Recurring revenue is the name of the game as SaaS and subscription-based models for direct-to-consumer retail sales become more successful each year (see Is the Perpetual License Dead?). The perfect example of this trend is the recent sale of Dollar Shave Club to Unilever for $1 billion.
How did a four-year-old e-commerce start-up achieve a billion dollar valuation? The key is Dollar Shave Club's subscription model. For as little as $1 per month (or as much as $9), customers get a subscription to receive razors every month. It is a simple purchase with clear messaging that is entertaining and perfectly tailored to the company's audience.
The monthly subscription gives Dollar Shave Club ongoing opportunities to build and develop relationships with its customers, which it has done with flying colors. Each mailed package comes with a "Bathroom Minutes" magazine with light-hearted articles about life and shaving tips. The company built its recurring transaction streams around its spot-on knowledge of its customers and a low-cost subscription model that fills a real need in the market: cheap razors without the inconvenience of shopping for them.
But for a company that isn't yet profitable, how did it manage a $1 billion valuation? The brand strength and customer relationships are an important part of the appeal for Unilever, but the future potential in the numbers is critical as well: Dollar Shave Club currently has 3.2 million monthly subscribers who are on track to bring the company $200 million in revenue this year.
Why Do Subscription Models Work So Well?
Not all subscription-based companies will see valuations like the Dollar Shave Club, but the recurring transaction aspect of subscription-based models is a huge boon to almost any type of business. While this pricing structure has been mostly limited to software, SaaS, and B2C companies until now, it already has begun expanding into hardware and service-based businesses.
Some benefits of this model for businesses include:
- The ability to predict revenue through a recurring transaction stream
- Easier to manage inventory
- Simple pricing structures
- Higher valuation to potential acquirers
The benefits for customers are similarly compelling:
- With automatic replenishment, customers never run out, and don't need to go shop for something
- A flat rate helps customers stay within their budget
- Bundling opportunities can present added value
Is your business ready for subscription pricing? While this approach presents significant benefits, there are also some challenges that should be addressed up front. The quantity of customer data is multiplied due to monthly rather than annual subscriptions, channel delivery systems may become more complex to manage, and the operations of delivery (from quoting to ordering, fulfillment, and invoicing) can become increasingly laborious. Successfully managing a business based on recurring transactions will rely on an efficient and effective renewals process.