Revenue over Users

Growth in subscription businesses often presents a strategic tension between users and revenue priority -- it can be a fork in the road for the leadership to take one path or the other.

For many, the strategic accessibility of “users first, monetize later” has led down a path of short-term success and later struggles.

Of course, we’re all enamored with the stories of products that put “users first” and grow like crazy, but truthfully, examples of sustained success are quite few. Notably, those that do succeed have done so with a scale of investment funding that’s unrealistic for the vast majority of companies to support over time.

On the other hand many companies with a stated priority on revenue still fall back on user-based metrics for measuring and optimizing growth - over 65% in our experience. It’s incredibly hard to set a revenue priority and have the discipline to stick with it.

Look at what has happened to so many promising subscription DTC companies, falling far from their peak valuation. They’re not realizing the revenue potential of their recurring revenue business model.
- Blue Apron - Down 99% from peak. Market Cap: $48mm
- Smile Direct Club - Down 98%. MC: $157mm
- Bark - Down 93%. MC: $256mm
- Honest Co. - Down 92%. MC: $174mm.
- Stitchfix - Down 95%. MC: $565mm
- Rent the Runway - Down 95%. MC: $189mm
- HelloFresh - Down 78%. MC: $4.12B
- Hims - Down 63%, MC: $2.15B

As Ben Cogan points out:

All of the above companies were venture-backed and rewarded for growth at all costs. The market flipped to rewarding profitability and these brands were caught flat-footed.

To be even more blunt, I don’t think this is simply a positioning issue. When a DTC brand is founded as a venture-backed business, profitability is rarely in the company’s DNA. Brand’s can’t pivot to profitability quickly or, in many cases, at all, because they never really had product market fit.

It’s incredibly hard to capitalize on the advantages of a recurring revenue business model when the strategic priority is user growth. But imagine if any of these companies had set a strategic decision framework on revenue-based metrics — they’d be the darlings of this category having sustained growth through market volatility and over-performed their peers in profitability.

Sustainable growth of a subscription product is largely dependent upon the ability to prioritize revenue-based metrics and the discipline to stick with them.

Having had the opportunity to look deep inside many recurring revenue, membership and subscription businesses across the spectrum of business models and product maturity, one thing remains true over time and through changing marketplaces — those with a foundation of performance evaluation and optimization through revenue metrics are more likely to succeed.

Consider how performance towards a Recurring Revenue goal while underperforming on Active User can still lead to success. Remember that this is the reason why recurring revenue and subscription models are inherently more valuable — though it requires the discipline to establish revenue-based metrics as the priority. Yes, it may be harder to achieve early results and looks less successful at first, nevertheless it is critical to inform good decisions and growth optimizations that create a more sustainable business.

Thanks
- Matt

P.S. Don’t miss the next AMA with Nicole Orders, Product Lead at The Washington Post.

P.P.S. The next workshop on our sustainable Subscriber Growth Framework will be in May, learn more and grab your seat here.