Profits, success and subscription models

By September 8, 2009Business models, Exits

Last week I posted that success equals profits and got an email response from William Reeve, saying very true, and good post, but don’t forget about businesses with subscription models.  Many of these have highly predictable revenues and profits and can therefore be said to be successful before they have reached profitability, but once it has become highly likely that substantial profits will be generated.

This is an important nuance to the success = profits argument.  To make the argument more general, a business is only truly worth a lot of money when there is a high likelihood of significant future profits.  A business is therefore not successful (in this sense) if it has a single great year but cannot sustain its profitability.

To go into more detail on subscription models Will’s put it like this:

where you are building subscription businesses and you can see strongly positive lifetime values, and are investing accordingly in customer growth. Early in such a cycle you will report an accounting loss, even as your shareholder value is rising under anybody’s metrics (dependent on lean/mean overheads too, but this is a nuance). Amazon, Orange, Sky, are three prominent tech-related businesses that have all exhibited this growth and proven it works

We have two businesses in our portfolio, both of which Will is involved with, that are following this model.  Lovefilm is now mature and profitable and can be said to have made the subscription model work and graze has a ton of positive momentum, but is at an earlier stage and is still learning about the lifetime value of its customers.

Note also that some subscription businesses get it wrong, typically by mis-calculating (or over-estimating) the lifetime value of their customers and over-spending on marketing and customer acquisition.  Vonage springs to mind as an egregious example of a company making this mistake.

Reblog this post [with Zemanta]