Subscription-Product Fit, Part 2: Model/Product Fit and the Use vs Pay Distinction

You have a product with a growing user base. You have a subscription that monetizes your product. How do you know that you’ve struck the right balance and achieved subscription-product fit?

To answer that question, we need to understand the fundamental distinction at the heart of subscription-product fit — the Use vs Pay distinction. As we’ll see, subscription products have the unique challenge of involving not just one but two fundamental customer decisions — the decision to start using the product, and the decision to purchase the subscription.

Model-product fit

To understand this dual decision, it’s important to take a step back and explain model-product fit. Shortly after writing part 1 of this series, I came upon an excellent presentation by growth guru Brian Balfour on the ‘4 Fits Framework’. In it, he zooms out from the typical focus on market and product to include two additional primary elements any startup needs to grapple with — model and channel.

A short explanation of terms:

  • Product: Your product, of course
  • Market: The specific audience you are targeting for that product
  • Channel: How you acquire that audience (e.g. paid acquisition, salespeople, etc)
  • Model: How you make money off of that audience

Balfour details four ways in which these primary elements fit together — product/market fit, channel/model fit, product/channel fit. Product/channel fit, for instance, covers how a product like Pinterest relies on the channel of SEO and Google, where Pinterest’s user-generated content gets indexed by Google, and then found by other users searching on Google.

Subscription/product fit into an extension of his model I call “model/product fit”.

Your model is how money is made, and the kind of customers your product makes money from — are they thousand dollar deals with businesses, or are they millions of non-paying consumers who are monetized through ads? Model-market fit is when the model and the product mesh seamlessly together — when the product effectively monetizes those users (= market) that they’ve brought in (through whichever channels they’ve used to grow).

Let’s take the example of Pinterest again to illustrate. Pinterest grows when new users engage with the product by pinning new content, which gets indexed by Google and thereby attracts more new users. From there, Pinterest shows users sponsored affiliate content to monetize them.

This monetization complements Pinterest’s core acquisition and engagement funnels rather than competing with them — you can see that the sponsored content blends seamlessly into the rest of the experience rather than disrupting it. The user’s organic use of Pinterest generates data about their preferences that Pinterest can use to target more relevant sponsored ads to them. Pinterest has strong model-product fit, just as they have strong channel-product fit and product-market fit.

Varieties of model-product fit

Clearly model-market fit extends beyond subscriptions — Pinterest isn’t a subscription business. Rather, Pinterest is ads-monetized, a category which includes content or social media products, with SEO (user-generated content and company-created content) and virality as their primary channel drivers, and broad consumers as their market — think Pinterest, Facebook. License-monetized companies are on the opposite pole of digital products. Usually B2B and often enterprise products, these have sales as their primary channel drives and larger companies as their market — think Salesforce or Oracle.

Subscription-monetized companies both stand alone and occupy an interesting middle ground. Standalone subscription companies include content products such as Spotify or Netflix, productivity products like Photoshop or Microsoft Word, and virtually every variety of app product, from educational games like Elevate or Duolingo to health and fitness apps like Strava to productivity and content apps, just like their web counterparts in Photoshop or Word.

Interesting to note — this subscription model has largely risen at the expense of retail-monetization, or the direct purchase of these products. Remember going to Staples to buy your software? Apps, too, were once more commonly purchased than subscribed to, and before Spotify and Netflix, we would buy our music and movies as CDs and DVDs, or as individual Mp3s on iTunes. Retail-monetization is largely obsolete in the digital space outside of games, which are largely consumable — you finish the game eventually — and therefore not a great fit for subscriptions. Physical goods still, of course, follow an almost exclusively retail model, and e-commerce is simply a digital platform for retail-monetization. However, marketplace channels have continued to live on for digital products, with the App Store being the best example in the digital world.

That said, the primary channel for growth for most subscriptions, app or not, is through paid advertising, and the primary market will be consumer audiences with a propensity to pay. This usually means targeted audiences that have demonstrated an interest in a particular product line, and therefore a higher potential LTV. Few subscriptions can afford the cost of advertising to a broad-brush audience that may include many people who don’t fit the profile of the typical subscriber, which is why you won’t often see a consumer subscription app advertising at the Super Bowl.

A subscription+license model is typical of B2B SaaS products like Slack or Dropbox. SMB companies will start on a free version of the product and eventually run into a limit in usage that compels them to sign up for the subscription. Larger companies would be targeted by sales reps to get them into larger licensing contracts, either as the customer grows bigger in their freemium usage, or straight out the gate.

The Use versus Pay distinction

I detail all of this in order to establish a distinction that’s central to a successful subscription model — the Use versus Pay distinction.

Ultimately, a subscription product has the challenge of having two distinct decision points to deal with. In the case of an ads-monetized product, the model relies solely on the decision of the audience to use the product, which leads to organic engagement with sponsored content and other ads such as in Pinterest. In the case of a license-monetized product, the model relies on the decision of a business stakeholder to pay for the product. In the case of a freemium subscription model, two decisions are required — both initial use, and subsequent payment. The bleed of ‘pay’ into ads-monetized models and ‘use’ into license-monetized models represents ads/license + subscription hybrid models.

This complicates virtually everything about a subscription startup’s efforts. Anyone who has tried to define “retention” in a subscription company knows what I am talking about — are we talking about free users coming back, paid users coming back, paid users staying subscribed?

This complication is fundamentally a tension in how a company thinks about their product offering. With the introduction of subscriptions and the freemium model, software developers have to ask themselves a question: how much of the product is behind a subscription? This question is usually posed as a tradeoff: the more that’s gated, the more we’ll lose new users. This question is fundamentally a question about where this dividing line is drawn.

A reasonable place to start is to ask, “Why don’t these apps put everything behind a subscription?” Returning to the definition of subscription-product fit in part one of this series: “Subscription-product fit is when your subscription maximizes user value and user growth.” Yes, you could put everything behind a subscription. However, most non-UGC products also rely on word of mouth and/or referrals growth.

In fact, every model relies on some amount of word of mouth growth — in the case of consumer subscription apps, this often ends up in the ~30% range. This means they have a balancing act to strike. More value bound up in the subscription can leave less room for freemium users to experience the app and tell their friends. In such cases, one needs to attempt to measure what portion of word of mouth or referral traffic comes from free users. Less committed freemium users, as a rule, will spread the word less frequently, but some loss of word of mouth growth is still likely when the freemium experience has trouble keeping users.

Note that apps with stronger word-of-mouth can often afford to gate everything behind the subscription — Netflix, whose TV shows and movies are the constant subject of company lunch table smalltalk, can lock their entire experience behind a subscription, while Spotify has a hybrid ads-subscription model. Spotify’s content might be conversation-worthy, but you usually don’t need to listen to bands on Spotify, nor are they as enticingly binge-worthy as whatever the latest Netflix series is.

One could extend this extreme in the other direction — looking again at Pinterest, one could say that Pinterest’s subscription-product fit is “no subscription”. Adding a subscription in would do too much to interfere with their already strong ads-based model-product fit.

The Use versus Pay distinction applied to your product

So how do you think about the balance between the subscription and the freemium product, for your product? Start with the same exercise — think about the extremes of the balance. Let’s consider what happens if you put everything behind the paywall. It’s an easy way to get more subscribers, sure, but then you may lose much of your word of mouth. Can you afford that? You’ll also lose out on the opportunity to convert freemium users after a period of organic usage, and therefore is an especially bad idea for usage-limited models like Dropbox. Could you gate less essential features instead? Add usage caps so freemium users can experience the product, but will it hit a ceiling if they keep using it? How do you do so in such a way that you drive engagement?

On the opposite side, making it all free, you’ll lose out on all your revenue. Pretty clearly not the ideal. But let’s see what else this does. An example from Duolingo in their earlier days — they monetized a subscription initially by appealing to people’s desire to support the app. To this day, they have a subscription value prop to “help us keep education free”, but at one time that was their core value prop. This probably didn’t generate much revenue, but it would have generated customer love and good will, and therefore greater word of mouth.

Here’s a way of thinking about how you get the subscription experience right, then. At the one extreme, you sacrifice customer love and word of mouth for greater revenue. At the other, you sacrifice revenue for customer love and word of mouth growth. What you want to strive for is to find a monetization experience that makes you more money than if you locked down the whole app, and on the other, gets you more customer love and word of mouth growth than if you made the whole app free.

This is an ideal, obviously, and not a balance you’ll strike perfectly after a few tests, or possibly ever. But it will help you to understand what to shoot for. On the one hand, the freemium experience can usher users into the experience in a way that gets them wanting to experience the subscription, tantalizing them with the possibility. On the other hand, the subscription can itself be a goad to greater usage, getting users to feel like part of a community that compels them to bring more people along for the ride.

In the next installment of this series, we’ll consider ten examples of how to apply the Use vs Pay in practice and four principles to help you define the dividing line.

Continue on to the final Part 3: The SUBS Approach to Successful Subscription-Product Fit

Product, growth, data, archery