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Get Started with the App Subscription Model

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The app subscription model is a great way to monetize your app. It gives your app business monthly recurring revenue (MRR) and helps you build a value-based connection with your app’s users.

In this tutorial, we’re going to look at how to build such a subscription powerhouse. Here’s what we’ll get into:

• How do subscription apps work?
• What’s the best way to monetize your app?
• Which metrics should you track?
• Products and content best suited for subscriptions

The Subscription App Business Model

A subscription business is different from traditional businesses. Instead of purchasing a single app for a single price, a customer subscribes to paying a fee on a recurring basis and receives repeat value from it.

A few examples:

• You purchase a magazine subscription, and in return for a month-by-month fee you receive a physical or digital magazine every month
• You subscribe to a flat fee for services you use on a recurring basis, such as physical goods delivery with Amazon Prime or your mobile data plan
• You use a tool or certain resources on a recurring basis, such as your email provider or social media scheduling tool

The recurrence of value is key for a subscription business. It doesn’t make sense to simply turn a one-time-fee into a recurring fee, if you don’t also make the delivery of value recurring. The subscription business model is most suited for products you keep using.

What’s that look like for apps? A few examples:

• Many “prosumer” apps charge a monthly or yearly reccuring fee for a Pro upgrade. It’s a free app, and you unlock Pro features. A typical price point would be $15/year.
• Content-based apps charge a monthly or yearly recurring fee for content. These apps often have a free trial, but if you want to keep receiving content (articles, magazines, recipes) you’ll have to subscribe.

Just in case – what do we consider a business? A business provides value to its customers, but it’s important to note an extra characteristic: a business provides value at a price that makes it worthwhile to keep doing business.

As an indie app developer, you may not see your app as a business. That makes it difficult to turn a profit in the first place, let alone set up the foundations of a subscription-based business. It’s important to start thinking and acting like a business!

Advantages of Subscription Apps

Building a subscription app has several benefits:

1. Subscriptions reward a healthy relationship with your app’s customers

When a one-time purchase is completed, the relationship between business and customer often ends. You’ll have to persuade a customer to make a next purchase.

A subscription business, on the other hand, makes this a double-edged knife. With the repeat revenue you can continously fund your app and at also keep providing value to the user, with upgrades, for example.

2. Subscriptions turn your app’s customers into assets

When you acquire a customer for your subscription app, they become appreciable assets. The longer a customer stays, the more revenue they generate.

With a single-purchase model, the lifetime value (LTV) of a customer is determined by the price of the single purchase (and eventual repeat purchases). When you acquire a customer with a subscription business, you can recover acquisition costs during the lifetime of the customer. Once you’ve regained your investment and retain the customer, they bring in pure profit.

3. Subscriber engagement drives your app’s features

When a customer subscribes to your app they’ll want to get their money’s worth every time you withdraw that monthly fee from their bank account. Every time the customer gets value from your app, you create a touch point with your business. That opens up a lot of opportunities!

If you want to improve your app, or seek beta testers, you already have a loyal customerbase to ask for feedback. If you want to pitch new app ideas, you can ask your customers.

Subscribers cause engagement and a more lively business, making the value exchange a perpetual two-way street.

Of course, subscription apps have downsides too:

1. Churn is your biggest enemy

The biggest enemy of a steady Lifetime Value is churn. Churn is simply the percentage of users that unsubscribe, i.e. that you lose, on a monthly basis. Churn converts directly into lost revenue, and if churn outpaces your acquisition — you’re losing money.

Churn is a natural phenomenon in subscription businesses. Customers simply come and go, and that’s fine as long as your customerbase keeps growing. You can remedy churn too, for example by focusing on what your customers need, by innovating, building new features, but most of all, by creating a personal connection with your app’s users.

2. A new business model comes with new metrics to get used to

Say you need to invest $ 10.000 to build your app. Instead of charging a $ 60 one-time purchase, you charge the same total amount in a period of 12 months.

With the one-time fee you could recoup your investment in the first month of business based on one-off sales, but with the same sales effort you’d only recoup 1/12th of your investment in the first month. The risk is spread out, but the end result after a year is the same though!

If you retain customers after that first year, you’ll turn a profit beyond your investment. However, on the P/L of the first month, a subscription business will show up as a loss. That takes some getting used to!

3. Some customers get tired of subscriptions

Between Netflix, Apple Music, Spotify, phone subscription plans, and all the other stuff we have subscriptions for, your customers probably already have a lot of subscriptions. What if they get tired of subscriptions?

In the tech space, you occasionally hear complaints like “But I paid for this product, why do I need to keep paying?” It depends on the app, of course, but what people pay for with subscriptions should either be for consumables (i.e., cloud storage) or get funneled back into developing new features.

You can imagine that, if an app doesn’t improve, customers get grumpy. What are they paying for? An important factor, just as with reducing churn, is the connection you have with your customers. If they feel that the Pro upgrade is worth it – because it gets better or gets “more” – they’ll gladly pay for the subscription.

Types of Subscription-based Apps

Different types of apps benefit from different types of business models, and not every business model is a good choice for a particular type of app. Which types of apps match well with the subscription business model?

Content-based apps

The first app category that comes to mind is a content-based app: magazines, news, courses and any kind of consumable digital content like music, video and in-game content. If you add value to the digital lives of your customers through content, the app subscription model is perfect.

Service-based apps

The second category is, of course, a service-based app: cloud storage, backups, online services, games, or apps that complete tasks on your behalf like social media scheduling. Apps that provide services that people perform are by rule excluded from In-App Purchases (but not subscriptions in general).

If you think the new subscription model isn’t for you because you want to charge for app updates, you can learn from Software-as-a-Service apps. They’ve perfected the business model of charging for both service and updates.

Most professional SaaS apps I use, like Zapier and MeetEdgar, use the revenue from their subscription for both continued service as well as product updates. If you can’t use the subscription model because you only offer product updates, it’s a great idea to find out how you can make your app consumable.

Think about cloud storage, online backups, synchronizing data between your app and its desktop web app counterpart. There are plenty more ways to make a productivity app profitable, without charging for app updates.

Pro upgrade apps

A third category of apps that’s suitable for subscriptions, is the Pro upgrade. Here’s how that works: You’ve got a free app that works well, and you offer premium features to users that upgrade. Many productivity apps use this approach to offer users extra functionality, for example, for $15/year or $2/month. You can charge a one-time upgrade fee, or a yearly fee.

How To Launch a Subscription App

Now you know how the new subscription model works, let’s take a look at how you can benefit from it. Are you considering to launch your own app, but you’re unsure about the best app business model? Here’s how you can start with a subscription-based app.

First things first. What’s your app’s value proposition? Make sure to validate your app business before you build it. Don’t jump to conclusions, building a product before you’ve validated it.

It’s simple to validate a subscription business. Why? Unlike other types of apps, for content- and service-based apps the app itself is not the product, it’s the value it provides that’s the product.

Take a look at the following examples:

• A recipe app helps you maintain a healthy lifestyle
• A movie recommendation app helps you pick movies to see next
• A curated content app filters interesting content so you don’t have to

You can validate these ideas without the app, with a low-tech alternative. You could also build a Minimum Viable Product (MVP) to try out different ideas. You could even build an MVP and use it as a playground for different subscription products and ideas.

The app itself is simply a medium for value distribution. The value itself – the recipes, recommendations, curation – is what you validate, to determine if your app has potential to generate revenue.

How would you go about validating these ideas?

1. Ask your friends for $5/month and send them a new recipe every week. Grow your customerbase, when friends tell friends, and then turn that into an app.
2. Create a simple online form (Google Forms, SurveyMonkey, etc.) and post in online communities that you’ll research personal movie recommendations for people who fill in the form. Try it out, then see if you can charge for it, and then scale up into an app. You figure out the tech as you go.
3. Set up a mailing list account (Mailchimp, Drip, ConvertKit, etc.) and start collecting interesting articles and media around a topic. Ask your friends, Twitter followers, LinkedIn connections to sign up – if they’re interested. Once you’ve got a few hundred signups, see if you can turn the newsletter into an app.

The interesting thing about this approach is that you’ve already got a working business long before you’re building an app. The app isn’t the product, it’s merely the medium. Try out the low-tech, then build the app!

Important Metrics for Subscription Apps

Alright, let’s wrap this guide up with some tangible metrics. You can’t improve what you don’t measure. For a subscription-based app, these metrics are the most important:

• Montly-recurring revenue (MRR) or anually-recurring revenue (ARR)
• Life-time value (LTV)
• Churn rate and growth rate

Monthly Recurring Revenue (MRR)

Monthly-recurring revenue (MRR) is, as its name says, revenue that repeats itself every month.

It’s the heartbeat of a subscription-based business and it tells you exactly how much money you’re making from your subscribers every month. When you’re working with an annual subscription, it makes of course sense to work with Annually-recurring revenue (ARR).

It’s often sensible to look at your business’ performance on a year-by-year basis. In such a case you can’t simply multiply your MRR by 12, but you’d rather look at the average monthly recurring revenue for each of the months of the year.

Lifetime Customer Value (LTV)

The Lifetime Value (LTV) of a customer is how much revenue you make from a single customer during its lifetime with your business.

Let’s say you sell an app for $1.99 a piece, without additional revenue from In-App Purchases. Logically, your customer’s life-time value will be just $ 1.99 because it’s all the cash you make from a customer during its time with your app business.

Another example would be an app with a subscription business model. Let’s say it gives access to dinner recipes for $5 per month. On average, a customer stays with the business for 9 months. The life-time value of a customer, then, is 9 × 5 = $ 45.

Churn and Growth Rate

Churn rate is simply the annual or monthly percentage of users that decides to unsubscribe from your app.

If 2% of your subscribers stop subscribing every month and you started with 1.000 subscribers, you’ll end up with ~ 941 after 3 months. A simple way to calculate churn is to count the number of customers who stopped subscribing, comparing one period against the one before it.

Your app’s growth rate is the opposite. It’s the annual or monthly percentage of users that signs up for your app’s subscription business. You see that a 5% churn rate and a 5% growth rate cancels itself out, so you’ll always aim to outrun your app’s churn rate with its growth rate.

What’s Next?

Ready to build your own subscription-based app business? Here’s what we discussed:

• How do subscription apps work?
• What’s the best way to monetize your app?
• Which metrics should you track?
• Products and content best suited for subscriptions

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