However, in evaluating whether this model is right for a particular business, entrepreneurs need to have an intimate understanding of the immutable force governing their success—churn. Having run and invested in quite a few consumer subscription businesses over the years (eMusic and Dollar Shave Club being the most well-known), I have put together a view on churn that I am happy to share.
As I have discussed before, one of the clear indicators DSC could be huge was their low churn rate. This was apparent even in the very early months of the service’s life. On the flip side, many of the meal kit services we looked at showed very high churn. As we will discuss below, this is the single most important factor predicting a service’s future success.
Are Subscriptions Right For You?
First, not every business or service should be sold using a subscription model. Customers tell us if they like buying our product via subscription by how many of them stay in the service versus how many defect. High churn businesses indicate customers would likely prefer another model, like a la carte sales.
For subscription services to have to become large venture-scale returns, two things must be true: (1) the churn rate must be low and, (2) the market size must be large. There are plenty of niche subscription businesses where customer lifetimes are long, but the population interested in them is small. Those businesses are typically hard to reach venture scale and be worth, say, half a billion dollars or more. Some examples of these include good old-fashioned magazines and wine-of-the-month clubs.