Finding Growth in Subscription Models

In the past few years, Europe has become a B2B SaaS powerhouse, a segment which has quickly grown in popularity among investors with increasingly steep valuations. Related but very different at its core, the B2C SaaS model is less popular, although several businesses have indeed established successful consumer SaaS products, such as Spotify in Europe or Calm, Chegg, Netflix, and Twitch in the US, all of which resulted in outsized returns for investors.

Major consumer brands are also reaping the benefits of the SaaS model by launching their own subscription offerings, with Instagram being one of the most recent companies to join the trend allowing creators to charge a monthly fee to access premium content. Consumer subscription models commonly face the following criticisms: they exhibit high churn rates compared to B2B SaaS and often have high individual customer acquisition cost, which in turn results in higher cash-burning investment profiles.

Overall, we believe this to be an exciting era for the emergence and growth of B2C companies benefitting from the recurring nature of SaaS revenue. Therefore, to tackle this segment, HPE Growth has decided to focus on business models that can lead to long-term and profitable growth without requiring massive and risky injections of capital.

Of course, this is no easy feat and we have identified two main challenges for companies that are looking to scale efficiently: the need for a strong community or a large content library which both allow for lower customer acquisition costs and higher retention. The perfect example to illustrate this is Netflix, which is producing more and more of its own exclusive content to attract and retain users as well as reduce the power of film rights holders, or Disney+ being able to compete directly from launch given their existing extensive library.

The HPE mentality is to back businesses with sustainable and efficient growth directly enabled by built-in network effects where steady growth will propel the company forward, rather than rapid growth that falls away just as quickly. Therefore, we are constantly on the look for companies that use a specific efficient playbook which could be materialised by hybrid B2C/B2B2C models or original user acquisition strategies, for example SEO or content driven methods.

In the case of B2C SaaS, this line of thinking often entails a customer base that remains engaged for longer but might exhibit a higher customer acquisition cost. In contrast, the high customer turnover and low customer acquisition cost model can seem appealing to some businesses but is not conducive to the same kind of stability in the growth trajectory and thus not part of the HPE strategy.

To illustrate that as part of the broader B2C landscape as well something that has been in the headlines recently, “quick commerce delivery” businesses are able to acquire customers and scale rapidly through social media campaigns and discounts for new customers. While this will bring on a large pool of customers, the chances of them leaving after a short period are high, keeping churn elevated and requiring injection of more capital to sustain the growth. This will also entail substantial dilution for existing investors.

Looking at a slightly more mature market in a similar space, food delivery companies which also followed “growth at all costs” models. One of the lessons from their story is that discount-driven marketing does not create the right customer base for long-term growth. As a matter of fact, established delivery apps such as DoorDash and Deliveroo have eventually launched their own subscription models. However, it is important to note that the “growth at all costs” strategy is not always negative and can be driven by two very distinct reasons: product-led growth or a winner-takes-all market.

Product-led growth generally has limited customer acquisition costs and limited initial monetization options. This growth model is end-user-focused and requires companies to purposefully build a community by investing in USP features which, if done successfully, will lead to meaningful monetisation in the future. Companies such as Dropbox, Calendly, and WhatsApp have followed this model by relying on their product as the primary driver of customer acquisition and conversion.

On the other hand, the winner-takes-all play is characterized by high CAC and limited monetisation in a search for better economics as the business gains scale. Quick commerce start-ups perfectly represent this by leveraging their network and scale effects as a means to swiftly become the dominant player. Once this is achieved, monetisation kicks in for the market leaders and others are left behind.

To link that back to HPE’s strategy, WeTransfer perfectly portrays how the product-led growth model can be harnessed to bring efficient growth. The cost of acquiring new customers is low, and through the model, existing customers can be used to acquire new customers and seamlessly onboard them with just one email. This built-in “network effect” is something that HPE Growth is always looking for in prospective B2C SaaS investments. It allows a B2C product to grow its brand naturally and rapidly through specific demographics, creative designers in the case of WeTransfer. The growth is also more long-term and as the audience is acquired through organic means, they tend to remain customers for much longer.

When it comes to innovative marketing strategies, the company is known to think outside the box to build new audiences and has created a special brand and identity. The success of the short film 'The Long Goodbye', created by WeTransfer’s editorial platform WePresent in collaboration with Riz Ahmed and Aneil Karia, is the finest example of this. Produced to accompany Ahmed’s 2020 album of the same name, the film won the 2020 British Independent Film Award for Best British Short Film and was shortlisted for the Oscars. This is also key to appealing to Generation Z, which some businesses have struggled to adapt to. For instance, Meta’s recent earnings reflect the company’s aging demographic and difficulty to attract Generation Z users who opt for more dynamic social apps.

It is crucial for players in the B2C SaaS market to be aware of trends and keep reinventing themselves with innovative offerings and marketing strategies. Additionally, as discussed in Deloitte’s 2021 Millennial and Gen Z Survey, the youngest generation of consumers are more ethically invested in their purchases than any generation before, with 49% taking ethics into account when choosing an employer. Since inception, WeTransfer has always put an emphasis on sustainability. As a certified B Corp since 2020, the business has made a commitment to carbon neutrality and creating meaningful positive change through its activities. The focus on sustainability is in no way specific to B2C SaaS businesses, but one that investors and entrepreneurs across all sectors are having to come to terms with if they want to compete.

A sustainable mindset has become a key part of the forward-looking ethos that many new B2C platforms across Europe are adopting, whether they include the subscription model or not. Businesses like Backmarket, which recently raised $1 billion becoming the highest valued French start-up, and Vestaire Collective, are examples of European ideas that are intrinsically forward-looking and sustainable at their core.

With the rapid development of innovative ideas in the B2C market, consumers’ expectations are only set to increase as businesses find new products to fit into the subscription model. Even large items like cars, furniture, and electronics have become available through subscription, through Swedish car giant Volvo, scale-up FINN, London-based start-up Zenkki, and Berlin-based technology subscription platform Grover. Even though the idea of a car on subscription may seem outlandish to some, Volvo expect the model to account for 5% of its deliveries in 2022. Volvo is not the only existing major brand to have made a foray into subscription models, as Twitter, Sony, and Lululemon all introduced subscriptions to their existing offerings. These businesses enter the market with one large advantage, an existing audience to appeal to. They bypass one of the largest challenges of starting a subscription business which is finding and growing that community.

However, even massive multinationals still have to ensure that their product is strong enough to be successfully marketed as a subscription. This can be exemplified in Sony’s two subscription offerings for online gaming, PS Plus and PS Now. Both of the offerings are marketed to the existing PlayStation consumer audience of approximately 120 million console owners. PS Plus, a simpler online multiplayer subscription, sat at 48 million members in 2021, while PS Now, a more expensive game streaming offering, struggled at 3.2 million subscribers, a meagre 6% of its internal competition.

The future for B2C subscription products is promising, as new and existing businesses find niches to fill with the model. Future innovation will depend on businesses appealing to the notoriously fickle Generation Z and the social media platforms of the future. Three themes where HPE sees B2C subscription thriving in the near future are Social Commerce, the Creator Economy and Edtech.

Social Commerce has emerged in Asia and is beginning to take hold in US and EU markets. Early predictions foresee it representing 4.3% of all ecommerce sales in the US, with these early years important to see whether it will be a force to be reckoned with. However, Europe may be a more difficult market, with the 2021 European E-Commerce Report showing that 46% and 45% of German and Dutch consumers respectively would not be convinced to purchase through social channels.

Secondly, the Creator Economy is booming and will likely follow the steps of category leader Twitch towards the subscription model, suggesting that the increasing appetite of users will also create a great opportunity for brands to jump into.

Finally, education is also progressively relying on B2B2C/B2C SaaS products whether in the corporate world, CoachHub and Sharpist for example, or for universities with products like Perlego. We believe that whether or not these themes are the next steps in B2C internet and/or subscription, the innovations to come within this space will definitely be something to keep a close eye on.