The Subscription Network Effect - How Subscription Businesses Can Reap Benefits Of The Network Effect

By  Jonas Åström, 
May 3rd 2022
Read time: 
2 minutes
Table of contents

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. 

  • Build a sense of community. Any business benefits from its users feeling connection and a sense of community, with each other and with the brand itself. Investing in your brand and community will create a long-term decrease in your CAC.
  • Create features to support the community. Building the community will go a lot easier if your service has features to support that. Examples are account family sharing, content sharing and the ability to use the service together with friends. 
  • Referrals with incentives. Another way of producing a network effect is to have your existing users refer their friends to your service. If you do this with an incentive, such as a free month for every user they referrer, this can lead to exponec zntial growth. 

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.

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