Subscription companies will eventually meet The Honeymoon Effect

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Af Morten Suhr Hansen

When I was still in the media industry years ago, we were constantly busy launching new subscription initiatives, often in the form of new digital media outlets that would cover a particular niche interest. The idea was that since traditional media products were struggling and, for some, in free fall, it was crucial to find new revenue streams to replace the old ones. It was a sound strategy, which many media organizations still pursue today.

The interesting thing is that many of these new digital subscription launches followed a similar development trajectory. Initially, they took off with a bang. The influx of new subscribers meant that the user base quickly grew. In fact, the growth often exceeded our expectations, and after a few months of being operational, when we projected the subscriber base, we could clearly envision a successful future for the new subscription product and substantial revenues in the bank.

But after a while, the growth plateaued and eventually came to a complete halt. This often happened six to twelve months after the launch. And no matter what we did, the subscription growth remained stagnant, if not slowly declining.

We dubbed it the “Honeymoon” effect because it seemed like the honeymoon period was quickly over. But what was actually happening?

Why is my subscriber base stagnating? It’s basic math

We delved into that and the answer turned out to be rather simple mathematics. Imagine the following example of a brand new subscription business that you’re launching:

Naturally, you start by executing your sales plan, budgeting for – and successfully achieving – an acquisition of 100 new subscribers every month. Of course, some of them will drop off because that’s how subscription businesses work. After a few months, it turns out that your average churn rate is 10 percent per month (which is a realistic level for many subscription companies).

After the first month, you have 100 new subscribers, and the following month, you add another 100. Although 10% of the initial subscribers dropped off, you still have 190 subscribers after two months. The next month, you have 271 subscribers, and you continue to grow your subscription base in this manner. Until you reach 1,000 subscribers, at which point the number of new subscribers is equal to the number churning.

In my simplified example, it would take an infinitely long time to reach 1,000 subscribers. If you don’t continuously increase your sales targets month after month, you will find that after just 12 months, the monthly growth rate drops to around 15 subscribers per month. You will feel as if the growth has come to a halt and the honeymoon period is over.

Make sure your sales goals follow you subscriber base

So what is actually going wrong here? What should be done differently?

The simple answer is that the progression of your sales targets should align with the development of your subscription base. In other words, you need to plan and budget for the fact that it becomes increasingly expensive and challenging to grow your subscriber base. This is something we overlooked back then, and it is my experience that many still overlook this.

Continuing with the above example, after 24 months of adding 100 new subscribers every month with a 10% churn rate, the base has grown to 920 subscribers. However, if we instead increase the number of new subscribers by 10% each month, the base would grow to 4,900 subscribers after 24 months.

In other words, there is a significant impact in continuously adjusting your sales targets to match the growth of your subscriber base.

Why doesn’t it happen automatically then? Probably because it can be an expensive strategy. In the above example, we increase the number of new subscribers from 100 per month at the start to 895 per month after 24 months.

This brings us to one of the truths that also applies to subscription businesses. Maintaining a growth strategy can be exceedingly costly. Many subscription-based “unicorns” have had to learn this the hard way. Even with huge subscriber bases, sustaining growth requires substantial investments.

But that’s a different story altogether. My point here is that if you’re facing the launch of a new subscription concept or planning to grow an existing subscription business, you need to consider the honeymoon effect and ensure that your sales targets align with your growth ambitions.