Speaker 1: What's up, everybody? You're listening to the Hustle and Float Shark podcast with your boys, Matt Wolf and Joe Fear. I have a question about the subscription business because you might be able to help us sort of handle an ongoing debate we've been having with some other people. So we have a friend and I'm not going to mention any names. He listens to the podcast, so he's going to hear this episode. But he he has a software business that he sells at a one time price. Right. It's just the pay once and then you never have to pay again on the software. And the question always comes up to him of why don't you sell this as a recurring thing? People would continue to pay for this software month after month. It's it's a pretty critical software in people's businesses. So they they would keep using it. Why? Why not make it recurring? And his answer was something to the effect of, well, if you know the lifetime, if you know the retention of your customer and you know the lifetime value of a customer, why do you need it to be recurring? Right. If let's say a product is one hundred dollars a month and you know your average retention is twelve months, why wouldn't you just charge him twelve hundred dollars up front and then the lifetime value is the same regardless? So I'm kind of curious, you know, how do you respond to that? That style of thinking about it? Yeah, because your company is going to

Speaker 2: be worth infinitely more if it's on a SAS or recurring revenue model, even though you might be getting the same in terms of lifetime value as a one time payment, like a lifetime membership versus an ongoing kind of monthly membership. You're going to get a much bigger multiple for your company if you structure it as a SAS business, because usually a well run SAS business can lengthen the lifetime value of a customer because you're always interacting with that customer. The problem with doing it as a one time thing is you get the big check and you forget about the customer. Whereas once you create a recurring or automatic customer business, you have to serve that customer day in, day out. It's going to make you want to keep them sticky. And that just has its own halo effect. And just to give you a sense of like the proportion here I'm talking about, I just did a podcast with a guy named Rob Walling who started a company, Drip. Have you ever had Rob on the show?

Speaker 1: Not Rob, but we've used Drip before.

Speaker 2: You used Drip, so email marketing software, builds it up, two million dollars of annual recurring revenue, subscription based. A couple of million dollar business in a transactional business space, you know, maybe you get one times revenue for it, maybe a little bit of a premium on that in a traditional world. Rob was entertaining offers in the nine to 13 times top line revenue.

Speaker 1: Wow.

Speaker 2: Wow. Like, like stratospherically different than what would be considered for transaction model. Now, that's not to say every recurring revenue model gets multiples like that. They are not the case. Rob had a very, very unique business, had very low churn rates growing very, very quickly, which is the two kind of elements that people look at valuing a subscription business. But even relatively slow growth and smaller SaaS companies are usually trading at lower, but still multiples of revenue. And so I would counsel your buddy, you know, think about the value of your company. And again, it's indicative of, I think of this mindset of the product launch, the, you know, where there's this sort of transaction and the sort of ability to go to, you know, boast about the size of the launch. And it was a six figure launch or seven figure launch. Again, I would just encourage you to think about the tail and are you trying to build the short-term profitability of your company or the long-term value of it? The other thing I would say, and this is a, this is a thing that, that folks often underestimate when it comes to the benefits of recurring revenue is there's something called the Trojan horse effect, which effectively means that once somebody subscribes to your product, service, information, product, et cetera, they become much more likely to buy other things from you, their boy by boosting the lifetime value of that customer. So once they buy subscription A, it makes them infinitely more likely to buy product B. And so if you're just focused on the value of product A and you're doing, well, it's 12 times, you know, you're probably miss missing the other benefit of the product BC and D that you could sell to a subscriber. Why is that? Well, once we're a subscriber, you've got my credit card, you know, where I live, we, we trust each other. And therefore it just makes it many, many more times easier. Like if you think about once you subscribe to prime, you probably likely started to buy more things from Amazon. I've, you know, I've interviewed a guy for actually for the automatic customer guy named Jim Vigonis, who does a home renovation, home maintenance, I'll call it on subscription. And he found that once he got customers to subscribe to his home maintenance plan, like half of his revenue is coming from one-off stuff they buy from him. Like I need a new roof. I need you to install a deck, but he would never have had the opportunity to bid on that. Had it not been that he was billing them, you're like a hundred bucks a month to maintain their home. So he's in the conversation. He's always in the mind. Exactly. Yeah. He's got that trust, that relationship, that billing relationship, permission to communicate, opt-in, et cetera, et cetera, et cetera. It just makes it infinitely easier to sell product B, C, and D.