John Warrillow - The Automatic Customer: Creating a Subscription Business in Any Industry

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First published by Portfolio / Penguin, a member of Penguin Group (USA) LLC, 2015

Copyright 2015 by John Warrillow

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Illustration credits

Pages : Shockwave Innovations, www.shockwaveinnovations.com

: J. D. Power 2014 U.S. Retail Banking Satisfaction Study

: Dmitry Buterin

LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA

Warrillow, John, 1971-

The automatic customer : creating a subscription business in any industry / John Warrillow.

pages cm

Includes bibliographical references and index.

ISBN 978-0-698-17633-1

1. Entrepreneurship. 2. Business planning. 3. Strategic planning. I. Title.

HB615.W37 2015

658.8'7dc23 2014038637

While the author has made every effort to provide accurate telephone numbers, Internet addresses, and other contact information at the time of publication, neither the publisher nor the author assumes any responsibility for errors or for changes that occur after publication. Further, publisher does not have any control over and does not assume any responsibility for author or third-party Web sites or their content.

CONTENTS

Introduction

W e had been running together for five months when Sacha announced he was leaving on a business trip to China. The timing could not have been worse; the marathon was just six weeks away, and we had come to rely on each other to stay motivated through the hardest part of our training schedule.

Now, at the height of our work, he was leaving for two weeks.

Since Sacha and I wouldnt be able to run together, we decided to egg each other on digitally. We agreed to text each other the results from our training run each day as a way to stay motivated. Sacha asked if, instead of texting, we could use a messaging service called WhatsApp.

I was used to texting using the standard service on my iPhone, so I wasnt in a hurry to learn a new platform. I asked him why we couldnt just text the normal way.

Sacha replied that the phone company charges a relative fortune to text from China, and WhatsApp, instead of using the mobile networks, runs on the Internet and therefore doesnt require expensive mobile carrier fees. In fact, the only fee to use WhatsApp is a $1 per year subscription it charges after the first year.

We used WhatsApp to communicate while Sacha was in China, and eventually finished the marathon together, thanks in part to our WhatsApp-supported training regimen. It turns out that, in using WhatsApp, we were not alone. By early 2014, WhatsApp had acquired 450 million users and was adding a million users per day when Facebook announced it had acquired the company for $19 billionthe largest acquisition of an Internet start-up in history.

Most of the other Internet-based messaging services at the time used an advertising model to monetize their users. They offered a free platform but bombarded users with cheesy ads in return. WhatsApp founders Jan Koum and Brian Acton wanted to offer a cleaner, more private messaging experience. Instead of selling advertising, they opted for the subscription business model.

A dollar a year as a subscription fee may not sound like much, but when you have 450 million users and are picking up a million users a day, $1 a year starts to add up. Whats more, because WhatsApp doesnt try to be anything other than a subscription-based messaging platform, it doesnt need a lot of employees. In fact, at the time of its acquisition, it had just 55 people taking care of its 450 million subscribers.

WhatsApp won the $19 billion lottery not because its technology was better, or its people were any more caring, or its advertising was funnier. WhatsApp won, in large part, because it made its customers automatic. It chose the right business model for success by asking users to subscribe to its service.

This book will show you how to apply the subscription business model to your own business. When people think of subscriptions, they often think of cloud-based software, gaming, or media companies. While readers from those industries will benefit from this book, you can also apply the subscription business model to your companyno matter what your size or industry. WhatsApp is only one example of how powerful automatic customers can be for the growth of your business.

I Screwed Up

The last time I wrote a book, I screwed up.

Called Built to Sell: Creating a Business That Can Thrive Without You, the book was designed to illustrate how to transform a successful business into a sellable one. In it, I touched briefly on the importance of having customers who repurchase from you on a regular schedule, but in hindsight, I should have dedicated at least half the book to recurring revenue.

In the years since Built to Sell was published, Ive come to see how important recurring revenue is in building a valuable, sellable company. These days I run a subscription business called The Sellability Score (SellabilityScore.com) that helps owners build valuable companies by examining the eight key drivers of sellability. Owners who achieve a Sellability Score of 80 or more out of a possible 100 garner offers that are 71% higher than the average.

The biggest factor in driving up your Sellability Score is the degree to which your company can run without you, the owner. Thats a head scratcher for a lot of owners who are the best salesperson in their business. The secret is to build recurring revenue that brings in sales without having to resell the customer each month.

To appreciate the impact of recurring revenue on your companys value, you have to understand what buyers are buying when they acquire a business. Most owners want buyers to value their past achievements, such as last years profits or an industry award theyre proud of. In fact, it has been my experience that financial buyers are really buying only one thing when they purchase a company: a future stream of profits.

In the home security business, for example, companies have two forms of revenue. They receive installation revenue when they come to your home or office to install the keypad and wire things up, and they receive monitoring revenue in the form of the monthly payment for keeping an eye on things.

At SellabilityScore.com, we know from our analysis that when an acquirer buys a security business, it pays 75 cents for one-shot installation revenue and $2 for every dollar of monitoring revenue. Said another way, a security company with 100% monitoring revenue (the subscription aspect of such a business) is almost three times more valuable than a security business of the same size that has 100% installation revenue.

The same trend plays out across most industries. Accounting firms are valued based on their recurring fees. Financial planning practices trade based on how likely clients are to stay with the firm after the owner retires. IBMs stock moves up and down based on its recurring revenue from service contracts.