how do you evaluate a subscription start-up? My thoughts on what investors & entrepreneurs should look at
This is a continuation to my previous post “My fascination for subscription start-ups”
Subscription start-ups are fantastic but it is important that the entrepreneur and investors keep certain metrics under very close watch. These are the few but very important things to consider when dwelling on the investment aspect of the start-up business as a yielding asset…
Get large quickly
The start-up should quickly get to a large number of customers on the subscription after the launch of services. A large number of consumers will reduce corporate costs per unit and also gives the business a large float that can be utilised wisely to generate a healthy bottom line.
It is anybody’s guess that to get your initial set of customers you will have to use a carrot that will force the consumer to change their daily habits. How long and discounted this effort will be requiring a deep thought into psychology of your consumer. There will be a point after which a customer is used to your product or service and at that time the discount should not be the reason for them to continue with you. However, if you intend to use discounting as the means of getting customer loyalty you are definitely going to lose money
As an investor or owner of the start-up business you should control and monitor the churn. The churn is the amount of people who will unsubscribe monthly. This number needs to be monitored on a constant basis. Let’s say you have a churn of 10% at the end of the first month. Even though this may seem like a small number, in 10 months’ time you would have lost 100% of your initial client base. This means that your consumer base would have changed and you need to adapt to it.
The churn will in turn affect your CAC – the consumer acquisition cost. You need to be aware of this in order to adapt to the changing data base. Monitor how many people leave and what you can do in order to harvest new subscribers to make up for those who have gone.
Focus on referrals
The great thing about subscription services is that it creates a safety net amongst consumers. People usually hear about start-ups from other people and word-of-mouth advertisement carries more weight than online adverts. This means that there is a support structure for if something goes wrong, which means that people will be less likely to quit the service if the unknown element comes to play.
Subscription businesses are great businesses once they have got going but the battle to maintain and sustain the customer base is what will separate the successful from the failures.
I am on the lookout for a sustainable subscription based start-up… if you know one then drop us an email at Prospects@Artha.Ventures