Consumer Subscription Software

From SaaS to CSS

Nicolas Wittenborn
Nov 7, 2016 · 4 min read

I’m a SaaS investor by training and still do believe it’s one of the most attractive digital business models out there. Here are three reasons why:

http://www.slideshare.net/PointNineCap/saas-101-metrics-best-practices/8-Why_VCs_like_SaaS_companiesRecurring

It’s not actually in the name, but ‘Software as a Service’ is usually a term limited to B2B enterprise software. Yet if you think about it, all three factors above are true for consumer subscription software (CSS) as well:

  • High margins ✅
  • Recurring revenues ✅
  • Global scale from day 1 ✅

Kudos to Tom Tunguz for recognising this a lot earlier than me. In my defence, it has become a lot clearer over the past couple of years that the willingness to pay for CSS has increased significantly:

Why do I point this out? Even though we haven’t seen many billion dollar exits in CSS, I strongly believe that there will be a number of big winners in the coming years. I hope to work with some of them. :)


Below is an overview of some of the biggest differences between SaaS and CSS. I will describe them briefly, but might follow up with a longer post and more detail — so let me know if you want me to dive deeper in any of these!

Average Revenue Per Account

While most CSS companies charge somewhere between $5–15 / month today, a SaaS account is often 10x that or more than that per month. This is because the willingness to pay is usually higher for enterprise buyers, since SaaS ideally provides a quantifiable ROI.

Churn
Retention for SaaS tends to be significantly higher than for CSS. This is due to a couple of reasons:

  • Higher lock-in: SaaS often serves as a system of record or collects data that is very valuable for the organisational customer
  • Multiple users per account: While SaaS is usually used by multiple users, CSS is bought by individuals (now family plans make more sense, huh?)
  • Lower price sensitivity: It’s easier to take money from a budget than out of a consumers pocket

Expansion revenue
The best SaaS businesses grow significantly from their existing customers and some that I have worked with actually attribute over 50% of added MRR to existing accounts.

For CSS there is typically no or very little up-sell. I think about this point a lot though and believe that this could really change over time. I certainly would pay $20 / month for Netflix to get earlier access to West World for instance. And there are many more potential ways for price discrimination that haven’t been explored yet. Tinder is doing something interesting with age, Tidal with sound quality and Netflix with viewing quality for instance.

Mass market potential
This might be one of the most crucial differences: In contrast to SaaS, CSS can leverage mass marketing channels like TV and Social Media. This can make growth a lot more explosive than the ‘long slow SaaS ramp of death’.

Acquisition costs
Partly because of the last point, the cost to acquire a CSS customer is usually a fraction of that of a SaaS customer. The other big reason is that CSS is usually 100% self-serve, whereas SaaS sales cycles usually span over weeks or months and have multiple, human touch points. Obviously this is directly related to the higher ARPAs in SaaS and it would actually be interesting to compare LTV/CACs in more detail on a relative basis (noted!).

WOM distribution
Though SaaS usually also has an organic distribution component driven by SEO/content and branding, the true word of mouth distribution is typically a lot lower than for CSS. It’s not untypical for CSS to have 50% or more of new subscribers referred to from existing customers. I have written about some of the reasons in a different context before, but in short that is because potential customers hear about or see an existing subscriber use an application. Looks like we are more chatty about apps we discover privately than whatever we use at work!


It’s fun writing about this, so feel free to reach out if you want to discuss! I’m curious to see where CSS into which verticals CSS will go next.

📱🚀

Nicolas Wittenborn

Written by

big things start small 🚀

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