Subscription EconoSubscription Economics: m ics: How HoRewcurri Rencurrig Revenng Revenue Changes Everythinue Changes Everything g expresexspresed assed a peras ac entperacgente. Inag thee. In ol thed econo old economy, thismy ,i sthis one is ofone the of m theost most importimanportt manargit mnargis. ns. UnfortUnfortunateluny,a thitelsy pict, thisu pictre isu erentirely is entirely wrong w rongfor a sforub ascription subscription busine busssine, ss, for threefor three main m reaainson reas:sons: 1. It’s a backward-looking picture. This is a preterit framework 1. It’s a backward-looking picture. This is a preterit framework — — it’s all it a’sb aollu at mboount mey oalreaney dalreay eardnyed, ear enxed,pen exsepens already pses already paid, aid, actionsac tioalreans dalreay takedyn t.a Sukebnsc. Suriptiobscription busn inbeussseins aessree s aall arebo allu at bout forwaforwrd viasrdibility visibility: how: mhowuch mmucoh neym oI nkneyow I k In cowan Ico can uncot onun overt on thovere the next 12ne xmontht 12 months, so Is c, saon Ia cccan ounacct,o plaunn,t, plaandn, s anpedn sdpe acncdor adcicnorglyd.ingly. 2. Sales and marketing are matched to past goods sold. It’s 2. Sales and marketing are matched to past goods sold. It’s essentially a sunk cost. I’ll get into this later in the chapter, but essentially a sunk cost. I’ll get into this later in the chapter, but subscription businesses need to think strategically about sales subscription businesses need to think strategically about sales and marketing spend going toward driving future business.and marketing spend going toward driving future business. 3. This statement does not differentiate between recurring and 3. This statement does not differentiate between recurring and nonrecurring dollars. That’s a fundamental oversight. That’s like nonrecurring dollars. That’s a fundamental oversight. That’s like saying there’s no difference between a dollar and a dollar that saying there’s no difference between a dollar and a dollar that keeps happening every year for the next 10 years.keeps happening every year for the next 10 years. SmartS masubrts csriptioubscription businesn businesses dosesn’ tdo thinkn’t think like this like. Ithisnste. adIns teofad reve ofnu revee, nue, they fotheycus fo mcoreus m ooren an onnu anal renucalurring recurring reven revenue (ARR)ue (ARR). Here. ’Hers a nee’sw a inencowm ine come statemstateentm, ewnhta, tw whea t cwalle ac asllu bas criptionsubscription econo economy inmcyo minec ostmaete mstaenttem, ent, which illustrwhich illustrates thiatess: this: AnnuAnal Rneucaurril Rencgurri Revenng Revenue (ARR)ue (ARR) $100$100 Chur nChur n (10) (10) Net ARNetR ARR 90 90 Cost Cof ostGoo of dGsoo Soldd s Sol(COGd (CS)OG S) (20) (20) Gener Gaenerl & Aadml & Ainidmstriniative (straGtive (&A)G&A ) (10) (10) Rese aRrch &esearch & Develop Development (mRent (&D)R& D) (20) (20) RecurringRecurring Profi tProfi t 40 40 Sales Sa & lesMa &rk Metianrkgeti ng (30) (30) Net InNcoetm Ineco me 10 10 New AnNewnu Anal Conuanl Cotractn trVaaluect V (aAlueCV )(AC V) 30 30 Ending AREnding ARR R $120$120 1717 1717