A Deep Dive into the Consumer Subscription Softwares
A silent revolution in the consumer software industry
Welcome to my newsletter, Venture Capital & Alii! Today, we are diving into the Consumer Subscription Software. This is based on my personal experience and perspective. I won’t be going into too much detail to keep it accessible for everyone, and I might miss a few elements — feel free to reach out if you need any additional information.
Introduction
From the mid-1990s to the early 2000s, the company Video Futur expanded in France with the promise of revolutionizing personal film consumption by offering DVD rentals at competitive prices, ranging from €1 to €5 per DVD. This offer was available in nearly 400 stores.
Many companies also emerged in France to offer private English lessons, either at a fixed hourly rate between €15 and €20 or through hour-based packages costing several hundred euros. The older generations experienced the early stages of social networks and their communities with MySpace or MSN, allowing us to share key or trivial moments of our lives on the internet.
Today is an unprecedented revolution:
The shift from "Blockbuster" to "SVOD" > with just around 50 cents per day, one can access nearly unlimited streaming services in terms of catalogs and original content on platforms such as Netflix, Disney+, Amazon Prime, or Paramount+;
Affordable education > it has never been easier and more enjoyable to access English, German, or Spanish lessons on Duolingo without paying a cent to start learning the language;
Redefining social interactions > dating apps like those offered by the Match Group (owner of Tinder, among others) or Bumble have redefined dating and relationships for one (or more?) generation(s).
We have always had a strong relationship with consumption. This relationship has drastically evolved over the last 25 years, completely reshaping how we interact with each other. And in terms of our average spending as consumers: we have never stopped consuming.
The Growth Acceleration team at the US fund General Atlantic estimates that 68% of subscription spending is concentrated on media and entertainment, as well as sports and education.
Although it is not a new business model, the consumer subscription software (CSS) market is not only growing year after year. On the SaaS vertical scale, the market size is estimated to reach 339 billion dollars by 2024.
The Importance of App Stores
App stores have become the largest markets in history.
Apple's App Store reached a historic milestone of 1 billion paying users in August 2023, with over 2 million available applications. With over $23 billion generated in fiscal year 2023, Apple's services revenue surpassed that of Boeing, Intel, Nike, and McDonald's combined.
In 2022, Apple’s App Store facilitated nearly $109 billion in sales through "in-app advertising" and a total of $1.123 trillion in sales via its store (a 27% growth since 2020).
With continuous growth since 2019 (and particularly massive growth since the onset of COVID in the early 2020s), Apple’s App Store shows no signs of slowing down and even highlights consistency in terms of revenue. Of course, all of Apple's consumer services contribute to the significance of these revenues: Apple Store, Apple TV, Apple Music, and Gaming. The only limit to this growth is that it is directly correlated with the purchase of Apple products (iPhone, iPad, Mac), and thus products centered around its ecosystem.
How can we ultimately define a CSS?
The best definition, in my opinion, is the one given by VC investor Nico Wittenborn from Adjacent: "digital businesses with (i) recurring business models that are (ii) global from day one and (iii) monetize at the consumer level."
The 2020s marked a major turning point for CSS.
And not just due to the COVID pandemic that hit us in 2020. It wasn't the pandemic itself that had the most impact, but rather the way we relearned to communicate, share, broadcast, and consume content.
Take sports as an example. Sports have never been consumed as much as they are today.
In 2021, according to Statista, OTT services ("Over The Top" - a type of service delivered directly to viewers via the internet) generated over $129 billion in revenue, with projections to surpass $210 billion by 2026. These services had more than 3 billion users in 2021 and are expected to double that by 2026. To offer video content to different types of potential users, OTT services are broken down into several models, including "SVOD" (Subscription Video On Demand).
As of today, Netflix is by far the largest platform in terms of subscribers, reaching 260 million subscribers by early 2024. This is much higher than its direct competitors, Amazon Prime Video and Disney+, though their market share is growing rapidly, and in the near future, Disney’s catalog could surpass Netflix’s.
Aware of this, Netflix has committed in recent years to original film and series production and, more recently, to the creation of documentary content aimed at a wide audience: “Drive to Survive,” “Break Point,” and the “Netflix Slam,” which featured live broadcasts of tennis matches between Spanish players Nadal and Alcaraz.
Similarly, Apple, like Netflix, is also aiming to carve out a place in what could be considered an evolution—“SSODD” (Subscribe Sport On Direct Demand). We are not changing how we watch sports but simply how we consume it, through the same platform we use to watch our favorite movies and series. Apple, following Lionel Messi's arrival, announced a 10-year deal valued at an estimated $2.5 billion.
Live broadcasts of premium sporting events set the tone for subscribers. This opens up more content choices:
Subscribers now have the freedom to choose the platform on which they want to watch a sporting event, discover new disciplines, while benefiting from a platform where their subscription price remains unchanged and is not subject to geographical limits;
Platforms see their subscriber numbers increase, or existing subscribers upgrade their subscriptions through upselling.
Rationales & MOAT
I would like to focus on the definition of a MOAT before moving forward and understanding what ultimately defines the key characteristics of a CSS startup.
For those unfamiliar with the term, an economic MOAT is most often associated with Warren Buffet. It was first used in 2007 in his annual letter to shareholders.
It refers to, among other things, a deep competitive advantage. Just like the moat of a castle, meant to protect the castle from attackers through the barrier it creates, a MOAT provides a company's competitive advantage over its rivals through various factors:
Network effects: The value of a product or service increases as more users adopt it (example: Meta/Google);
Switching costs: The benefits of switching to a new product or service are outweighed by the costs of transitioning (example: Apple and its related services like Music, TV);
Economies of scale: The production costs of a product decrease as the company grows its scale (example: Amazon Prime);
Intangible assets: Technology, customer loyalty, brand image, etc., that belong to a company (example: Netflix).
SaaS, the parent vertical of the consumer subscription software (CSS) sub-vertical, no longer has anything to prove regarding its relevance and dominance in terms of performance.
CSS have a relatively rapid and adaptable capacity for innovation in the face of a new generation of consumers who are even more eager for content, tools, and experiences. The consumer, beyond the mere act of subscribing to an application providing any service, primarily seeks the answer to a specific need—a distinct service tailored to their requirements. It is no longer just a simple marketing action to which they react; their desires, psychology, and need for belonging are at the heart of a founder's reflection.
The approach to the subject is well defended by Greg Isenberg and his "ACP Funnel." Greg Isenberg defines himself as a "multipreneur": he is the CEO of Late Checkout, a holding company that builds businesses based on business communities.
The "ACP Funnel" is constructed as follows:
A for Audience: You should start by creating/developing a page on social media (Instagram, TikTok, Twitter, YouTube) focused on a niche and specific theme where interests, values, and preferences are a common denominator for a precise audience ;
C for Community: How do you convert some of these members into a space where you own their emails, where they have a place to discuss, and where you understand their "pain points" and how to address them?
P for Product: What is the product you can create that they desire the most?
Of course, the customer acquisition cost is low or even zero at this point, but what is most interesting about this funnel is that the genesis of the product directly identifies a target ready to pay the price for a product and then a subscription to use that product.
The genesis of Consumer Subscription Software (CSS) is closely tied to the principles outlined in the ACP Funnel, which emphasizes the importance of audience, community, and product.
To begin with Audience, tools like Appy Pie, Bubble, and Figma empower startups to rapidly prototype and launch applications that cater to niche markets, ensuring they attract a specific user base. For the Community aspect, subscription management platforms such as Chargebee and Recurly play a pivotal role in managing customer relationships and facilitating seamless billing, allowing businesses to build a loyal community around their services.
As they cultivate this community, effective marketing management tools like HubSpot and Mailchimp enable targeted outreach and user engagement, helping to convert initial interest into sustained interaction. The Messaging infrastructure, provided by solutions like Twilio and RingCentral, ensures smooth communication channels, further enhancing user experience. Moreover, efficient payment processing systems such as Stripe and PayPal create a frictionless purchasing environment that encourages subscriptions.
Finally, reporting and analytics platforms like Amplitude and Firebase are essential for monitoring user behavior and performance, enabling businesses to refine their offerings based on real-time feedback. Together, these tools create a comprehensive ecosystem that supports the effective implementation of the ACP Funnel, driving the growth and sustainability of CSS ventures.
Strengths & Weaknesses of CSS
The service generally sells itself
Most CSS companies provide subscription services that allow them to generate revenue quickly through a subscription process where users are self-sufficient; they can autonomously subscribe without the help of a sales team.
No sales team means no product training time, no salary spent as a founder, a low or nearly non-existent Customer Acquisition Cost, and thus resources in time, finance, and company development are allocated differently.
However, this absence of a sales team does not allow for effective collection of feedback, taking the time to engage with users, and gathering their needs. The impact on engagement would be illustrated by a higher churn rate, and this, without an intermediary like a salesperson, would lead to higher costs or a different allocation of resources (new developers, UI design changes, product changes, etc.).
Recurring Revenue
As long as users continue to use the service, revenues will be recurring and can facilitate the company's growth. Similarly, since ARR consists of a multitude of customer transactions, there is less dependence on one or a few clients, which supports a sustainable service.
Recurring revenues make the company a predictable and enjoyable entity to manage. This reduces pressure regarding customer acquisition month by month.
Historically, subscription software has always generated valuation premiums, benefiting both employees and investors looking to acquire CSS. Amazon acquired Pillpack for $753M in 2018, having generated $100M in revenue during the previous fiscal year, achieving a revenue multiple of 7-8x.
However, revenues can also decline due to the nature and engagement related to the product: if my goal is to quickly learn the basics of Spanish with Duolingo for a short trip, I will no longer need the app's services afterward. Whether it's for education, dating, or sports training, the impact on a user's LTV is significant and particularly unpredictable. The multitude of low-priced subscriptions compared to B2B makes CSS companies harder to scale quickly.
Characteristics of CSS to Generate Valuation Premiums
Eric Crowley, partner at GP Bullhound in the US and a specialist in consumer subscription software, has outlined with the rest of his team the key characteristics for these CSS aimed at investors.
Recurring Revenue: Recurring revenue is the foundation of the CSS business model, built around a subscription plan.
Premium Content: All applications offer something unique that justifies users paying to use them. An effective UI and UX design constitute a perfect moat.
Proprietary Data: User data is utilized and retained by applications to deliver unique reports or measure user progress and engagement within the app.
User Acquisition: Effective user acquisition is accompanied by conversion through viral content (along with some marketing actions).
Monetization & Pricing Strategy: A solid pricing strategy enables easy conversion of "free" users to "paid" users: either focusing on tiered pricing or based on engagement/use, thus paving the way for a coherent upselling strategy with users.
Niche User Base vs. Large TAM: It's much easier to operate in a smaller niche market than in a larger market where differentiation is key.
Churn / Retention: Churn in B2C is higher for CSS than for traditional B2B SaaS. The LTV/CAC ratio needs to be closely monitored. It's essential to understand the category of churn involved: is it intentional ("happy" or "unhappy" churn) or unintentional (users can no longer use the service)?
The inertia wheel of CSS highlights their main characteristics by emphasizing the essential aspects for founders and investors. The key valuation factor for them is the concept of "winner takes all" in CSS niches. If a company has the potential to dominate a niche or a larger market due to network effects, investors may be willing to invest more.
Classic SaaS metrics that need to be nuanced
Nuance is essential in the investment approach towards CSS. Although it is very much a classic SaaS in terms of its business model and metrics, the focus will be much more pronounced on certain indicators, whether it is a B2B SaaS or a CSS in the eyes of investors.
At a more granular level, we naturally observe a very high churn rate for CSS, but very low customer acquisition costs and a larger market potential. The comparison could be as follows.
Metrics measuring engagement
Ultimately, the crux of the matter lies in engagement. At the core of a CSS, engagement is measured, analyzed, and studied to track consumer behavior beyond mere downloads and to determine if the chosen direction is the best one.
What Dimensions Should Be Considered in Measuring Engagement? RevenueCat defines them as five:
Frequency and Duration of Use: It is crucial to track both the frequency and duration of use ;
Quality of Interaction: What captures a user's attention? What actions do they take in the app that engage them?
Retention Elements: If users return to the app regularly, it's a good sign of retention and indicates that the engagement strategy is effective ;
User Feedback: User reviews and ratings provide tangible insights into the actual use of the app and the satisfaction derived from it ;
Monetization and Conversion Metrics: The way users engage is closely linked to the revenue generated. Transitioning from a simple lead to a revenue source is what the LTV (discussed previously) helps evaluate.
It is essential to segment and model users based on their level of engagement. Of course, the primary metric for understanding user engagement is found in DAU: daily active users. However, at a more granular level, segmentation encompasses a multitude of metrics related to user retention for CSS.
The level of engagement can be measured throughout all stages of product or service development, and these measurements are certainly not unique; they can translate into an "infinity" of key metrics.
In the context of online media or paid newsletters, for example, Google defines a set of engagement metrics in its Google's Reader Revenue playbook based on the growth phase of the digital media.
Turning to engagement well beyond traditional metrics has been Netflix's bet since early 2024. The American streaming giant has decided to publish a biannual report called "What We Watched: A Netflix Engagement Report." This report aims to provide an in-depth understanding of what Netflix consumers are watching, including:
Viewing hours for each title—both original and licensed—watched for over 50,000 hours;
The premiere date for any Netflix series or film;
Whether a title was available globally.
Conclusion
In conclusion, the landscape of consumer subscription software (CSS) represents a dynamic interplay of traditional SaaS metrics and new engagement-focused strategies. With the emergence of innovative frameworks like the ACP Funnel, the focus on understanding consumer behavior has intensified. The metrics and characteristics outlined demonstrate the importance of engaging users beyond mere transactions, thereby building a sustainable business model that thrives on recurring revenues, user retention, and valuable insights into consumer needs. As we move forward, understanding and adapting to these nuances will be vital for investors and founders aiming to succeed in the competitive world of CSS.
Thank you for reading this article! What specific topics in VC or regarding software would you be interested in? Feel free to share your feedback 🌐 and give a ❤️ if you enjoyed it!