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THE POWER OF REOCCURRING REVENUE: subscription models on the Internet
Here is a question, think you can develop a business with a half a million dollar market cap?
Well, to give you some context to think about market cap — the Wall Street valuation of a company — Overstock.com has a market cap of $539 million and for Q2 2004 alone had 722,000 transactions and 1800flowers had a market cap of $511 million and for Q2 2004 over 8.9 million transactions. Think about the amount of resources that 1800flowers needed to spend to generate their 8.9 million transactions for Q2 and their $551million market cap.
Pretty tough proposition to create an half a million company, don’t you think?
Now, try thinking about this from a different angle. What about a subscription model? Think about the concept of reoccurring revenue. Once you get a customer to sign-up, and you keep them satisfied, you’ll realize revenue for months or years to come.
NetFlix acquired only 300,000 customers in Q2 and their market cap is $775 million. The linchpin to their success is that they acquired 1.9 million subscription customers over 5 years. And here is the best part: they only charge $20 a month.
In other words, reoccurring revenue is the quickest way to build a viable company with a half a billion dollar market cap. Stops and makes you think about the power of subscription-based models, doesn’t it?
Here are two more subscription-based Internet companies and their market caps:
One of the reasons I like subscription-based models on the Internet is that they are dynamic and give rise to interesting business questions to ask and problems to solve.
As we all know, Internet commerce morphs traditional business models into something new. To borrow an analogy from Sam Harrelson, the Internet is like Steven Hawkings new black hole theory. Hawkings stated, if you jump into a black hole, your mass energy will be returned to our universe, but in a mangled form, which contains information about what you were like but in an unrecognizable state.” So, who knows what interesting business models can be developed.
The black hole of the Internet has altered traditional subscription models into five basic categories:
Ok, got some ideas, ready to build your company and win the stock option lottery? Me too. There is an island in the South Seas with my name on it.
Well, the good news is subscription-based business models are exceedingly profitable. The bad news is the products are harder product to sell. Consumers are nervous to commit. Not so fast to my island it seems.
When Wayne Porter and Brian Clark first approached me about joining ReveNews, I was unsure I had anything to say. Wayne wrote to Brian and me:
“Beth’s blog would center on the challenges of selling subscriptions…….Naturally Beth you can blog whatever you like of course, but that might be a good focus since there is complete lack of knowledge about this aside from some of the material MarketingSherpa puts out. i.e. Content Biz.”
A month and eight blogs later (guess I had something to say after all - sometimes your colleagues know you better than you do), I figured it was time to write about some of the issues I was invited into this community to discuss.
Selling subscriptions is a topic I plan to write about periodically to offer some practical knowledge from the marketing trenches. Let me know if there are specific topics about which you would like me to write.
As a final note, As Wayne implied in his email, the bible on selling subscriptions online is Content Biz which part of MarketingSherpa. It’s by far the authority on selling subscription-based services online. If you’re interested in this topic, it’s worth some time to read it.
