Unfortunately I messed up the link for the AngelList Confidential conversation when this post went out to all subscribers. Here's the correct link to the video recording: https://vimeo.com/456778040/130bfb1cda
had a small question about subscriptions: why do annual subscriptions only work by paying the complete amount upfront? (It could maybe have a simpler answer, but I haven't found it yet)
There's a bunch to unpack with annual subscriptions vs. monthly.
I think they work very well for some businesses, and less well for others.
For startups, getting annual subscribers can be very helpful - more cash upfront leads to better working capital and quicker payback on customer acquisition costs, which in turn can lead to faster growth.
Annual subscribers can often retain better than monthly subscribers, and you get a whole year to deliver value to subscribers, versus monthly subscriptions where you have to deliver value every single month, else a subscriber could churn.
So what's most important here is consumer behavior and the type of behavior you expect from subscribers, and that should drive your decision-making around annual vs. monthly, and which one you prefer. Netflix and Spotify I believe only offer monthly subscriptions. They are the types of services that consumers can use every day, multiple times per day, and so they should be able to deliver enough value every month to their subscribers to justify renewing the following month. They can also increase prices and suddenly have more revenue next month by virtue of every customer being monthly - which is a big benefit versus having all annual subscribers.
In contrast, a lot of services are more episodic than Netflix and Spotify, and hence annual makes more sense. For aspirational services, that you sign up hoping that you will use, like gym memberships or meditation apps like Calm and Headspace, driving subscribers to annual has an extra advantage which is that consumers psychologically feel like they have a year to use and get enough value out of the product. Their retention is certainly better with annual subscribers versus monthly ones.
And finally there are annual membership programs like Amazon Prime and Costco that make sense as annuals instead of monthlies, because of the episodic nature of some customers' purchasing from those stores. You can also offer more in an annual bundle over time during the course of a year.
Hope some of the above helps you think this through.
Currently building a b2c subscription-based edtech startup and the point about aspirational services potentially working better as annual subscriptions is very very useful, thanks.
thanks nikhil! so you mentioned, “programs like Amazon Prime and Costco make sense as annuals instead of monthlies, because of the episodic nature of some customers' purchasing from those stores” — which speaks to the “memberships” side of the conversation — what i actually wanted to get your take on is what happens when this is distilled down to just the product level — e.g. to just your monthly subscription of coffee. would it ever make sense to only offer an annual subscription to coffee for example? and to completely forgo the monthly? wouldn’t this help reduce monthly churn, and be able to take part in all the advantages you mentioned above as well?
I’m a little late to the party... but the post still was very informative and well put composed. This makes me very excited for the future of this great business model and business as a whole. One of the next areas I believe may be disrupted with this business model in the future is transportation, via robotaxis possibly sold in a subscription of some kind. What are some areas that you are most excited about?
Definitely more to do in subscription in areas like transportation, housing, healthcare, education, financial services, climate tech... even some aspects of entertainment like audio, per Matthew Ball's fantastic piece from this week: https://www.matthewball.vc/all/audiotech.
Great post! For me, subscriptions are all about automation and intentional spending, which then allows me to better automate my saving/investing. One of the open questions for me is whether or not subscriptions actually make sense for products with more fixed/upfront costs. At ClassPass it was obvious we had to charge users on a recurring basis because our corresponding costs were recurring. If you look at something like Calm or Todoist, more software only products, it's a little less clear why those payments have to be recurring. Sure there are new content/feature and data/warehouse costs (plus employee salaries), but in many cases I would rather pay 3-4x an annual membership fee in a one time payment just so I can feel like I actually own the thing, which then allows the company to get out of the dreaded churn game altogether. I'm surprised we don't see more companies pressure testing the assumptions being made there and running the experiment themselves.
1) Love the framing around automation and intentional spending. I'm curious how many other consumers think about subscriptions this way, but you're definitely not alone.
2) Companies with low ongoing/marginal costs are better subscription businesses, but you're right that some of them are less clear as to whether or not they should be subscriptions for consumers. I think in many instances consumer happiness would be higher with a onetime cost. Perhaps we will see some companies recognize this and build anti-subscription businesses. Will be fascinating to watch.
Re: #2, totally understand why they're better businesses to invest in, particularly from a venture perspective, but am not fully convinced they're inherently better if you're starting from scratch. Will definitely be fun to watch though, plus you made it my exclusive Recs page :)
Nikhil thanks for the great analysis and I look forward to the next one on subscriptions. Subscriptions seem to have become the Holy grail to build resilience to shocks through recurring revenue. It's definitely an increasingly dominant business model, you are more than right! The only concern is that too much focus on subscriptions can be misleading especially for non-tech businesses. Subscriptions are not for everyone and not the solution for everything.
I've listened the last earnings call of Nike a few days ago and they are starting to talk and act like a SaaS business. Starbucks has had a similar path in the last few years. I believe that subscriptions or not subscriptions the next 5-10 years are going to be the era of the SaaSification of all sort of industries. The winners of the new reality are the ones that understand how the secret formula today is to follow a set of go-to-market mantras pioneered by the SaaS industry in the last 20 years.
Following the mantras of Saasification doesn’t mean necessarily moving 100% of a business into subscription, or even launching subscriptions at all, although there is still a lot of room for subscription models ...
Today all businesses should know they are a SaaS business. If not it means they don’t realize it yet. I'm having fun sharing news and writing about this topic on substack if you want to have a look.
Great post, Nikhil. It helped me to stop and think more about it. Hope you don't mind me sharing it here for your thoughts.
It seems that asking if we are reaching subscription fatigue is just the wrong question. Subscription in itself is not a product/service. Before the subscription, there is a job to be done by the real product/service. Analyzing the job being done sheds some light into which subscriptions will likely thrive and which will fade. The acid test: is the subscription perceived as a convenience to receive the real job done by the product/service, or does it represent an onus?
Traditional retail banking that charges monthly fees is unarguably a subscription, and it has been for ages. Neo-banks are demonstrating that they can do the same job without the onus of a subscription.
Greenlight, a fintech that offers a debit card for kids, hit the spot with a subscription. The real job is to make parents' lives easier to control how much and where their kids can spend money. Subscription adds to the convenience of paying for this service.
BlueApron (and the likes) partially succeed at the job of delivering food but fails to eliminate the burden of cooking. Allured patrons are led do believe that cooking gets magically effortless, but it doesn't = high churn. But it explains why BlueApron experienced a rebound during COVID: food delivery was the real job new customers were looking for during the scary times. BlueApron will inevitably resume fading as we get more used to the new normal and shift to other options to get the "food delivery job" done, the subscription will be perceived as an onus.
Your post also prompted me to think that subscriptions have second-order effects. For example, subscriptions promote inertia, which explains why we don't reevaluate all our tv on-demand subscriptions monthly. Subscriptions could represent an emotional commitment, which explains why so many people continue to subscribe to a gym even if they don't use it.
Anyhow, thanks for the nudge! I cannot wait for parts 2 and 3.
Alex, really enjoyed these thoughts - thank you for sharing. The way I think about your "job to be done" framing is: is this service a "must have" vs. "nice to have?" The more convenience for a job to be done... the more it's a must have. But that's not the full story given the aspirational/emotional behavior that drives subscriptions such as gym memberships or meditation apps. Would love your feedback on the next essay, which relates to these points.
Shrenivass, firstly, this piece is U.S.-centric, so I'm not sure how many of the learnings are applicable to markets like India. But, in general, I think you're right that credit cards and the higher penetration of cards and propensity to use those cards is a big driver of the growth in subscriptions in the U.S., as well as in other markets.
I think subscription fatigue does exist, though it's probably smaller than it's made out to be and I would define it differently. The fatigue is around having to pay for something in eternity for a service that you would rather own. While owning content is not viable any more as an alternative for a Spotify or a Netflix, subscribing to an office 365 is not as much of a slam dunk when not much 'new' content or functionality is coming outside of safety updates. So the fatigue might be around too many services rushing to the subscription model where the value just isn't there. But yes, subscriptions are here to stay in general and they are also a great way for customers to try new things without investing heavily upfront
Rukesh, really appreciate this balanced perspective. You're right that there are a bunch of services that would be better one-time purchases for the consumer to own, in spite of lack of updates and other potential benefits that come with subscriptions. Thanks for sharing.
Looking forward to parts 2 and 3 on this topic! And now that we are here, I had sent you a pitch on LinkedIn a little while back. Would love to chat, thanks
Wonder if there is also a connection between the boom in adoption of D2C / consumer products subscription and a rise in dual income households. Certain subscriptions like meal kits, kids toys, Amazon Subscribe & save for CPG stuff etc help save time and shopping for these was typically a chore traditionally handled by the woman
Rashi, perhaps. I think consumers have always valued products and services based on a combination of more convenience, higher quality, and better price. I think the familiarity with direct online purchasing and subscribing, and the better convenience+quality+price of a number of these services is more of a driver than the rise in dual income households. But perhaps those households are more sensitive to convenience than ever before, and there's more of those households in the U.S. as well.
Unfortunately I messed up the link for the AngelList Confidential conversation when this post went out to all subscribers. Here's the correct link to the video recording: https://vimeo.com/456778040/130bfb1cda
Hey Nikhil,
had a small question about subscriptions: why do annual subscriptions only work by paying the complete amount upfront? (It could maybe have a simpler answer, but I haven't found it yet)
There's a bunch to unpack with annual subscriptions vs. monthly.
I think they work very well for some businesses, and less well for others.
For startups, getting annual subscribers can be very helpful - more cash upfront leads to better working capital and quicker payback on customer acquisition costs, which in turn can lead to faster growth.
Annual subscribers can often retain better than monthly subscribers, and you get a whole year to deliver value to subscribers, versus monthly subscriptions where you have to deliver value every single month, else a subscriber could churn.
So what's most important here is consumer behavior and the type of behavior you expect from subscribers, and that should drive your decision-making around annual vs. monthly, and which one you prefer. Netflix and Spotify I believe only offer monthly subscriptions. They are the types of services that consumers can use every day, multiple times per day, and so they should be able to deliver enough value every month to their subscribers to justify renewing the following month. They can also increase prices and suddenly have more revenue next month by virtue of every customer being monthly - which is a big benefit versus having all annual subscribers.
In contrast, a lot of services are more episodic than Netflix and Spotify, and hence annual makes more sense. For aspirational services, that you sign up hoping that you will use, like gym memberships or meditation apps like Calm and Headspace, driving subscribers to annual has an extra advantage which is that consumers psychologically feel like they have a year to use and get enough value out of the product. Their retention is certainly better with annual subscribers versus monthly ones.
And finally there are annual membership programs like Amazon Prime and Costco that make sense as annuals instead of monthlies, because of the episodic nature of some customers' purchasing from those stores. You can also offer more in an annual bundle over time during the course of a year.
Hope some of the above helps you think this through.
Currently building a b2c subscription-based edtech startup and the point about aspirational services potentially working better as annual subscriptions is very very useful, thanks.
glad to hear, Garreth! all the best :)
hey nikhil! was just wondering if you thought this line of thinking also applies to monthly vs yearly subscriptions for D2C food companies?
John, I believe so, but happy for you to comment more and give feedback.
thanks nikhil! so you mentioned, “programs like Amazon Prime and Costco make sense as annuals instead of monthlies, because of the episodic nature of some customers' purchasing from those stores” — which speaks to the “memberships” side of the conversation — what i actually wanted to get your take on is what happens when this is distilled down to just the product level — e.g. to just your monthly subscription of coffee. would it ever make sense to only offer an annual subscription to coffee for example? and to completely forgo the monthly? wouldn’t this help reduce monthly churn, and be able to take part in all the advantages you mentioned above as well?
I’m a little late to the party... but the post still was very informative and well put composed. This makes me very excited for the future of this great business model and business as a whole. One of the next areas I believe may be disrupted with this business model in the future is transportation, via robotaxis possibly sold in a subscription of some kind. What are some areas that you are most excited about?
Definitely more to do in subscription in areas like transportation, housing, healthcare, education, financial services, climate tech... even some aspects of entertainment like audio, per Matthew Ball's fantastic piece from this week: https://www.matthewball.vc/all/audiotech.
Great post! For me, subscriptions are all about automation and intentional spending, which then allows me to better automate my saving/investing. One of the open questions for me is whether or not subscriptions actually make sense for products with more fixed/upfront costs. At ClassPass it was obvious we had to charge users on a recurring basis because our corresponding costs were recurring. If you look at something like Calm or Todoist, more software only products, it's a little less clear why those payments have to be recurring. Sure there are new content/feature and data/warehouse costs (plus employee salaries), but in many cases I would rather pay 3-4x an annual membership fee in a one time payment just so I can feel like I actually own the thing, which then allows the company to get out of the dreaded churn game altogether. I'm surprised we don't see more companies pressure testing the assumptions being made there and running the experiment themselves.
Andrew, these are fantastic insights.
1) Love the framing around automation and intentional spending. I'm curious how many other consumers think about subscriptions this way, but you're definitely not alone.
2) Companies with low ongoing/marginal costs are better subscription businesses, but you're right that some of them are less clear as to whether or not they should be subscriptions for consumers. I think in many instances consumer happiness would be higher with a onetime cost. Perhaps we will see some companies recognize this and build anti-subscription businesses. Will be fascinating to watch.
Re: #2, totally understand why they're better businesses to invest in, particularly from a venture perspective, but am not fully convinced they're inherently better if you're starting from scratch. Will definitely be fun to watch though, plus you made it my exclusive Recs page :)
https://www.acwints.com/views/recs
Nikhil thanks for the great analysis and I look forward to the next one on subscriptions. Subscriptions seem to have become the Holy grail to build resilience to shocks through recurring revenue. It's definitely an increasingly dominant business model, you are more than right! The only concern is that too much focus on subscriptions can be misleading especially for non-tech businesses. Subscriptions are not for everyone and not the solution for everything.
I've listened the last earnings call of Nike a few days ago and they are starting to talk and act like a SaaS business. Starbucks has had a similar path in the last few years. I believe that subscriptions or not subscriptions the next 5-10 years are going to be the era of the SaaSification of all sort of industries. The winners of the new reality are the ones that understand how the secret formula today is to follow a set of go-to-market mantras pioneered by the SaaS industry in the last 20 years.
Following the mantras of Saasification doesn’t mean necessarily moving 100% of a business into subscription, or even launching subscriptions at all, although there is still a lot of room for subscription models ...
Today all businesses should know they are a SaaS business. If not it means they don’t realize it yet. I'm having fun sharing news and writing about this topic on substack if you want to have a look.
www.saasification.net
thanks for sharing, Luigi.
Great post, Nikhil. It helped me to stop and think more about it. Hope you don't mind me sharing it here for your thoughts.
It seems that asking if we are reaching subscription fatigue is just the wrong question. Subscription in itself is not a product/service. Before the subscription, there is a job to be done by the real product/service. Analyzing the job being done sheds some light into which subscriptions will likely thrive and which will fade. The acid test: is the subscription perceived as a convenience to receive the real job done by the product/service, or does it represent an onus?
Traditional retail banking that charges monthly fees is unarguably a subscription, and it has been for ages. Neo-banks are demonstrating that they can do the same job without the onus of a subscription.
Greenlight, a fintech that offers a debit card for kids, hit the spot with a subscription. The real job is to make parents' lives easier to control how much and where their kids can spend money. Subscription adds to the convenience of paying for this service.
BlueApron (and the likes) partially succeed at the job of delivering food but fails to eliminate the burden of cooking. Allured patrons are led do believe that cooking gets magically effortless, but it doesn't = high churn. But it explains why BlueApron experienced a rebound during COVID: food delivery was the real job new customers were looking for during the scary times. BlueApron will inevitably resume fading as we get more used to the new normal and shift to other options to get the "food delivery job" done, the subscription will be perceived as an onus.
Your post also prompted me to think that subscriptions have second-order effects. For example, subscriptions promote inertia, which explains why we don't reevaluate all our tv on-demand subscriptions monthly. Subscriptions could represent an emotional commitment, which explains why so many people continue to subscribe to a gym even if they don't use it.
Anyhow, thanks for the nudge! I cannot wait for parts 2 and 3.
Alex, really enjoyed these thoughts - thank you for sharing. The way I think about your "job to be done" framing is: is this service a "must have" vs. "nice to have?" The more convenience for a job to be done... the more it's a must have. But that's not the full story given the aspirational/emotional behavior that drives subscriptions such as gym memberships or meditation apps. Would love your feedback on the next essay, which relates to these points.
I didn't know about Angelist Confidential. Thanks for sharing this and the next year I will attend.
Hello Nikhil, Do you think people using EMI or credit cards for shopping have a higher tendency to opt for subscription based services ?
Who are the immediate potential customers for a subscription based service in terms of lifestyle behavior of people?
Would love to know your thoughts!
Shrenivass, firstly, this piece is U.S.-centric, so I'm not sure how many of the learnings are applicable to markets like India. But, in general, I think you're right that credit cards and the higher penetration of cards and propensity to use those cards is a big driver of the growth in subscriptions in the U.S., as well as in other markets.
I think subscription fatigue does exist, though it's probably smaller than it's made out to be and I would define it differently. The fatigue is around having to pay for something in eternity for a service that you would rather own. While owning content is not viable any more as an alternative for a Spotify or a Netflix, subscribing to an office 365 is not as much of a slam dunk when not much 'new' content or functionality is coming outside of safety updates. So the fatigue might be around too many services rushing to the subscription model where the value just isn't there. But yes, subscriptions are here to stay in general and they are also a great way for customers to try new things without investing heavily upfront
Rukesh, really appreciate this balanced perspective. You're right that there are a bunch of services that would be better one-time purchases for the consumer to own, in spite of lack of updates and other potential benefits that come with subscriptions. Thanks for sharing.
Looking forward to parts 2 and 3 on this topic! And now that we are here, I had sent you a pitch on LinkedIn a little while back. Would love to chat, thanks
Wonder if there is also a connection between the boom in adoption of D2C / consumer products subscription and a rise in dual income households. Certain subscriptions like meal kits, kids toys, Amazon Subscribe & save for CPG stuff etc help save time and shopping for these was typically a chore traditionally handled by the woman
Rashi, perhaps. I think consumers have always valued products and services based on a combination of more convenience, higher quality, and better price. I think the familiarity with direct online purchasing and subscribing, and the better convenience+quality+price of a number of these services is more of a driver than the rise in dual income households. But perhaps those households are more sensitive to convenience than ever before, and there's more of those households in the U.S. as well.