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How to Value a Subscription Business

GoCardless
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Last editedNov 20212 min read

While selling subscriptions used to be a niche market populated by gyms and magazines, today it’s a widespread business model. Business-to-consumer subscription businesses are booming, offering repeat purchases of everything from beauty products to socks and recipe boxes. Yet for every success story like HelloFresh or Birchbox, there are hundreds of start-ups that fail. Taking this volatility into account, here’s how to value subscription businesses.

How do subscription businesses work?

The subscription business model charges customers recurring fees to access their product or service. Customers might receive the product through the mail at regular intervals, as with recipe boxes like HelloFresh, or they might enjoy continual access to a service, such as Netflix. The recurring fee can be charged at any interval you choose, usually monthly or annually. There are benefits to this model for businesses and consumers. Businesses enjoy steady cash flow from recurring payments, while consumers enjoy an interrupted delivery of their product or service.

How to value a business based on turnover UK

One of the classic ways to value any company is based on its turnover. In the case of subscription business models, this gives you a good indication of how popular the product is by looking at sales volumes. However, it won’t take factors into account like investment and product costs. Here’s how to value a business based on turnover UK:

  • Step 1: Calculate average weekly sales by dividing total turnover by the number of weeks.

  • Step 2: Multiply average weekly sales by sector value.

With subscriptions, you’ll need to look at a long enough time frame to cover subscription payments. If you only look at a single month when you charge annual fees, this might not be a very good indicator of how well your company’s doing.

How to value an online subscription business

Traditional business valuations typically factor in big-picture inputs like macroeconomic trends and how they impact different customer segments. This approach doesn’t work as well when creating revenue forecasts for subscription businesses, because they don’t consider the volatility of this model and its high customer turnover rate.

One proposed method when looking at how to value an online subscription business is the customer-based corporate valuation (CBCV). The CBCV method doesn’t look at macroeconomic factors, instead focusing more on customer behaviour. Customers are the lifeblood of any subscription business, so you need to weigh in things like:

  • Number of incoming customers

  • Customer retention levels

  • Average revenue per customer

It’s similar to using turnover as the basis for a valuation, but rather than looking at sales alone you’ll also weigh in how many customers are acquired and how many stay during the accounting period in question.

This valuation model also considers the fact that not all customers are created equal. For a subscription-based business, customer loyalty should be weighted more heavily. The most loyal customers are those that stick with the firm for years, while new customers are more likely to cancel their subscriptions.

How to improve your subscription business valuation

If you plan to use a customer-focused valuation method like CBCV, how can you make your business more attractive to investors and increase its value? Customer retention is everything for a subscription business. While you need to attract new customers to drive growth, it’s also very important to reduce churn. Try to avoid these common mistakes:

  • Don’t scale your business too quickly before you’ve sourced your products

  • Don’t neglect customer retention metrics like engagement

  • Don’t give away products for free in a bid to boost acquisition rates

Instead of planting too much focus on your product, instead you need to look at the value provided to each customer. Customers choose subscription services because they want a long-term commitment to good service and the convenience of not having to reorder their favourite products. This predictability can translate to a higher business valuation, provided you make customers your primary focus.

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