[MUSIC] Welcome back, everybody! In this module, Module 4, we're going to focus on subscription models which I think may be the most familiar of all five models. After all, we all subscribe to all sorts of things. We subscribe to goods, we subscribe to services. Services like Netflix, cable TV, various kinds of periodicals that still arrive on a lot people's door steps or in their digital inboxes. There are organic veggies, or a healthy snacks, goods like those that are delivered each week too on a subscription basis. So, these days, I think subscriptions are a part of just about anybody's life style, and increasingly, software is sold this way as well. So first, let's be sure we know what we're talking about here. Subscription models are those in which the customer agrees to buy goods or services that are delivered, whether physically or digitally, and then paid for an extended period of time. As we all know, we are always asked to pay something up front to get started. Some of the magazines which I subscribe to actually tried to get me to commit for periods as long as three or four or five years and they give me a small discount to do that. Wouldn't you like to have that kind of float if you're the publisher getting paid years in advance? Wouldn't you like a business in which your customers pay you upfront for years in advance? I think you would. So in this model, we're going to see some stories of some very inventive new businesses that use subscriptions to fund their startup and fund their growth. We'll also see some more traditional business that have long worked like that. In addition to always having cash in the bank, a really nice thing for most entrepreneurs, most subscription businesses have something else that entrepreneurs normally lack, peace of mind. I'll tell you a little secret, their founders sleep much better at night. As one of my most memorable professors once remarked, the best kind of business is a mailbox to which people send regular checks. Think cable TV, nursing homes, the list goes on and on. So what might this all mean for you? If you've not chosen the kind of venture you're going to start, you could do a lot worse than to find a business that works like that. So let's pause here now for a few seconds and see how many kinds of businesses you can think of that work just that way, monthly, where people send regular checks once they sign up, they just keep on sending checks. Are you ready? Go. Okay what have you got, newsletters right? Publications of all kinds, magazines, newspapers, all kinds of publications, utilities of all kinds, whether it's electricity or water or cable television. Your mortgage, your rent, your birch box subscription, and so on. Before we look ahead to what you're going to get in Module 4, I want to first give you a little quiz. It's a quiz about the economic principles that underlie most subscription models and indeed, underlie many other e-commerce models as well. So which of these economic elements do you think is the most important to a subscription model startup? CAC that is cost to acquire a customer. Or average consumer purchase, the amount the customer pays on average each time they pay. Or the profit contribution margin on each purchase. Or the customer churn rate, the rate at which they go away when they don't repeat purchase. Or the lifetime value of a customer. Or the payback on CAC. So what I'd like you to do is rank these factors in importance, in order of importance from number one the most important to number six, the least important. Okay? Go. Okay, so which did you say were numbers one and two, the two most important? Actually, I played a trick on you. I asked you a question for which there isn't a real answer. The real answer is that these elements have to work together in a holistic pattern that makes the overall return on CAC work. In fact, the same thing holds true, the very same elements for lots of e-commerce models that are not subscription models. So what you want is the following; you want a low enough CAC so that what you make on the average purchase and the margin on that purchase pays very quickly for the cost to have acquired that costumer in the first place. Of course if CAC is too high, it may take so long to repay the CAC investment that it's not worth acquiring the customer in the first place. If churn is too high, that is people don't come back, the same thing is true of course. In addition, if profit contributions are too low on what gets bought, then it may take too long to pay back the investment and so on. On the bright side, if the profit margin on what you sell or the frequency with which the customers order are high enough, then it's worth spending more money to acquire more customers even if it costs you a higher CAC, because the investment in that customer is worth it given what they pay. So do you see how it works? In essence, subscription models are a simple game of mathematics. If the mathematics work, you've got a business. If they don't, you're dead. The good news is that when you build a subscription business online, as many have, all of this is easily measurable so you know exactly where you stand and you know it very quickly. So let's look ahead to what we're going to do in Module 4. First I'll tell you the fascinating story of NakedWines, a customer funded winemaker that solves two really big problems for today's winemakers. Then, I'm going to tell you a couple of failure stories because in recent years, the allure of subscription models, which is sort of clear to see here, has led lots of entrepreneurs to do what I think are pretty nutty things. I would prefer that you not follow in their footsteps. Next, we're going to hear from an American serial entrepreneur, a guy named Bill Flagg. He's a veteran of several softwares and service businesses, SAS businesses they call them, that have been financed and grown with customer funds. Bill's going to tell us how he made it work and the lessons he's learned about getting SAS businesses underway. Finally, we're going to hear from one of Europe's most insightful young venture capital investors, Hussein Kanji, who has been a keen observer of what's happening in the subscription and the SAS world from the investor side of the table. I think you'll enjoy his perspectives. After all these interviews, we'll then explore why we've seen so many failures in the subscription arena, what you can do about it so that does not happen to you. I will also suggest a few optional things you might want to read. And then finally, as always, I'll give you an assignment to move you further along the customer funded path. So are you ready to rock and roll? I'll see you shortly for the Naked Wines story. [MUSIC]