The Consumer Subscription Software “CSS” ecosystem continues to mature as consumers demand high-quality digital services and entrepreneurs continue to integrate user generated content, social and sensor features to drive value and increase organic interest and retention.

The building blocks and the business model of Consumer Subscription Software as published by GP. Bullhound is shared below for reference.

1. The Building Blocks

2. The Business Model

What’s Next For Consumer Subscription Software?

Particularly, software has not only been disrupting entire industries from the ground up but is now becoming a distribution channel in its own right, creating new business models that impact the end-to-end value chain. Let’s take a look.
 
Some facts to begin with:
 
1) Consumers are increasingly willing to pay for niche services without, however, the burden of high upfront costs

2) Companies across industries based on traditional transactional models or using licensing are looking for a pivot for their monetization base and are particularly attracted by the economics of subscription business models
 
3) The global subscription ecommerce market size is expected to reach $904.28 billion in 2026, growing at over 60% annually on average (source: Business Research Company)
 
Consumer Subscription Software (CSS) is where consumer demand meets software delivery and is based on a tectonic shift away from ownership and towards access. Think of the thousands of apps that we are using today (and the dozens on an average mobile device) and you soon realize that we are no longer paying for ownership but rather for access.

From streaming movies or music to reading magazines or newspapers the concept is the same: an all-you-can-eat “buffet” model, which is – in its most successful variations – subscription-based.
 
Recurring revenue, premium content, mass customization through the efficient use of data and an ecosystem approach are some of the key ingredients of CSS. GP. Bullhound was estimating already in 2020 that the total addressable market (TAM) for CSS alone would reach $150 billion by the end of 2022.

Software companies are typically valued based on forward revenue multiples, which means that the total value of the business is a factor of the company’s future revenue. The higher the multiple, the bigger the potential because it means that they have a high-margin, high-growth set-up. Comparing the forward revenue multiple of CSS companies with that of SaaS companies, provides a good glimpse of the CSS potential.

Even in an environment of falling valuations and record macro-uncertainty, CSS companies trade two or three times lower (depending on the data and comparison methodology) than SaaS ones. Closing the gap is part of the opportunity.
 
However, building a successful CSS company requires the combination of several building blocks – from messaging infrastructure to payment processing to reporting and analytics – tightly knitted together in an ecosystem set-up. The recipe is up for grabs but not everyone will make it.

CSS Ecosystem and Metrics to Watch

• Entertainment: still-strong growth users, but large incumbents like Netflix are looking for new ways to attract users to platforms
• Fitness/Recreation: remains a leader in converting freemium users to paid
• EdTech: solidifying its new place in the hybrid classroom environment
• Family/dating: drastic increase in use as popular dating spots open
• The pool of investors is ever-increasing: venture builders should focus on low customer acquisition cost (CAC) and long-term retention to illustrate their staying potential

Going Forward..

To build your position as a partner with the user, your relationship can’t just be transactional. You need to provide a utility that drives engagement over many years and an organic re-activation of users. The subscription model fits perfectly with this use case, but it can be monetized in a variety of ways. Amazon, Prime, Netflix, Spotify, Strava, Vivino, YouTube, Whoop, and Patreon are examples of this.

It shows that US consumers are willing to accept a higher price in exchange for high usage frequency. It means that if an app has the capacity to drive more engagement, it may extract more value from end users.

More and more SaaS companies – Datadog, Twilio, AWS, Snowflake and Stripe, to name a few – find success with a usage-based pricing model.

The usage-based model allows a customer to start at a low cost, while still preserving the ability to monetize a customer over time.

The usage-based model allows a customer to start at a low cost, minimizing friction to getting started while still preserving the ability to monetize a customer over time because the price is directly tied with the value a customer receives. Not limiting the number of users who can access the software, customers are able to find new use cases — which leads to more long-term success and higher lifetime value.

While we aren’t going 100% usage-based overnight, looking at some of the megatrends in software – automation, AI and APIs – the value of a product normally doesn’t scale with more logins.

Both Subscription Based and Usage-based pricing will be the key to successful monetization in the future. A wise strategy is to have an open mind to offer the right fit-model and/or create a context based bundled approach creating a win-win scenario.

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