Lately, we’ve been seeing evidence of stagnated growth in some of the largest subscription businesses, such as Netflix. There are several reasons for this, but it shows an inherent issue in subscription businesses: The larger they get, the harder it becomes to grow. They lack a network effect.
Subscription businesses almost always grow in a linear fashion, which has its upsides and downsides. On the upside, subscription businesses can start small. They don’t require thousands of users to be functional. Building a great subscription service and selling it to a couple of hundred subscribers can be enough to make a healthy margin.
On the downside, when the subscription base grows, the churn becomes a real killer. Growth stagnates. Businesses need to keep adding subscribers just to stay on net zero. The CAC usually rises and revenue stagnation along with cost increases creates a dire mix. Growing in these circumstances, especially keeping up with stock market expectations, is tough.
This is quite different from services based on the network effect - such as social media networks or marketplaces. These services usually have a very hard time taking off, but when they do, they can grow exponentially with a very low CAC.
Is it possible for subscription businesses to create a network effect? Here are three suggestions on how: Build community, create features to support the community and use incentivized referrals.
Subscription businesses might lack an inherent network effect, but there are strategies around that. Realising these strategies can help reap network benefits and continue to grow your business.
Are you in need of a sounding board? Reach out to us for a discussion.