Is this the end of the subscription era?

April 18, 2018

Blue Apron, the meal kit delivery service that launched in 2012, promised to change the way Americans cook at home. If Blue Apron had its way, there would be far fewer trips to the grocery store, no more anxiety about deciding what meals to cook, and less frequent trips for greasy takeout. In only four years after launch, the company was well on its way to achieving that mission. Blue Apron had raised $194 million and scored a $2 billion unicorn valuation.

Part of what made Blue Apron so disruptive was their pricing model. They took what would normally be a series of one-off purchases and turned it into a flat, predictable subscription fee. This presented customers a new, more intimate way of engaging with their provider and presented investors with healthy recurring revenue streams.

Blue Apron is part of a phenomenon that Zuora has called The Subscription Economy, which has spread to nearly every industry. Consumers can buy a subscription to software (of course), music streaming (Spotify), ride sharing (Uber), shaving supplies (Dollar Shave Club), eCommerce shipping (Amazon Prime), fitness classes (ClassPass), clothing (Stitch Fix)…the list goes on and on.

Flash forward to 2018. Consumers and investors alike are abandoning Blue Apron en masse, sending its stock price to an all-time low of $1.81 per share. That’s down over 80% from Blue Apron’s initial public offering price of $10 per share according to Business Insider.

Blue Apron stock price

There are many contributing factors to Blue Apron’s struggles, including rising competitive pressure, Amazon’s push into food, and distribution challenges. But there’s one overarching issue: customer churn. Daniel McCarthy, Assistant Professor of Marketing at Emory, estimates that 72% of Blue Apron’s customers churn by the time they’re six months old. Even more troubling is that as Blue Apron brings on new cohorts of customers, the new cohorts exhibit even worse retention economics. (Oh, and those newer cohorts are costing more and more to acquire).

In total, 70% of Blue Apron’s recent customers won’t stick around long enough to pay off all of the expenses that went into acquiring them (i.e. advertising, promotions). By comparison, SaaS companies often see extremely high renewal rates – rates of 80% or higher were reported in our 2017 SaaS benchmark survey. In many cases, SaaS companies also exhibit net negative churn, where the value of customer cohorts actually increases over time due to upsells and expansion revenue.

TL;DR Consumers have fallen out of love with Blue Apron’s subscription model and have decided they just don’t need a meal kit delivered every week.

Ok, but how does Blue Apron relate to SaaS?

SaaS businesses going back to Salesforce have proved decisively that subscriptions are a winning economic model for selling software. If you look up SaaS in Wikipedia, the very first line explicitly ties SaaS back to subscriptions, stating that “software as a service is a software licensing and delivery model in which software is licensed on a subscription basis and is centrally hosted.”

Here’s the thing: SaaS doesn’t actually mean subscription and being successful doesn’t require selling exclusively on a subscription basis. I believe that several of the trends that work against Blue Apron’s subscription model actually apply to the B2B SaaS world as well. Subscriptions may not be the only game in town anymore for SaaS. Price-market fit may indeed become as important as product-market fit, and in the process disrupt SaaS 1.0 companies. There are a few reasons why this may play out:

  • Customers want pricing to scale directly with usage and revenue. PayPal charges businesses 2.9% + $0.30 per transaction processed through the platform. But imagine if PayPal instead charged their customers a fixed subscription fee, regardless of how much their customers sold or how much of those sales were processed by PayPal. They’d probably struggle to get traction, right? Smaller buyers would have a difficult time justifying the monthly fee, and hence churn. Meanwhile, larger buyers would process so much transaction volume through PayPal, they would become unprofitable customers, leading PayPal to drive up rates for everyone else. This same customer-side issue isn’t unique to PayPal. Rather, it could apply to a number of MarTech companies or other SaaS vendors that directly tie into business performance.
  • Many SaaS use cases are one-time or occasional. Let’s look at Logikcull, cloud based discovery software for modern legal teams. Logikcull initially charged on a subscription basis, asking customers to commit in advance to a given discovery volume and user count. What they discovered is that two-thirds of private attorneys work at firms with five or fewer lawyers. These firms are often left out of the market because their discovery needs are occasional and extremely hard to predict at the outset. That’s why Logikcull launched their “pay as you go” product, where customers pay a flat monthly, per-GB fee without any minimum commitments or annual billing. The response was phenomenal, enabling Logikcull to raise a $25 million Series B round from NEA in just 17 days.
  • Vendors are under pressure to prove (and price based on) performance. Emerging SaaS startups, especially ones targeting verticals that have been slow to embrace technology, often run into a wall on pricing. On the one hand, they believe their software has the potential to generate millions of dollars in return for their customers (whether based on time savings, accuracy, increased performance, etc.). On the flip side, buyers are skeptical whether those returns will materialize, and may not want to bet huge sums on something considered unproven. That makes it a challenge, to put it mildly, to settle on mutually agreeable terms. The fix is performance-based pricing, which completely aligns the incentives of both buyers and sellers (at least in theory, and Tomasz Tunguz has a thoughtful contrarian perspective on the subject). Recent trends around data accessibility, predictive analytics, and machine intelligence remove some of the roadblocks that have, until now, gotten in the way of performance-based pricing in SaaS. As SaaS vendors get pulled into incentive-aligned, performance-based deals, they’ll need to  ditch the knee-jerk attachment to traditional subscriptions.
  • The rise of developers as influential SaaS buyers. Finally, developers have become an increasingly important SaaS buyer, especially in today’s API economy. They expect minimal barriers to trying new products and they want to pay for software based on their actual usage, not some pre-set subscription. That’s how they buy AWS, Stripe, Clearbit, New Relic, Segment, Datadog, and other developer-friendly products. While usage-based pricing may be communicated as a “subscription,” in practice it feels more like “pay as you go” versus enterprise SaaS subscriptions.

Have you seen pressure to move away from traditional subscription-based pricing? If so, what did you do? We’d love to hear from you in the comments!

Kyle Poyar

Partner at OpenView

Kyle helps OpenView’s portfolio companies accelerate top-line growth through segmentation, value proposition, packaging & pricing, customer insights, channel partner programs, new market entry and go-to-market strategy.