Phil Carter
speaker
228 appearances
1 recordings
1 series
first heard Sep 2024
last heard Sep 2024
Phil Carter’s voice in public audio — every appearance, attributed to the second.
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Sure. So I think there are several advantages that consumer subscription businesses have relative to more complex business models. And that might include B2B SaaS, it might include marketplaces, simple on their surface, but there's a lot of complexity underneath.
When you think about consumer subscriptions, and this certainly isn't true of all of them, but in many cases, they're operating in relatively mature categories with customers who understand that the product they're bringing to market And they're just relatively easy to launch for a few reasons. Number one, most of them don't require sales teams.
Number two, most of them don't have to deal with complex two-sided marketplace dynamics. They tend to have high gross margins, low marginal cost to serving additional subscribers. And then over the last 10 years, thanks to the app stores, they get all these advantages in terms of global distribution, payments, turnkey support tools. So they're very easy to get up and running.
They tend to be able to get to market faster and with less capital than a lot of other tech companies. But then you run into a lot of challenges that make them hard to scale.
Yeah, so I think there are a few reasons and inherent challenges to consumer business models. And some of them are sort of the other side of the coin of some of the advantages they have. Number one, they don't have control over distribution in a lot of cases. I mentioned that they don't have sales teams. Sales teams are expensive. They get a lot of advantages from the app stores.
Well, the flip side of that is they don't have sales teams to do hand-to-hand combat in closing their customers. And they have to deal with 15% to 30% app store fees and lots of restrictions on their ability to control the in-customer relationship because the app store sits in between. So that's number one. Number two, acquisition has become particularly difficult for consumer subscription.
And that's because a lot of them have just grown overly reliant on paid acquisition channels, specifically Facebook. So over the last 10 years, we've been in this zero interest rate period where venture capital has been cheap. You've had lots of these companies sprouting up. A lot of them have been trying to just pay their way to greatness, in many cases on channels like Facebook and Instagram.
But what's happened is a lot of consumer subscription app categories have just gotten very crowded. These paid acquisition channels have gotten overly saturated, which means that customer acquisition costs have gone up. Consumers are starting to experience some degree of subscription fatigue.
And so all of that just puts a lot of downward pressure on their unit economics and makes it really hard to build a sustainable business. And then the last one I would emphasize is ARPU tends to be relatively low, certainly compared to B2B SaaS businesses, and churn tends to be much higher.
The average consumer subscription app is maybe $10 a month, $60 to $80 a year versus B2B where you've got contract sizes in the thousands or hundreds of thousands or even millions. And then churn rates are high. So Revenue Cat has a lot of data on this.
The average consumer subscription app is losing more than 50% of its annual subscribers in the first year and more than 50% of its monthly subscribers in the first 3 months. there's no real concept of net revenue retention because unlike B2B SaaS, you can't land and expand. Most of the companies have one subscription tier. They don't have anything they can really upsell consumers into.
And so that means they can't offset the loss of churn subscribers by increasing the average revenue per retained subscriber. And so when you combine all of these factors together, it just means that a lot of consumer subscription apps launch really quickly, get a bunch of early traction, Maybe they hit 1 to 10 million in ARR, if they're lucky, because a lot of them never make it that far.
And then they just sort of start to hit the ceiling where it becomes really hard to scale because LTV goes down, CAC goes up, and the unit economics no longer work for scaling on paid channels.
Yeah, it's a great question. And I'll sort of divide the world up into two categories. There are the outliers. Let's say Duolingo, Tinder, Strava.
You do have examples of companies where some combination of the quality of their product and the virality of their use case leads to this tipping point where they become so mainstream in the public consciousness that at least for a while, their blended cacks go down because... you just have so many people in their target demographic talking about this product and sharing with friends.
I mean, ChatGPT is a great example of that right now. It's so viral because it's such an amazing product. And so I don't know what their balance of paid versus organic acquisition is, but I have to believe that the vast majority of it is just viral because everybody's talking about AI right now and ChatGPT is at the center of that conversation. But those are the outliers. For everyone else, CACs...
almost by definition, will go up over time for a couple reasons. One is... And the simplest is as you expand beyond your core, and as you tap out your highest intent early adopters, you're just going to have a harder and harder time converting eyeballs into subscribers. So your cost per install will go up. your signup activation rate, trial start rate, trial conversion rate.
All of those metrics become harder and harder to maintain at the same levels as the average intent of the user goes down. So that's one big factor. And then the second factor is certainly on paid channels, as you scale up the amount of spend you're budgeting per week, per month, at some point, it gets harder to maintain the same levels of efficiency. There's certainly a level below which
you're inefficient if you're not spending enough money because you're not giving the algorithms enough information. That's a problem that a lot of really early-stage companies face. They're spending $5,000 a month, $10,000 a month on Facebook. That's just not enough to get an efficient outcome.
But once you're really starting to scale, you run into the opposite problem where you throw too much money at Facebook or Google too quickly And it's the same problem. Like you're moving beyond the users who are most interested in your product and you're starting to get into these lower intent users are starting to get into lower quality ad inventory. And so the system just starts to break down.
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