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Time to Invest in ‘Product as a Subscription’ Companies?

Investors

The UK appears to be in the grips of a subscription addiction that fortunately doesn’t involve pharmaceuticals. Products as a subscription is the latest business model trend and it’s taking off in a big way. Companies that focus on recurring revenue streams are also popular with investors. From SEIS and EIS investors looking for promising startups to back for the chance of a risky but tax-efficient shot at a big win to stock market investors, subscription-based models are in vogue.

Publically listed success stories such as Salesforce showed the way to Microsoft, who have also turned software into subscription services (SaaS). Netflix and Amazon (through Amazon Prime) are among the fastest growing companies in the world. Outside of tech, other new subscription services are tearing a path in staple consumer products and convenience markets.

The Dollar Shave Club, that so disrupted the market for expensive, branded razors by selling similar but non-branded models for a fraction of the price was so successful Unilever bought the company. Graze, the healthy snack box subscription service has done very well, as has Birchbox who sell pampering products to a largely female audience. Loot Crate have capitalised on ‘geek culture’ with their monthly deliveries of collectables, gadgets and other general ‘stuff’. Tails has been making fast progress in growing its subscriber base for breed, age, health and activity-level specific dog food subscriptions.

Not all subscription companies, however, are universally successful and especially not as an investment. 2017’s worst performing significant IPO was that of Blue Apron. The meal kit delivery business went public in June and saw its share price tank by 70% over the following months. Many other subscriptions services, particularly those focused on ‘boxes’ gain some initial traction and then fade away or fail, turning out to be fads. Others, notably New York-based lingerie subscription service Adore Me, have been accused of using small print to lock subscribers into expensive commitments it is difficult for them to then get out of. There is also concerns the subscriptions market is already becoming saturated.

However, with YouGov research indicating that subscription rates in the UK grew by 11 percent in 17%, there is obviously still plenty of potential. Another meal kit subscription service, Hellofresh, was declared as the fastest growing company in Europe by the Financial Times after it multiplied its revenues by 400% for three years in a row.

So what’s the secret to picking out a winning subscription-based company to invest in? Like most investments it doesn’t seem to be black and white. Many of the most successful subscription companies, like Dollar Shave Club and Tails, take something consumers are almost obliged to buy regularly and make the process cheaper and more convenient. High margin products where the big players also high advertising costs, as the previous two examples show, have proven to be particularly fertile markets for subscription success.

Tapping into consumers’ lifestyles and psychology is also important. Many individuals in the 18-35 bracket enjoy cooking but lead busy lives, have ambitions to live sustainably (minimising waste) and have a level of disposably income. They also eat every day – hence the success of meal kits. While more expensive than supermarket shopping, when the temptation to eat out for convenience and speed is removed, and waste due to uneaten food, it can also be easily, and is, argued that meal kits save money.

However, as in most other business models, perhaps the main component to success is execution. Out of 10 companies offering the same product as a subscription, one will be successful. For companies already on the stock exchange the question is different. How much space does the company still have to grow in terms of market penetration and what are its plans for new revenue streams? And while considering subscription based investments, subscribe to our newsletter for more articles covering investment topics and news. It’s free!

Risk Warning:

Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.

There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

Paul

The author Paul