Being a millionaire is easy. At the age of 17, I had deduced it to a science. One simply need knock on one million doors and ask for a single dollar. This was the premise of the 2008 App Store gold rush.
When it first opened its doors to developers in 2008, the App Store had beckoned vast quantities of prospectors to migrate to this new wild west and establish humble towns centered around simple software. It marked a unique opportunity where one need only develop the software and upload it to the Apple gods—from there, app listings propagated effortlessly to millions of doors around the world.
This was the knock-on-one-million-doors-and-ask-for-a-dollar scheme turned true. And guess what—it worked. Millionaires were made. Apps centered around flatulence and fake alcohol consumption had given rise to a new class of ephemeral success stories. But there was one problem:
The odds that you would successfully solicit a payment once for one app, then develop another app and successfully solicit another payment from the same customer, were slim.
Your chances of staying in business to develop yet another app? Also slim.
In a word, software developers had focused more on developing single-use applications than on building a sustainable business. And while books may be written on the topic of business longevity, let us say that no thesis on the topic would be complete without the mention of recurring revenue.
Pinch your fingers together, burst your eyes open smiling, and explode your hand outwards as if you were pinching-to-zoom the air, and say with deep wonderment: recurring revenue.
An Automated Business
Customers need to come back for your business to be healthy and successful in the long run. For experienced ecommerce entrepreneurs, this lesson has already been deeply ingrained, carved in their mind through years of restless erosion by the distressful wind of one-time-payment revenue models. For new entrepreneurs and builders who may not have yet acquired this gene, it may be tempting to reduce online sales to a one-million-door scheme as the quickest way to a buck.
But while you are hurriedly running door to door, you’re failing to build things that actually matter. Relationships, products that make people come back, word-of-mouth advocacy, a real revenue model, and most importantly: a business.
Because while you may successfully solicit a one time payment from one customer once, and do so for many customers, this resource will deplete far quicker than you can imagine. The fatigue you will experience from having done so much work to get one customer to pay once will be so overwhelming, that you would have to be mad to go at it again. You need to automate, or your business will whither.
Enter subscription revenue. Subscription or recurring revenue is the automation of knocking on doors. It sounds great, because it is, but it does warrant some consideration in how you design your business and product.
Same Product, Many Times
One is, your product, whether it be digital or physical, need warrant return business. A coffee shop sells beverages that are somewhat addicting in nature, so you come back many, many times. Can you imagine how quickly Starbucks would go out of business if a customer only came through their doors once?
For digital goods, it’s quite easy, because the subscription model naturally lends itself to this type of product. Software very clearly requires constant improvement, bug-fixing, server space, and expensive developers and designers. Subscriptions in software are becoming more and more commonplace. There is small resistance from consumers in this movement (mostly with their speech and not with their wallets), but this new mode of thinking is quickly becoming innate as the “layman” comes to better understand the underlaying nature of software.
In building Standard Notes, a private, encrypted note-taking app, a subscription model was of no question. Was I, a software developer, really expected to spend all my waking time finding new customers every single month, rather than on improving my product? I couldn't relive the nightmare of one-time purchases. No—this time, it was going to be done right.
For physical goods, it seems madness to solicit repeat payment for a one-time trade of currency for an item. “I paid for this smart vacuum once, and now I own it. Why should I keep paying you?” But even non-smart physical good manufactures have figured out how to warrant repeat business. Simple coffee machines have filters that you need to buy and replace every few months (they even include a small little analog timer so you don’t forget). Wifi router companies like Eero offer a $99/year optional subscription to add additional, but mostly redundant, features to your setup. Even simple one-time purchase arrangements like buying an iPhone now come in a subscription variant—get the newest iPhone every year automatically for just $50 a month.
Your Customers Will Thank You
More importantly, subscription revenue models align company incentives with user incentives. Companies that must repeatedly acquire new customers every month to make up for their one-hit customers last month must occasionally stoop to unsavory business tactics to keep the doors spinning. The unspeakable amounts of time that companies must spend on acquiring new customers is shared with the time spent on improving the product. When a company is so focused on how it will pay its bills next quarter, it loses its capacity for innovation, creativity, delightful customer support, and overall vigor. And it will show, both internally, and outwardly to customers.
Subscription models are great not just for businesses, but for consumers as well. Companies will have more space and freedom to build better products, and build them ethically, knowing that their key to success is keeping every user subscribed, and not tricking new prospects into believing their one-time sales pitch. When companies become interested in long-term relationships, they're more likely to act honestly with their customers, and less likely to forgo the future for the present. Subscription models create healthier businesses. And health spurs creativity and a do-it-right attitude.
If you’re in the industry, you’ve already learnt this lesson. You already know that subscription revenue is an unstoppable force. If you’re new to starting a business, you might have missed out on the last ten years of action. While this article isn’t a comprehensive overview, it is what I hope will be the starting point in your investigation towards how you should structure your online business.
Build good products and treat your customers well, and customers will come right back. This is the revolving door business, and is, as far as I know, the only way to build a healthy business.