Quality of a subscription business?
Hi guys:
What metrics would you usually look like to see if the quality of a subscription business is good? A lot of businesses these days seem to claim they are subscription businesses/indeed charge through subscription, but I'm thinking about how would you know if these are good quality subscription (things that people will keep over time, even during economic downturn) versus low quality subscription (things people will drop when they have less money)?
What metrics would you look at (if there's limited historical data available, esp. for some new services)?
Customer churn would be a good indicator of perceived value.
Thanks! I was wondering if there are indicators that might specifically help us see how a company might perform when its customers are in harder economic situations. For example, 2 products can both have a churn rate of 10% now, but one is serving a more core need, and won't be dropped as much during economic downturn. How can one tell?
Recently acquired a SaaS based business that didn't have customer churn data through the last downturn. Fairly limited comps available to go back and look at how other similar businesses performed during a recession, so was in a similar position. Ultimately, a huge portion of our diligence process was focused on this.
We looked at the end users of the product and did our best to figure out what happened to the people who are the users of the product last downturn (revenue in their industry, headcount/employment data from the BLS in their industry, how quick those things bounced back, etc., spent a TON of time talking to customers to understand what happened last recession and how they would likely be impacted by a new recession based off of shifts in business model).
That was in the B2B SaaS space, and I imagine you can do something similar for a B2C play. Stratify your customer base into as detailed and meaningful of buckets as possible if the data is available - geography, age, annual income. Try to determine what happened to a similar looking customer base during the last recession, and if there have been any changes (say to the economy of a particular geography) that would make that customer base perform differently in the next recession. Furthermore, if it's a new method of delivery for an old product (such as a subscription box for health and beauty products), look at sales of similar products last go-around.
There's also other elements besides churn that you have to try and triangulate - what happens to existing customer upgrades? What happens to existing customers that downgrade? What happens to the company's ability to acquire new customers? How is your cost of customer acquisition impacted? Ultimately, you'll have to make a judgement call on how sticky that revenue actually is - you'll never get a clear answer until it happens. But I would dedicate a lot of time to informing yourself as best as possible.
Customer Acquisition Cost (CAC), Lifetime Value of a Customer (LTV), and Payback Period.
CAC needs to be lower than LTV. Otherwise, you need to start looking for more efficient marketing channels.
Payback Period is how long it takes to cover the CAC. It could range anywhere between Day 0 (the signing date) all the way to Year 5+.
Whether a number is good or bad depends on the business and industry. A high CAC may just mean you have a high and consistent LTV that you can afford to spend more to grow. A long Payback Period may be worth it if it's a winner-takes-pie industry.
CAC, gross margins, subscription retention rate, subscription growth rate, and conversion rate depending on if there is a free version or not (Dropbox example). Looking at page 56 on the dropbox June 10-Q they don't even track retention rates (Just average revenue per user). Many are dream figures that public companies simply don't publish. Subscription length/contract length could also factor in. If the minimum subscription time is a year you will likely see less churn/turnover. Also I suppose it would be important to see how big the sign up bonuses are and if customers are just signing up for that.
For judging how it will do during a downturn with no past data you will have to look to similar businesses and estimate from there. Another way is to take a qualitative approach and see how sticky the product is or how required the subscription is. Cisco sells many products on a subscription only basis (B2B). Where it is difficult for the customers to change services not only because of ease but cost as well.
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