscription models drive growth.”
This partly explains why subscriptions are always being pushed so aggressively – six months for the price of one, free car for every new subscriber, and all that. Subscriptions are a harder sell because most buyers want to pay and go but they’re worth the effort in terms of generating stable income.
Even if you have to slash prices to get someone signed up, the chances are you’ll make it back over the duration of the relationship. And every single month a customer stays signed on, that’s guaranteed income without investing time or money on sales and marketing.
The dirty secret of this business model is that once someone’s signed up, it’s usually easier for them to keep paying than to cancel. If you’ve ever signed up for a gym in January, gone twice and then spent six months meaning to call about a refund, you’ll know the feeling.
Not just magazines
When they invented the idea of subscriptions in the 18th century, it was a way of getting people to pay upfront to cover the cost of printing books and what eventually came to be known as magazines. For decades, if you subscribed to something, it would most likely be a magazine, saving you popping to WH Smith for your copy of The Economist every week.
In the past couple of decades, though, it’s occurred to people that you can create subscriptions for everything. From bacon of the month to new razor blades to organic veg, you can sign up for weekly or monthly deliveries of almost anything.
Software has moved to the subscription model, too. Back in 2011, to the lasting annoyance of some of my clients who work in the creative industries, Adobe turned Photoshop into ‘Creative Cloud’. Instead of owning the software outright, and upgrading every year or two to get access to new features, people pay a monthly fee for ongoing access to the software.
Have a look at Adobe’s share price over the past decade and you’ll see it was a smart move. It also proves my point: investors tend to look at subs-based businesses and get a warm, fuzzy feeling.
If you’re not already doing so, you should think about how your offer could incorporate a subscription component.
A common practice is to charge a reduced fee for designing and building a website with a monthly fee for maintenance and hosting.
Another is charging a subscription for ongoing support for technical products or services.
Valuing subscription businesses
Measuring the health and value of a subs business means looking at the following factors, among others:
- Rate of acquisition – how many new sign-ups do you get each month or quarter?
- Churn – how long do those customers stay with you, on average?
- Average revenue per customer (ARPC) – how much are your subscription customers worth?
- Cost of acquisition – how much are you spending chasing new customers?
Obviously, you want the first to be high, the second to be low, the third to keep increasing and the last one to be as low as possible.
Ideally, new clients should be beating down your door – pretty much the experience of streaming services such as Spotify and Netflix in recent years.
When we value your business, we’ll take all that into account so that investors, lenders and buyers can see – hopefully – that you’ve got a stable, long-term revenue stream from subscribers.
Defining your subscription model
You need to ask yourself what subscription offers that customers can’t get from the à la carte menu.
That might mean free or discounted equipment, setup or training at the start of the relationship, for example.
It could be about access to higher tiers of service – exclusive service lines, dedicated relationship managers or subscriber-only content.
You might even throw in another paid product or service as a freebie for subscription clients.
If you think about mobile phones, what lures people into multi-year contracts is a discount on the latest iPhone and bundled minutes, texts and data. What’s your equivalent of that?
A word of caution
There are a couple of things to bear in mind.
First, managing subscription payments will probably mean automating payments and ensuring integration with your customer relationship management system (CRM). You don’t want to be generating invoices or bills manually each month if it can be helped.
Secondly, subscriptions aren’t foolproof, and plenty of subscription businesses have struggled and failed over the years. It’s best thought of as one strand of your business model – a way of spreading the risk.
Talk to us for advice on valuing your business.