Does subscription business need continuous acquisition?

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Summary

Yes. I should constantly acquire new subscribers, regardless of the initial number to keep my subscription business running. Otherwise it is meant to die due to churn.

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Let’s say my business model is based on the subscription principle. I have subscribers, I bill them regularly, monthly or annually, I collect and start again.
Should I acquire new subscribers continually?
Even if I have a very large number of them?

1. Subscription model challenger : the Churn

I must acquire new subscribers continuously, simply because I don’t renew all of my subscribers: this is the Churn. Without new additions, the number of subscribers decreases every year until the business collapses.

Not convinced yet?

Let’s take a simple example to understand the subscription model.
My business is a SaaS company:

• I manage to renew 7 subscribers out of 10 on average: my renewal rate (RR%) is 70%. I can also say that I have a 30% Churn rate. Churn Rate = 100% – Retention Rate.
• For the sake of this example, let’s imagine that, at first, I do not acquire any new customers.

Hypothesis #1: table above

• Hypothesis #1: No Acquisition and Retention Rate (RR%) = 70%
• Result #1: Without the addition of new customers and at a rate of 30% decrease per renewal, I will have lost more than half of my customers after 2 renewals and more than 3/4 after the 4th renewal.

Even companies who are great at renewing customers cannot do without acquiring new customers, as you can see below.

Hypothesis #2: table above

• Hypothesis #2: Without Acquisition and Retention Rate = 87%
• Result #2: Even with such a high rate, we will have lost more than half of the customers after 5 renewals.

2. The fuel of subscription models: Acquisition

Now that I measure the risk, I am going to invest in acquisition strategies.

Hypothesis #3: table above

• Hypothesis #3: Acquisition of new customers = 20,000 and RR% = 70%
• Result #3: with the same RR% of 70%, this time we acquire 20,000 new customers during each period. My business still decreases but slower.

I notice the total number of customers continues to decline: the number of new customers is not large enough to prevent the decline in the total number of subscriptions.

3. How many new subscribers should you acquire?

Hypothesis #4: table above

• Hypothesis #4 : Acquisition = 36,000 and RR% = 70%
• Result #4 : To keep the number of subscribers flat, I must acquire as many new customers as customers churn. In this example, you must acquire a number of customers equal to 30% (Churn rate) of the total number of customers (120,000) or 36,000.

📍When Acquisition balances Churn, the number of customers remains flat.

Key Takeaways

1. A subscription business that acquires fewer customers than it loses is doomed to extinction. I need to invest in both Retention and Acquisition strategies.
2. Churn defines the speed at which the number of subscribers decreases.
3. Decline is slowed by Acquisition. When Acquisition equals Churn, the number of subscribers remains flat.