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A tweet on a touchy subject

We put something out there on Twitter yesterday and it seemed to touch a nerve.

120+ likes and 25,000 impressions isn’t enough to promote a SoundCloud, but it is enough to know people were getting hung up on it.

As the replies rolled in, there was talk about how the comparison to software was maybe unfair:

The business models are different, the buyers are different, you can’t compare the churn rates.

We think people were missing the point.

Parallel thinking is a valuable skill in all businesses, and particularly at this stage of DTC’s evolution. Because software underwent a similar trend.

Once bought as a semi-physical good, software moved to the cloud and started selling on a subscription basis. Investors poured in, because the sales generated by a software business with a subscription-delivery model became viewed as annuities: contracts renewed at a fixed rate on a set interval.

The result?

You could pay more to acquire a customer than previously, and you could accurately project out how much that customer would be worth over time, helping you scale a business faster than ever.

It provided for a highly predictable model, with a nice tidy metric to keep things in check on the acquisition front. Thus, the LTV:CAC ratio was born (thanks to David Skok), and, well, for a long time all you heard SaaS folks talking about was the importance of reducing churn and clearing a 3:1 LTV:CAC benchmark. 

Under that benchmark retention become as important as acquisition.

Sound familiar?

Here’s the problem: While DTC is parroting these lines and running this playbook, software has moved on.

The fastest-growing SaaS businesses today don’t charge a set fee on a monthly or annual basis anymore. They charge based on usage and consumption. And they work to grow that usage and consumption on a monthly basis.

In fact, the publicly traded companies don’t even report on churn; they report on net-dollar retention to show how effectively they’re able to make more money from their customers who stick around—and how that more than makes up for the customers who don’t. 

In other words, they report on how they expand share of wallet.

Early in this newsletter’s history, we proposed that retention was a poor word for what brands should aim for when it comes to repeat customers, and we explained that stance as follows:

A better term might be reacquisition...

  • Retention-focused mindset: I am not competing in market for my existing customer, because my customer is committed to my brand and illustrates that commitment through her/his behavior and emotional reactions to my brand’s message. It will take something significant for me to lose that commitment from the customer.

  • Reacquisition-focused mindset: I am in a competitive market and my customer has a lot of choices. My customer likes my brand and uses it, but also knows better products and better deals may exist (and probably takes advantage of them on occasion), and is not averse to change. It takes very little for me to lose that customer.

We know we bring up this point often, but that’s because it’s worth repeating. And it’s highly applicable here.

The DTC subscription model—today—is one that’s rooted in retention. But the fastest growing software companies? 

They’re focused on reacquiring a customer through increasing product usage and expanding product adoption.

This is, perhaps ironically enough, more akin to the Big CPG playbook than the original SaaS playbook—except for the fact that a credit card is on file.

Which sounds a lot like something DTC has at its disposal.