The subscription business model is booming. Previously dominated by the likes of newspapers, magazines, gyms, utilities, and telecommunications firms, more products and services are being offered to more people through subscriptions than ever before. Business-to-consumer subscription businesses have attracted more than 11 million U.S. subscribers in 2017, and the industry as a whole has been growing at 200% annually since 2011. There are over two thousand consumer-focused subscription businesses capitalizing upon customers’ diverse tastes. While many companies are selling more traditional products – such as food (Blue Apron and HelloFresh), grooming products (Dollar Shave Club and Harry’s), beauty supplies (Birchbox and Ipsy), and clothes (Stitch Fix and Trunk Club) – there are hundreds of companies with more unorthodox products catering to the “long tail” of consumer tastes, including Harry Potter toys, survivalist products, and moss.
Subscription Businesses Are Booming. Here’s How to Value Them
How many of their customers will actually renew?
December 19, 2017
Summary.
Subscription business models have become more popular than ever. How can investors accurately assess the true underlying financial valuation of these businesses? And what metrics should company executives use to manage these subscription businesses in order to hold themselves fully accountable to their stakeholders? In this piece, the authors propose that a new methodology, called customer-based corporate valuation, may hold the answers. While there are no cut and dry solutions, this methodology can help both businesses and investors to better understand the value associated with a subscription-based model.
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Strengthen your fluency in financial statements.