Mick Jagger, Goodnight Moon, Blue Apron, and Churn Rates
The Rolling Stones were formed in 1962- the year I was born (which is not recently).
Like a number of music acts, The Stones entered into some contracts that hurt them financially. From a great article in The Wall Street Journal:
“The Stones weren’t financial savants when they started. They learned the hard way—by having serious business problems. To this day, they don’t own the copyrights to huge early hits like Satisfaction.
Mick Jagger was ahead of the curve: The Stones piled into merchandise, branding and sponsorships at a time when making money was verboten. They took the bullets and today’s artists collect the cash.
One of the things I’m really proud of, with the Stones, is that we pioneered arena tours, with their own stage, with their own sound and everything, and we also did the same with stadiums,” Jagger says. I mean, nobody did a tour of stadiums.”
Why are music royalties so valuable?
Because they generate recurring revenue.
Selling once: Recurring revenue
Royalties on music, books, and other types of intellectual property can generate revenue for decades.
Did you read “Goodnight Moon” to your kids- or read it as a child?
As of 2017, the book had sold more than 48 million copies- and continues to sell today (I recently bought a copy for my niece’s newborn). The book was published in 1947.
Someone- maybe the author’s estate- is still earning royalties.
The best part?
The author only had to write the book once.
Which brings us to SaaS companies and MRR.
Driving monthly recurring revenue
As the name implies, monthly recurring revenue (MRR) is revenue that posts every month. Subscription revenue is a great way to earn MRR, and software-as-a-service (SaaS) companies attempt to generate MRR through software sales.
But the competition is fierce.
And why not? Every would love to build a business using MRR.
Just how many competitors?
The Travel and Hospitality SaaS industry includes 169 companies who got to Series A funding, 26 at Series C or higher, and 19 businesses that had an initial public offering (IPO).
Competition makes it difficult to find customers, convince them to pay a monthly subscription, and to keep them. Customer acquisition cost (CAC) measures how much a company spends to acquire customers.
Once you find a customer, you need to keep them by providing a great product and responsive customer service. When the total monthly revenue you’ve generated is more than the CAC, the business can become really profitable. The monthly costs you include may be far less than the MRR- which means a big profit.
But the opposite can happen.
Customers may leave. And the percentage of customers who leave within a month or year is your churn rate. A high churn rate can damage a business that relies on MRR.
Just ask Blue Apron.
Why Blue Apron has the Blues
Blue Apron sells meal kits, and I’ve used the service. You pay a monthly fee, and Blue Apron ships a box with meal ingredients. I’ve also tried Hello Fresh and Green Chef- I like Green Chef the best.
So think about it.
Blue Apron spends millions to get customers to try the product. The company’s financial bet is that, once you try the product, you’ll stick with it and generate MRR. The MRR will eventually cover the cost of acquisition and generate high profits.
But I left- I churned as a customer.
Turns out that a lot of people did the same thing.
This blog post points out that: “Backed by $135 million in venture funding and a $2 billion valuation, the company was primed to become the ultimate disrupter of the food and grocery industry.”
What happened?
“An extreme obsession with customer acquisition killed its growth, leaving it with churn rates upwards of 70%.”
Blue Apron’s competitors report similar churn rates after 12 months of acquiring a customer.
Obviously, a 70% churn rate does not allow a business to become profitable- even if the CAC was 3 cents a person (well, maybe at 3 cents it might work)…
The Lesson
MRR companies may sound like a pot of gold, but high CAC and churn rates can break the business model.