Patience Pays Off: How to Understand Subscription Growth

In 2017, Codecademy had been struggling to get to $1M MRR. We had set the target multiple times and fallen short repeatedly.

In December of that year, Zach (our CEO) decided that we’d pull out all the stops and focus everything we had on hitting that target.

As a sign of commitment, we all signed a big novelty check to ourselves and hung it on the wall of the office.

We pulled every lever we had, shipped as much as we could, and watched our booking every day as we got closer. Before we left for Christmas, we realized we had a shot.

On New Year's Day, we got an email that we’d hit our goal and everyone celebrated!

About 7 days later we realized that we didn’t factor in refunds and had in fact missed that goal. We took the check down, shoved it into a closet, and never looked at it again.

In 2019, we had our first $500k week. There were balloons to celebrate, I think someone bought cupcakes and then we just went back to work.

A few years after that we had our first $1M week. We didn’t buy balloons and I can’t even remember when it was exactly. Probably in 2022.

I think about that check a lot when I talk to subscription companies about growth. The early momentum can be hard to see and it makes it very easy to feel like you're behind the curve.

Recurring revenue is less like a rocket and more like a wave.  It starts slow, and the momentum can be hard to see but if it keeps building it is very powerful.

Everyone wants to grow faster but it helps to understand the game that you're playing before you jump to any conclusions.

Growth Is Slower but More Durable

By the nature of subscription products, they are just slower to grow than E-commerce, Advertising, or B2B sales-driven products.

Because one user buys one account, subscription businesses grow linearly with their userbase growth.

They also tend to have 1 or 2 price plans, so revenue also grows pretty linearly with userbase growth.

Combine this with the fact that many subscription companies struggle to​ understand their LTV​, means that it's much harder to spend paid media effectively to accelerate growth.

This is much different than a B2B sales company that can sell hundreds or even thousands of accounts to a single buyer.  Additionally, they typically charge more per account for large companies, which unlocks another revenue growth lever.

This means that B2B companies can grow geometrically.  It's hard to do, but it is possible.

Advertising products can also unlock the same one-to-many relationship, they can increase the number of ads a user sees as well as the CPM/CPC for those ads. Again, not easy to do, but it is possible.

E-commerce companies are (typically) collecting the majority of the LTV of a user upfront, which allows them to reinvest that money back into ads quickly to acquire more users.

Subscription companies not only collect their LTV across the life of the user but they also are typically paired with a trial period or a free product, which further delays the payback period.

All of this slows down re-investing your capital back into acquisition.

The giant advantage that subscription businesses have is durability.  The revenue base is made up of thousands and thousands of small transactions, which makes it both diversified and more predictable.

If you are running a company with 40% net margins and have a single customer that represents 40% of your revenue, you could be in big trouble if they leave.

Recurring revenue businesses weather bad economies better, are easier to plan around and end up with potentially higher valuations.

Product Wins Can Be Harder To See, but Compound

In subscription products, you make money from your past and are trying to improve your future.

The majority of your revenue is from users you acquired up to now and when you improve the product, you only see the benefit for new users.

As an example, let's take an “average” early-stage subscription product:

• They’ve been in business for 24 months and assume their MRR is 20% from new users and 80% from existing users
• They ship a solid improvement to their acquisition funnel and see a 10% improvement in paid sign-ups

This is a great result, however, immediately they would only see a 2% increase in MRR, as this only impacts the new user cohorts. The older cohorts, which are 80% of the revenue, are not affected.

A 2% impact is hard to eyeball on graphs normally, but this is even harder considering:

• The normal variance in MRR is likely more than 2%, so seeing the trend could be hard.
• MRR is (hopefully) growing between 10-30% per month anyway, which makes a 2% change even harder to see.
• The company may or may not have had the traffic/money/skill to ship this as an A/B test, so they might not even know the exact impact.

The best-case scenario is that the company doesn’t learn what worked. The worst-case scenario is they either revert it or iterate again and make it worse.

The faster your team is shipping, the easier it is to make these mistakes.

Product Wins Take Longer to Impact, but Compound

Staying the same example as above, the company doesn’t fully “realize” the impact of this 10% win until all of their old cohorts cycle out and the new ones cycle in.

The better the retention of the product, the longer the older cohorts stay around and the longer this will take.

While this sounds like a bad thing initially, you are hopefully making improvements each month that you will see the benefit of in the future.

When this happens, it creates kind of a wave of momentum effect where your growth can look better and better as more and more of your revenue base is getting the improvements.

The more improvements you ship, the more momentum and compounding you have coming in your future.

Tracking and Metrics Definition are Just Harder

Subscription products, especially those with free products or trials, just have a lot more surface area that users will cover before paying.  

Even after they pay, they are coming back to the product to get some value and if you aren't meeting that, they will cancel.

This means that correctly defining and tracking their lifecycle in a way that allows you to understand your ability to meet these needs is just hard.

Additionally, most of the younger companies aren’t going to have the traffic or tooling set up to really finely measure the impact of all of their changes

• For A/B testing tools to work, you need both the traffic to run the test and the money to afford the tools
• Deep in the product, in the most important places for recurring usage, it is very unlikely that an early-stage product has enough traffic to run A/B tests

This means that setting up both the tracking infrastructure and the definition of your user lifecycle is very important to be able to see the impact of your changes.

Its hard, time consuming, but ultimately worth it.

So What Do You Do With This Information?

In subscription products, the early days can feel much harder but once you have the moment, predictable growth is much easier.

As someone running one of these companies, you need to plan for this journey.

This includes both the logistical factors of fundraising/hiring/expenses but also how you manage team morale and expectations.

The magic of the subscription model is how valuable and predictable the business becomes once you have the wind at your back.