Subscription Based Means Much Higher Business Valuations!

INTRODUCTION

Not everybody has a subscription based business where there are recurring levels of income. These types of enterprises typically trade at a premium and therefore have much higher business valuations than those who don't. The reason? Well typically the revenue almost looks after itself and means that customers keep coming back and spending at regular intervals with very little prompting and interaction. This also usually leads to more profit and cash flow which are two of the crucial elements when business valuers are assessing value.

Imagine getting paid say on the 15th of every month for something that people find useful and can't do without.

John Warrillow, founder of the Sellability Score and author of Creating A Business That Can Thrive Without You, talks about the nine different types of subscription models. Here is a very brief summary and their application.

Figure 1: Getting your ducks in a row and having a subscription based business can be financially rewarding with minimum effort.

Subscription based #1 - Network Model

• Where value of subscription goes up the more it is subscribed to;
• Example of this is the telephone or Snapchat;
• Use for products and services where they improve more when more people join.

SUBSCRIPTION BASED #2 - Surprise Box MODEL

• Where subscriber each month receives a new surprise package; 
• Example of this is say chocolates;
• Use for a clearly defined and passionate set of customers.

SUBSCRIPTION BASED #3 - All You Can Eat Model

• Where subscribers get access to unlimited supply of certain product or service;
• Example of this is Netflix or music sharing service Spotify;
• Use for products that are "evergreen".

SUBSCRIPTION BASED #4 - Private Club Model

• Where subscription relates to limited supply;
• Example of this is an exclusive event for entrepreneurs who pay a large sum to meet and share ideas;
• Use for those who strive to have and be the best.

Figure 2: Wouldn't it be wonderful to set and forget?

SUBSCRIPTION BASED #5 - Front Of Line MODEL

• Where those who pay more get priority to the product or service;
• Example of this differing levels of IT support;
• Use for products or services that have varying levels of urgency solving a consumer's problems.

SUBSCRIPTION BASED #6 - Membership website MODEL

• Where value of subscription is for exclusive content that needs to be updated;
• Example of this is research information that gets updated;
• Use for products that have unique content.

SUBSCRIPTION BASED #7 - Simplifier MODEL

• Where subscription is for a contract or service;
• Example of this is cleaning at the same time each week;
• Use for products that people don't like doing or can't forget.

SUBSCRIPTION BASED #8 - Consumables MODEL

• Where consumers need to regularly purchase items they use;
• Example of this is a packet of razor blades or nappies;
• Use for products that need replenishing.

Figure 3:  The grass may be greener when it comes to buying a business but subscription models can be very successful.

SUBSCRIPTION BASED #9 - Peace Of Mind Model

• Where subscription is for something that people cannot afford to lapse;
• Example of this is insurance;
• Use for products that cover consumers in case something goes wrong.

CONCLUSION:

You don't have to have a subscription business to have a valuable business. However, have you thought about applying any of the above concepts to either part or all of your products and services?

Not only will your profitability improve but so will your cash flow. You should also have a much higher capitalisation rate with your business valuation.