Is Consumer Subscription the Next Software Boom market?
Simply put, yes! I believe Consumer Subscription Software (“CSS”) will quickly rival enterprise SaaS as the most exciting growth opportunity in software. We are currently in the early innings of the CSS boom as consumers, entrepreneurs, investors and companies are all waking up to the benefits and potential of the CSS business model. As part of my research at GP Bullhound, I expect the total revenue for CSS companies to be over $150 billion 💰 globally by 2023!.
Consumers are adopting the model after becoming comfortable with Netflix and Spotify as the “Pioneer” CSS services. Now consumers are expanding their purchases to capture better experiences in broad and exciting new verticals including family communications, travel, exercise, hobbies and religion.
As a quick exercise — look at your phone — how many of your apps/services do you pay a subscription for today? More importantly, how willing are you to pay for a consumer app that offers a clear improvement in performance? Personally, I am now paying for 5 CSS services — a music app, a hiking app, a data storage app, a news app and a reading app.
Entrepreneurs are recognizing the power of the CSS model, leveraging simple tools to build software services, acquire customers, and manage payments and subscriptions. Consequently, new use cases are rapidly being discovered and CSS businesses are being launched.
Smart venture investors are behind the trend already with examples including:
- TeamSnap raises $25 million from Foundry & Fairfax
- Lightricks raises $135M to improve selfies
- OnX gets $20m from Summit and Bessemer to support hunters
Successful exits are beginning to occur providing evidence to the market of the opportunity in CSS businesses:
- Alltrails partners with Spectrum Equity
- Boeing acquires ForeFlight
- Muslim pro and its 10 million users acquired by CMIA and Affin Hwang Asset Management
Finally, Companies are rapidly experimenting with the CSS model as its predictable nature proves superior to transactional business models with examples ranging from Uber Eats subscriptions, Apple shifting focus from selling individual iTunes songs to selling Apple Music Subscriptions and Google launching Stadia Pro, a gaming subscription.
What is CSS?
CSS is by definition a consumer service that is 100% delivered in a software only format and the consumer pays a monthly or annual fee in exchange for ever updating content and service options. The consumer never owns anything specifically but is paying for the right to access the service.
CSS is not revolutionary — the model has been proven before in entertainment. If you think about it, CSS is the next evolution of a cable subscription, where consumers are paying a monthly subscription fee in exchange for a service but ultimately do not own the TV shows or content they viewed. However, unlike cable, consumer subscription software companies utilize user data and experiences to constantly improve offerings with enhanced interactive features and better content.
So what is changing? The use cases for CSS and capabilities are exploding with hundreds of new companies launching! With their early start in entertainment, CSS applications are rapidly branching out to fitness with Aaptiv, astrology with Co-Star, hobbies such as surfing with Surfline, managing children’s sports teams with TeamSnap as well as hundreds of other use cases.
Why is CSS better than the ad supported models of Internet 1.0?
Consumers want a product that is tailored to their needs, saves them time and makes their lives easier. Integrations with consumer collaboration tools, including social media, GPS and wearables, are allowing rapid user acquisition and data collection to improve the CSS services offered. Unlike in the early days of the internet, consumers are now willing to pay for higher quality offerings, driving demand for CSS offerings.
From the entrepreneur’s perspective, the ability to launch simple and free apps to millions of consumers through app stores enables rapid feedback and useful data to improve their offering. Social media targeting allows relatively low cost consumer acquisition across huge consumer pools based on interest as well as age, social status, etc. Entrepreneurs are building in social and sharing features to encourage consumers to interact and spread the service to others.
Once consumers recognize the value, companies can launch paid versions with crucial services hidden behind a paywall to encourage free users to become paying customers.
As consumers sign up and convert to paid offerings, companies can segment them into cohorts (monthly groups of new consumers) that can grow to thousands and millions of users as more join and early adopters renew, generating a valuable recurring base of revenue and cash flow. These users support continued investment in the CSS product and services, creating the CSS Flywheel
Historically, investors have been hesitant to invest in CSS businesses due to a few common myths:
Myth #1. Consumers will always churn at higher rates versus an enterprise software offering due to low switching costs or low value add.
This myth is partially true. Consumers will always churn at higher rates vs. enterprise services and even the best consumer apps can expect first year churn to be 30–50%.
HOWEVER, if consumers are finding a service useful and it becomes a part of their life, retention rates for the second-year approach 80–90% allowing CSS businesses to build extremely profitable cohorts of users that provide years of cash flow.
Myth #2. Consumers are used to free software, tolerate ads and won’t pay for consumer software
That was true in the early ages of the internet, but consumers are waking up to the pitfalls of “free” including intrusive ads, the sale of personal data and poor product quality.
Pandora vs. Spotify is a great example of consumers preferring to pay for quality. Both started as free apps using ads to generate revenue.
However, that is where the story diverged. Spotify focused on the user experience and added features such as downloading songs and playing music offline behind a paywall to drive user conversion to a subscription. Consequently, Spotify’s paid users took off and revenue surged while Pandora focused only on ads, was late to the subscription game and was ultimately sold off to Sirius.
For another famous freemium model , look at the example of Tinder — a free app which acquired millions of users, launched a premium product and was estimated to be generating close to $810m in revenue for Match Group in 2018.
Myth #3. CSS businesses are expensive to build and scale
Not true — new services and tools are up and running to allow entrepreneurs to build their applications, acquire users, sell subscriptions and monitor and support their user base.
As you can tell — I am passionate about the nuances and potential of the CSS model as well as a user of multiple CSS services. Professionally, I am excited to be a user, advisor and investor in the next generation of CSS companies. If you want to learn more about my thinking, feel free to reach out or take a look at the official GP Bullhound Consumer Subscription Software Research report.
Finally, a quick shout out to Nicolas Wittenborn & Tomasz Tunguz for recognizing the CSS trend earlier than I did.
