The Cardinal Rule of Subscription

Why almost every consumer subscription business breaks the only rule that matters

Subscription has failed to capture the whale that is consumer internet. Why?

In my last post, I explained why maximizing revenue in consumer software and services isn't about finding whale customers—it's about unlocking whale markets. But how? If we want to finally start to capture the whale market that is billions of consumers on the internet, we should start by asking ourselves why subscription hasn’t done it. Here’s my explanation.

Many people have no idea what makes subscription valuable

If I could distill everything I have learned about subscription into a simple maxim— a cardinal rule if you will— it’s this.

Subscription is only about doing two things well: getting and keeping your customers

You’ve heard this one before? Yes, LTV:CAC! LTV:CAC is technically the magic formula for every business, but in subscription we take this very literally. It’s potentially a huge mistake. Let me try to explain why.

Many people’s reasons for why subscription works (at least in theory) fall into two buckets:

1. Predictable, recurring cash flows

2. An efficient sale

Reason 1 is good but kind of overrated. Reason 2 however, is sacrosanct.

What actually makes subscription a cash cow? The trust premium

What is the thing that makes subscription greater than the sum of its parts? It’s something I call the trust premium of subscription.

The trust premium is the ability to make the same sale again and again without incurring additional selling costs.

This is where all of the leverage of subscription comes from. It sounds strangely like the cardinal rule doesn’t it? This is what that rule actually means.

Many people (still) have no idea what makes subscription valuable

The trust premium is not the ability to charge someone month after month no matter what (even if they’re not using the product). Although it’s understandable how people came to believe this if you assume subscription is just about predictable recurring cash flows.

It’s this very literal interpretation of LTV:CAC that might explain why running a subscription business has become so hard. Maybe even impossible.

lower case trust, not capital T Trust

I realize touchy-feely words like “trust” can sometimes make tech people throw up. I am not referring to capital T Trust as in, your customers consider you part of the family and they call on you in their deepest darkest hour. I’m only referring to lower case trust, as in: trust that what they’re paying for will be worth the money.

trust is the thing that maximizes LTV:CAC, not engineering your cashflows

When it comes to LTV:CAC, trust is the thing that keeps these two numbers as far apart as possible. Unfortunately because we take subscription so literally, we may actually be destroying the one thing that actually makes it valuable. After all, who trusts a subscription?