(2023-07-13) Winters Why Consumer Subscription Is So Hard And What To Do About It

Casey Winters: Why Consumer Subscription (B2C SaaS) Is So Hard, and What to Do About It. Shortly after I got into tech, investors started to fall in love with subscription business models, mostly on the B2B side.

years after Salesforce, Shopify, etc. became behemoths, people started adapting consumer software to subscription models.

These companies have largely under-performed their B2B counterparts, and I’ll use this post to explain why and how to produce superior returns in this category.

Why is B2B Subscription So Good

While the pessimist would argue B2B subscriptions business actually aren’t that good either and more so looked good during a zero interest environment where “seat growth” was a given for most of your customers, I believe B2B Subscription has some durable advantages

your customers are more rational in their decisions. You tend to be able to evaluate which potential customers will become good sources of revenue, and won’t be terribly surprised by their usage of a product

more importantly, when customers do grow, they create a phenomenon known as net dollar retention. So in any B2B subscription business, sure, some customers will churn. But the ones that do retain tend to invest more in your product over time

What is different in Consumer Subscription? In short, everything.

1. Churn will be higher. Average revenue per customer will be lower. Net dollar retention non-existent.

2. Payments will be less optimized and more expensive

the app stores take a significant percentage of subscriptions purchased through them

To make matters worse, these app stores are also much worse at collecting payments. One way B2B growth teams help their companies improve is addressing involuntary churn through payment failures. Not only is Apple not near as good at this as, say, Stripe, Adyen, et al., because it controls the entire experience, your growth team cannot optimize it to improve payment failure rate at all.

3. Customer acquisition is much harder, less scalable, and has fewer options

Every company uses paid acquisition to target its best potential customers first. And this usually works with healthy payback periods. But, to scale, the company needs to target more and more customers who look less like the core customer (ICP) over time. (CAC)

When we were evaluating investing the series A for Calm at Greylock, this is what spooked us.

How to Solve the Systemic Challenges of Consumer Subscription

1. Leverage network effects to solve retention and acquisition issues

Duolingo has done a masterful job of keeping retention high in a space with normally high churn because their lessons get better every day based on the feedback loop of their customer usage.

Spotify has exponentially more types of content (music, podcasts, video) and exponentially more artists than when it originally launched which attract more listeners. That’s a cross-side network effect.

I also think there are many more opportunities to create multiplayer consumer experiences (or direct network effects) to drive low cost acquisition and better subscription retention because your friends or family keep pulling you back into the app. We mostly see this in the computer games category today.

2. Go multi-product earlier in your lifecycle to make the product stickier and raise price

Calm was able to scale out its sleep stories product in a way that raised the retention rate of its meditation customer base as well as open up segments that were less interested in meditation

3. Open up less saturated acquisition channels

Masterclass is a great example of re-using a lot of the amazing content they sell in their courses and repackaging it for search engines as a taste of what the full courses offer. (SEO)

4. Start selling to businesses (you knew this was coming, right?)

Headspace and Calm have done a good job of expanding into this model as an expansion from their consumer roots