Become part of the growing movement. Invest in Kingscrowd Today!

March 5, 2019

How to Analyze a Subscription Business versus a Non-Subscription Business

The business models of subscription and non-subscription businesses are very different from each other. Non-subscription businesses rely on one-time purchases by the customers and repeat business. While subscription businesses generate revenues regularly and essentially have repeat customers already which forces them to focus on customer retention,

 

What is a Subscription Business?

 

Subscription businesses have a recurring revenue business model. Revenues get generated on a monthly or yearly basis, as the customer keeps renewing his/her subscription to the product or service.

 

With the advent of technology and the introduction of “Software as a Service” (SaaS) products, more businesses are converting to subscription-based models. The goal of a subscription business is to retain the customers for as long as possible.

 

The most common examples of subscription businesses are the entertainment content streaming companies, like Netflix. The industry relies on getting as many new subscriptions as possible. They also want to retain the acquired customers for as long as possible, to maintain the stream of recurring revenue. Instead of purchasing the service for a one-off payment, subscriptions typically renew on a monthly or yearly basis.

 

What is a Non-Subscription Business?

 

A non-subscription business sells its product or service as a one-time sale and earns revenue at the time of sale. Therefore, in a non-subscription business model,  the emphasis is on acquiring as many new customers as possible.

 

How long a customer stays with the business is not very relevant to a non-subscription business. Once the customer has bought the product/service and generated revenue for the company through his purchase, the business objective of a non-subscription business has been met.

 

A simple example of non-subscription businesses is an e-commerce site. They spend heavily on marketing and advertising to acquire new customers, thereby increasing their revenues. After the purchase, the business would like the customer to return to them for their next purchase. However, this is not guaranteed.

 

Difference Between Subscription and Non-Subscription Business Models

 

The most significant difference between these two types of business models is the evolution from buying to subscribing. Many businesses are undergoing this transition and moving from a non-subscription model to a subscription-based model.

 

A subscription business works on building a customer base that will keep paying them regularly. Therefore, the analytical tools for a subscription business revolve around measuring the monthly or yearly recurring revenues, customer acquisition costs, customer lifetime value, churn rate and other parameters. The success of a subscription business depends on retention.

 

By contrast, a non-subscription business should be analyzed based upon the number of transactions, transaction value, acquisition rates, acquisition costs, check out rates, additional traffic generation, and other similar parameters.

 

Analytical Tools for Subscription Businesses

 

We have discussed how the analytical process varies between subscription and non-subscription businesses. Due to the fundamental difference between the underlying business models, the analytical tools also differ.

 

Some of the analytical tools for subscription businesses are:

 

    • Recurring Revenue: The most critical parameter to measure the performance of a subscription business is its recurring revenue (monthly or annually). It indicates how successful the business is, in terms of generating revenue from the same customer regularly.

       

    • Customer Acquisition Costs: For subscription businesses, customer acquisition cost should be compared to the average customer lifetime value. The cost incurred for acquiring a new customer must always be less than the lifetime value that the customer generates for the business. If the cost to acquire a customer is more than the business he generates, it is not a profitable proposition.

       

    • Customer Lifetime Value: Customer Lifetime Value is the net profit that a customer generates for a business. This is an essential metric for analyzing a subscription business. It factors in the monetary worth of a customer to the business and should always be more than the cost incurred to acquire that customer.

       

    • Churn Rate: Churn rate is the percentage rate at which the customers stop subscribing to the service or product. It is a critical metric. If the churn rate is high, the business could find it in a precarious position, due to the loss of recurring revenues from the customers. Subscription businesses rely on happy customers, and a high churn rate indicates precisely the opposite.

       

    • Cost Recovery Time: This is another critical analytical tool. It’s calculated by dividing the customer acquisition cost by the average revenue per user. It indicates how long it will take for the business to recover the cost incurred in acquiring the customer. Subscription businesses with low cost-recovery time are generally more attractive.  

       

    • Customer Funnel: Customer funnels represents the event chain customers follow from the state of awareness in the business to interest, evaluation, commitment, and, finally, sale. The end of the funnel includes a repeat of the sale process. Therefore, for a non-subscription business, the upper part of the funnel is very significant, while for a subscription business, the bottom end is the key- repeat!

       

Subscription and non-subscription businesses are completely distinct business models. Therefore, they differ in what is essential for their survival and success. The primary source of business for a non-subscription business is the number of sales or transactions, while for a subscription business, it is the number of active users generating recurring revenue.

 

Therefore, each type of business must be analyzed differently, with the basic premise of each business in mind. It should be noted that because of the greater predictability, subscription businesses are generally more attractive to investors and are typically rewarded with loftier valuations by Venture investors.

 

Regardless, when considering investing in a company be sure to understand whether you are investing in a subscription or non-subscription business and make sure the fundamentals we outlined above look attractive.


26
About: Sean o'reilly

View Sean o'reilly's articles

Related Items

How to Make Sure You Understand the Terms…

Equity crowdfunding is a new concept. But that is changing. ...

public

Equity Crowdfunding vs. Venture Capital

One of the pros of equity crowdfunding vs. venture capital… ...

public

What’s the Difference Between Series A and a…

When raising capital for a startup, it pays to understand… ...

crowd