Discover more from Venture Desktop by Brett Bivens
Checking in on a (still) underrated category.
The consumer subscription software segment fits in very well with my definition of an underrated market opportunity.
Two of the main factors that tend to be present in underrated markets are artificial barriers that hold back scale and a gap between engagement and monetization.
In the case of consumer subscription, these hurdles have always been intertwined. This is partially due to the dominance of the App Store which, while powering tremendous distribution, created limitations on paths to monetization. This, in turn, led to products with extremely high engagement but challenges with increasing revenue per user.
These barriers to scale are falling rapidly thanks to (at least) four key trends that are worth digging into a bit deeper:
1. Precision Subscription
One of the areas I am most passionate about as an investor and consumer is "precision wellness" — the shift from products focused on content and community to those which also incorporate deeper tech elements like passive and more accurate biometric sensing, smarter algorithms employed to drive precision treatment and nutrition, more immersive experiences, and the ability to use AI to provide a 1:1 experience at global scale.
The notion of "Precision Subscription" is relevant well beyond the health & fitness category. From education to personal finance to productivity, companies are increasingly driving technical innovation into consumer subscription products to create more personalization and richer product experiences.
2. Expensable Subscriptions
Jarrod Dicker of the Washington Post had a great insight about the rise of "expensable media" (think Stratechery, The Information, 2PM) and its positive impact on the creator ecosystem. This same effect could fuel a massive expansion in the consumer subscription software market that is compounded by a shift away from the office and its bundled amenities.
Health and wellness, productivity and creative tools, home and family services, education — all are very much within the bounds of what companies will likely allow employees to expense and has the potential to create material growth through "bottoms up" enterprise distribution for consumer products (ex. I tell my colleague that I expensed Headspace, then she does as well).
3. Bundling and Higher Net Dollar Retention
One drum that I have been banging for quite some time is that the consumer subscription winners of the next decade will have metrics that look like good B2B SaaS, specifically around net retention.
The primary driver of increased net retention will come through bundling (ex. Spotify layering on an education, audiobook, or fitness subscription). This opportunity is made even more powerful for mature consumer subscription companies like Netflix and Spotify who have mature retention curves and years of insight into what drives engagement from their user base. As a result, their R&D ends up being relatively "predictable". With more consumer subscription companies hitting some level of maturity, we will start to see an increase in bundled offerings that will make it possible for companies to move from subscription products to digital subscription lifestyle brands.
Eric Stromberg of Bedrock had a great Screenshot Essay on the topic of consumer subscription retention that I riffed on with some additional thoughts.
4. Private Equity
One of the questions that I often heard when we started investing in consumer subscription companies a number of years ago was whether we were ever going to see the development of a real M&A market.
At that point, large acquirers hadn't quite arrived at the realization of the importance of subscription business models while deep PE pockets didn't have enough data (or target companies at reasonable scale) to place truly big bets on the category.
I wrote last year about the emerging opportunity for Private Equity to get more actively involved in the consumer subscription segment via investment and roll ups. While I've yet to see the latter take shape, the former has ramped up aggressively – one example being KKR's massive investment in Zwift's $450m funding round.
There has been a lot of great analysis lately on consumer subscription that prompted this post — Nikhil Basu Trivedi's series, Eric Crowley's annual report at GP Bullhound, and Parsa Saljoughian's very helpful benchmarking exercise all come to mind.
And if you are looking for great people to follow in this category, check out this tweet.
If you are building a consumer subscription business, I would love to talk. You can find me on Twitter @brettbivens, email me email@example.com, or subscribe below to get updates on new essays I write.