The 3 best business models for a consumer company
After bootstrapping a startup in the consumer space (B2C) for 6 years, I’ve learned what makes an effective business model. One of the most critical factors is having recurring revenue.
Here are three business models that provide recurring revenue:
Biz model #1: Subscriptions
Subscriptions are the holy grail of business models. They match the ongoing costs of a business directly with the number of customers, and they are predictable.
Subscriptions work great for ongoing content and for web based SaaS. They can also work really well for apps, but this is trickier to pull off than other categories.
Acquirers are paying insane valuations on recurring businesses – as much as 10x revenue for a really fast-growing business!
But ... there’s one big problem with subscriptions: consumers hate them. So in order to pull off a subscription, your product needs to be used for work or be very high value.
Biz model #2: Consumables
When you hear consumables, you’re probably thinking in-app purchases. However, consumables are actually more common as physical goods.
Many of the everyday items we use run out or wear out – like food, soap, shoes, and tools. Other items, like home furnishings and clothes, last a long time but styles change. All of these are consumables and recurring purchases.
People are more likely to purchase consumables than an ongoing subscription, particularly for long-lasting products and lower value items. This makes them a great alternativee to subscriptions.
Biz model #3: High cost one-time purchases
If subscriptions aren’t a fit, and you don’t have a consumable good, what's the alternative?
One-time purchases. But it isn't recurring revenue?! Hear me out...
Here’s a dirty secret of B2C subscriptions: Churn can be incredibly high, annual churn can be 50% or greater! So subscribers don't last forever.
For example, if a subscriber lasts 2 years (50% churn):
- 2 years on a $50 annual subscription: 2 * $50 = $100
- A one-time purchase of $150
By pricing your product greater ($150) than the lifetime value ($100) of a subscriber, you make more selling a one-time purchase! 🤯
Now, true recurring revenue is still better, but one-time purchases are an option to get started. Just know you'll eventually want to build a second product with a better business model.