My usual Saturday blog post: "How Subscription Business Models are Changing Business and Investing (the Microeconomics of Subscriptions)" is now up at 25iq.com/2018/08/11/how… A subscription is at its core an arrangement with a customer creating a periodic contract commitment.
I first learned about subscription businesses watching cable TV operators like Craig McCaw operate. The next set of lessons were delivered in the mobile business and finally in software as a service (SaaS). The microeconomics of each of these subscription businesses is the same.
A NPV must be calculated for each subscriber and the collective NPV must be aggregated. When confronted with doing this work to understand a subscription based business which resembles an annuity, many people say: “That’s too hard, let’s talk about P/E ratios.” That will fail.
"Value of a business = value per customer x number of current and future customers. … business value is a function of customer economics and the current and future users (market size). This equation is simple, but unpacking the essential elements is not." @mjmauboussin
What is not to like about subscription pricing? The answer is: it costs real money to get a customer to surrender the optionality associated with buying the product just in time. Customer acquisition cost (CAC) does not go away like a monster under a bed if you close your eyes.
