The principles of subscriptions

Over the last decade or so, the subscription-based business model has transformed existing industries and created new types of services. From Netflix and WhatsApp to Dollar Shave Club and Man Crates, subscriptions are everywhere. In The Automatic Customer, consultant and entrepreneur, John Warrillow, lays out the growth of the subscription-based model and how to leverage it to maximum effect.

Warrillow begins by discussing WhatsApp. It achieved massive growth in just a few years on the basis of its business model. For the first year, the app is free. After that, WhatsApp charges a very cheap subscription of $1 per year. The simplicity and low cost of entry enabled WhatsApp to achieve 450 million subscribers within 5 years of its initial release. At that point, Facebook bought the company for $19 billion, making it one of the most successful internet startups ever.

Subscriptions work because they can maintain a steady revenue stream without having to constantly resell to your consumers. Once you have a core of loyal subscribers, they become “automatic.”

The book is quite comprehensive. Warrillow does a great job exploring different types of subscriptions as well techniques for transitioning into a subscription based model. A key distinction here is the difference between private clubs and networks. Some brands are valuable precisely because they are expensive and exclusive. Networks on the other hand accrue in value the more people are using the service. Figuring out where your business lies on this spectrum is key to setting the rates for the subscription.

One major practical concern that Warrillow addresses at length is how companies need to adjust their traditional metrics of success when working with subscriptions. Profit and loss statements do not generally assess the value of subscriptions correctly. A rule of thumb that Warrillow gives, drawn from working with venture capitalists, is that the value or cost of each subscription should be worth three times as much as the investment to attain it.

The book is also very good at explaining the psychology behind subscriptions. A key contributing factor to the rise and success of the subscription-based model is what Warrillow calls “the access generation.” People today, especially in younger age cohorts, place a much higher value on the ability to access a wide variety of content or services as opposed to having outright ownership of less stuff. Why bother buying a collection of films individually, when a monthly subscription to Netflix or Amazon Prime offers up an all but infinite supply of content?

The largely positive attitude towards subscriptions may be changing, as some consumers start to feel “subscription fatigue.” This is seen especially in the Balkanization of the online streaming service landscape. Nevertheless, this book still gives an excellent overview of how and why the subscription model works as well as how to pivot into such a model.

The Automatic Customer by John Warrillow is available for purchase here.

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