Netflix’s Downgrade and the Subscription Economy Apocalypse

I do want to point out the downgrade didn't have anything to do with their. With Netflix physique. So when they talk about overweight, you know, that's not like their, their body mass index or anything like that. They said before you would overweight that stock in, you know, in your portfolio. And now, now they're neutral. Just if somebody was offended by that thinking that J.P. morgan was fat. Shaming Netflix.

Today on business launch, we're going to talk about the subscription economy bust. Why Netflix's downgrade signals the end of an era. So Netflix just got downgraded by JP Morgan from overweight in your portfolio to neutral. And the company that created the subscription economy, Netflix basically is credited for doing that, is now facing its own subscription. Reality check. What does this mean for the thousands of businesses that are built on the recurring revenue dream? And, and that's something that we've talked about. We're gonna break it down today on Business Lunch. Ryan, how you doing?

Oh, so dang good. I do wanna point out the downgrade didn't have anything to do with their, with Netflix physique. So when they talk about overweight, you know, that's not like their body mass index or anything like that. They said before you would overweight that stock in, you know, in your portfolio. And now they're neutral. Just. That is if somebody was offended by that thinking that J.P. morgan was fat. Shaming Netflix.

Interesting that actually it's fat aggrandizing. I think when they recommend that you over, they like they're favoring the overweight in their, in their portfolio selection.

In this case, they're like, stop being, stop being overweight.

They're skinny. You know, you think about it.

Exactly, Exactly.

All right, now that said.

So I don't.

Do you feel like Netflix started the subscription gold rush?

I mean, it's funny you said that and I was trying to think, you know, I kind of. I guess it seems like it all sort of happened all at once around the time when was Prime?

Cause I feel like prime was the big subscription, you know, thing maybe because.

Prime is annual and Netflix is monthly.

That's.

That's sort of why they're getting credit for it. And when we think about subscription, we tend to think about MRR more than, you know, more than the annual. So perhaps that's why it all seemed to happen at once when everybody decided that it was okay to finally buy online. And I remember when that happened. I remember when I, when I first started buying on, when I first started selling online. And this again, 1999, 2000, launching my first business online. One of the biggest questions that we would get from people is, how do I know this is legitimate? How do I know you're not going to steal my credit card? And then it was like overnight, all of those questions just stopped.

And that was around Amazon primarily was responsible for that?

I think so, yeah. There was a tipping point with Amazon and as soon as that happened, then it's like everybody realized, wait a minute, we could sell people once and charge them over and over and over and over and over again. And Netflix, I think, was one of the first. Was definitely one of the first to do it.

Yeah. And the, the argument in the, in the article and the content that kind of spurred this discussion was that there have been three phases. The gold rush from 2010-20 was everybody could launch a subscription. Business investors, we've been talking about this, you know, since then. We met with lots of private equity firms that were saying, we love recurring revenue. The multiples are going to be higher. SaaS multiples went, you know, to the moon and beyond. And at the time that 2010-20, I would argue that customer acquisition was relatively cheap. Do you agree that that's kind of the gold rushy period and that those things are true, or do you have pushback?

I feel like it ended before 2020, but maybe that's just in some of the markets that we were in, it.

Seemed to get really high in like 2018.

Yeah, 2018, I was thinking the same thing up until about 2016, 2016, it felt really easy. 2017, it was still kind of there. 2018 was when it got, was when it got particularly hard. I remember it was in 2015 was when we met with the big, you know, big muckety muck private equity firm and they said, oh, you've got these courses and certifications. Instead of selling them all a cart for hundreds and thousands of dollars and you should just put them all in a members area and sell them for a monthly subscription. And we did that and we almost went out of business a couple of months later.

Cash flow, that was all coming in in front.

Yeah, yeah. I mean, and I do think that that net net, you know, it worked out, but. But then, you know, fast forward, what did we wind up doing post Covid basically shifting back to a la carte.

So for that, the saturation phase, they're saying, is 2020 to 24. Every consumer has five to 12 active subscriptions. And I even, you know, for me, like I want to subscribe to things and have access to all the goodies. But you start looking at, you know, 10 or 20, 29, 39, 59, $99 a month subscriptions and more coming at you all the time. You're like, I don't, I don't think so. And especially in entertainment like, or news like to read this article. That was my. The reason that I think Google should be shot and drug out in the street is that you search for information and they give you paywalled results. So you click and it's Bloomberg. And now I go to read the article on Bloomberg and it's like, sign up for the subscription. And the subscription's not cheap, you know, And I'm like, you just wasted my time because I don't want another subscription. Certainly not to read this article that I can probably find the information free elsewhere. I think that's like part of this whole subscription thing, ultimately destroyed the integrity of Google as a search machine and at the same time made everyone say, I've got too many as it is, and so I don't want anymore. Just like, I can't afford it or it bugs me. And also how difficult it was to cancel subscriptions because playing the hide the cancel game, you know, was. Was also a big thing. So I think you had subscription fatigue and then customer acquisition costs went up. Well, I think they went down initially during the pandemic and then up. But that 20 to 24, I'd call the pandemic recovery period. Would you?

Yeah. And really it was in 2020 when I think, I think we were getting subscription fatigue and things were kind of dipping starting in 2018 and going into 2020. And then when the pandemic happened and everybody's at home, you've got substack launching. And it seems like everybody then, because they were at home, everybody's like, okay, give me all the subscriptions, because if there's one thing I got, it's freaking time.

And money from. From incentives and loans and.

Exactly. So I think what we saw was a resurgence in the, in the subscription economy in 2020, going into 2021. That really was kind of bubble, part two. That wouldn't have been there were it not for Covid. It probably would have continued and it bought this subscription economy a couple more years than it probably shouldn't have had.

Okay, so. And we changed during that period. And now they're saying this is the reckoning in 25 that even Netflix, the subscription king, is facing headwinds. I haven't seen any stats on Amazon prime and I would like to, to see like, is that are they facing and experiencing this as well? Because I feel like they're very bellwether on things like that. But basically the winners, they, you know, they're arguing are going to be value driven, essential subscriptions. The losers are going to be anything that's nice to have or easily replaceable with a little bit of work to find something free. I'd love to talk about it. What I think maybe in the context of, of our own subscription experience since we've had quite a few of them, you want to kind of set the stage for that and talk about, you mentioned it briefly, but basically why did we start? What was our experience? How do we feel about it over the last couple years and where are we headed now?

Sure. So we've had subscriptions across a number of different businesses. I'll use digital marketer because it's one that we've talked about pretty openly before. So it's kind of a lambda slaughter just so we're not violating any confidentiality of any of our private clients or portfolio companies. So a digital marketer, we had subscriptions at all different levels. So we had kind of the sub $40 subscription level which in B2B and consumer that's generally considered to be like breakage model pricing. So at that point people will join, people will sign up for it and they'll kind of hang around even if they're not using it because it's not that much money. And so for B2B that's kind of, you know, 20 to 40, maybe up to 100. And for consumer that's sort of zero to $20. Right. So that's kind of where, where we were living. Now when you get north of, you know, get into the couple hundred, so 200, 300, 500, 1,000amonth. Now you're getting into consumption level and at that point and I think this is really, really important. If you're not a critical piece of infrastructure, if you're not considered a utility, then just about every single time we found that we would be far better just selling it as a one time. And we went back and tried this so many different times, we just never could.

I think that's a really good point. People should remember if you're not, go ahead.

Yeah. If you're not a utility. And you have to be honest with yourself about this because the vast majority of products and services out there are in fact a nice to have and so you think it's, you think your product or service is great. And look, I'M sure that it is great. But most things out there are a nice to have. They're not a utility. So you're, you know, you're obviously the electricity coming in your home. That is a, that is a utility. Your CRM, you know, your, your erp.

It'S kind of infrastructure.

Right.

Like it's almost nothing consumer that I can think of off the top of my head. Almost all of that is like personal interest kind of stuff or entertainment.

I can't you're sell like see your mobile service. You know, most people won't, you know, they'll cancel, they'll cancel their electricity before they'll cancel the cell phone plan.

Again.

Infrastructure, right? Yeah.

So if we go outside of that like you know, cell cable maybe aws, if, if you're a web support thing, you know, salesforce, your CRM, your communication which would be everything from your cell phone phone to Slack and Zoom, you know, if you're communicating those ways. Although I think that alternate that free or more usage based alternatives to those would be a place I'd be thinking about right now. And then whatever the core business tools that you might need that are specific to your business. If you're doing data mining or something that requires a specific kind of tool. But other than that it's like if you're in conveniences you're going to have some, you know, some serious challenge. If you're, you know, we know how hard it is to do like a box, you know or meal kits or and all of those guys just burned piles of cash or even if you've got essentials but that have free alternatives, you're probably going to have some pretty significant headwinds and entertainment. Right?

It's all. Yeah. And it's also important to point out that what is considered and it's a spectrum. Right. So you know, a nice to have versus an essential. I acknowledge that it's that it's a spectrum. But your product or service can move along that spectrum based on macroeconomic stuff. So again going back to digital marketer when it was 2020, 2021 and we were in the midst of the great resignation. Remember that when everybody's quitting everywhere and employers are trying like crazy to hold on to their people. Well, our certifications, which digital marketer is not even in the certification business anymore showing how valuable those things are today. But at the time those certifications were considered by many companies to be critical infrastructure because they were able to say we're offering training, we're offering certification. So you want to Stay with us. They saw it as a retention device to keep their people. Now fast forward a couple of years, economy dips. They don't necessarily want all these people hanging around. The last thing that they want is an incentive to keep people around. So they're canceling it. It actually inverted. And so not only was it not an essential, it wasn't really even a nice to have. Yeah, because they wanted incentives for other people to, for some people to freaking leave. So you just have to be honest with where you are and you have to adjust your pricing structure. So if you're not, if you're in that consumption model, so you're at that higher price point, especially if you're in that consumption model, you are far, far, far better off to just charge an upfront. Now there's a way that you can tweak this and we've done this as well, which is where you have a higher upfront kind of startup and then a much lower ongoing subscription for some type of a maintenance. So maybe in B2B it's like a $10,000 upfront and then an ongoing for, you know, a couple hundred bucks a month to maintain it.

One thing that I think is an opportunity zone and we tried this also and so I'd love to kind of have you chat about it would be bundles, so services that aggregate multiple subscriptions. I know there's one for AI that's a, that's a Google plugin that. Excuse me, a Chrome plugin that basically I can put my search query in and I'll get, you know, seven eyes giving me the responses so I can kind of compare and pick the ones that I want. And I think that's kind of cool. Although to get the most of it, you have to API in with paid subscriptions to the AIs. But we did it with this, with the certifications because you could subscribe to a certification and get updates and stuff. But then we said here's the big bundle, that's the, you know, Trivial Pursuit wheel that has all of them in it and it is a bundled price that was much less. How do you see that? Like how did that work for us at Digital Marketer and how do you see that as an opportunity for people Now?

I think what the advantage that you have, what you have to promise if you have subscription and what that did, and so what, what that made it work is if you have a subscription based product, people will not stay for what you offered. They will stay for the promise of future value. That's so incredibly important. They don't.

There's no.

They're not going to stay for loyalty. So nobody's going to stay at Netflix because of that show that they binge watched that they loved in the past. Oh, I love Stranger Things. That was so great. Well, there's not going to be Stranger Things anymore. They're done making that. So it always has to be about the promise of future value. So what we were having to do at Digital Marketer was, like you said, come out and release new certifications and promise more of them coming down the road. So you wanted to complete the set, you wanted to collect them all, but at some point you kind of run out of ideas, so now you're creating higher tiers of them. And then what? The benefit of subscription, if you think about it, is we sell it once, we kind of fulfill it once, but we get paid over and over and over again. Well, if you're always having to come up with the new, then it's sort of like you're selling it over and over and over again.

Right.

So it's not that different. I mean, I do agree it is. It is better to not have to sell it each and every time, you know, to have it pre sold, but it's almost as much work to keep it sold as it is to sell it. And I think we're finding right now, even at the lower levels that, that not only are people churning out at a higher rate, they're simply not buying on the front end. And that's what we're seeing in massive numbers. If we offer subscription, the front end conversion rates are so low that we're better off offering a, you know, one off purchase. And certainly because of, you know, back in churn rates being so high, we generate a lot more revenue.

So a couple of kind of the post apocalyptic models of subscriptions to consider. What do you think about freemium to premium? So the model is basically a free core service with paid transactions. So it's kind of like I get my Netflix for free and there's some free stuff on there, but maybe I pay for Friends and Neighbors or Game of Thrones or House of the Dragon or whatever it is that's hot that I want to see and that could be the same for even for us or other services. So that you maintain the audiences, if not attention, the ability to access them without having to reacquire them with, you know, with a new acquisition cost because they're already there. And then as you create things that might be of interest to them that are higher value Those are paid things. What do you feel about that?

The time to value from when they access the free needs to be measured in minutes, if not seconds. So I get the free thing, and now I'm going to experience some value that needs to happen insanely fast and very low friction.

But let's say that you're getting value from the free thing. Like, I want to be able to run the calculator for how to do something that I have to do all the time. Yep.

So as long as it's super fast and super low friction. But then there's a third thing. It needs to be useful but incomplete. So you have to be able to check all three of those boxes, because if it's too high friction, then no matter how quick it can be, they're not going to get to the value if it's low friction. But it still takes a while to realize it. They won't wait around for it to come. But if they get this sense of completeness, like, great, I got it. I mean, you mentioned a calculator app. This calculated the thing I needed. Why on earth would I pay to upgrade anything else? I don't need more advanced calculations. Most of it does what I need it to do. Then it's not incomplete. So if you're going to go freemium to premium, you need to check all three of those boxes.

So then give a quick description of splintering, because I think that would be helpful for people to think about.

Yeah. So the easiest way, if you want to make sure that what you're offering is useful but incomplete, you start from the big thing that you want them to buy and you splinter off a independently useful chunk of it. And so what this, this could be if, if you have a service, for example, you know, this could be like. So I'll give you an example, specific example for the scalable company. So the scalable company, we help businesses install operating systems. Right now, one aspect of the operating system is a company scorecard or a CEO dashboard. So this is just all your metrics in one place. Now, that is independently useful. But the reality is, if you want to know the metrics that you're supposed to put in there, it would really help if you did some of the other steps in the process. Right. And once somebody gets the dashboard template, they find out that really this is just one part of a company operating system. So if they want help building it out and if they want to complete it, then we should talk. So that's useful but incomplete. So it needs to be independently useful or it's bait and switch, but they should sense that it's incomplete. We did the same thing in consumer back in the survival and preparedness space. So we would give somebody, you know, a fire starter and we'd say, great, you've got a fire starter. But a fire starter is just one aspect of an eight part, you know, survival preparedness kit. You also need something that can purify water and this and this and that. So buy the entire kit independently. Useful but incomplete. Once they understand the whole. I like that a lot.

And then from a pricing standpoint, what about subscription? So that subscription costs money, but it only costs money based on delivering results. Something like that.

That scares the crap out of me. Yeah, I don't think the idea, if.

The subscription model produced the results, I think it would be easy to do.

Like it would have to be tied.

In so that it was verifiable. Credit card on file, automatic, the other, you know, so, so it'd be. Usage would be another thing. We've done that in different businesses where you're accessing data. I think that's, you know, that's the model that the. I'd say the modern subscription AI world has, you know, you're using processing credits.

But to me that's less a subscription model and more of a, you know, less a recurring and more of a reoccurring like more just they're going to come back and buy it. It's more of a consumption on. On consumption type model. No different than when we're at a hotel and they give us a meeting room and they say every time you drink one of those Cokes in the little fridge, we're going to charge you like $38, you know. Yeah, I was gonna say the success one. That to me is the perfect business. If you can pull it off. Yeah, like if you can actually pull that off because you've got, what you have is perfect alignment. And I think, I mean, just going back to like, why do I feel like the subscription business is in decline? Because at the end of the day, who loves it? Businesses love it, investors love it, consumers don't love it and never have. You know, if you're a consumer, you're like, wait, so I basically sign up for this thing right now, you're going to bill me every single month. I don't necessarily know what I'm getting down the line and it's going to be a pain in the butt to cancel. It's really only the advantage of the other people on the other side. So what you Describe gets total perfect alignment. It's just I think difficult to pull off.

Yeah. So for people that have subscriptions, that have sasses that are currently struggling, what is your advice to them.

If you currently have a subscription based business? I would say stop trying to front end subscription and instead go to the splinter model I described before. Sell something one off a la carte and then look to upsell and ascend people into subscription. We're having much more success across the board, every single business doing this. And it is amazing how often, even at the same time, people will make an upfront investment. And you could say, you know, by the way, you know, we found a lot of our folks, once we do this or once they have access, they want ongoing access, you know, would you like to add it even before they receive the value, once they've made the purchase decision, they're now living mentally in this happy after state where they've, they've received the transformation. So they haven't literally received the value exchange, but they're now mentally living in a state where they perceive that they have and so they're willing to take that risk, especially if it's in a, you know, 30 day or a 60 day free trial. So I would just say stop trying to front end, stop trying to sell subscription, sell one off and upsell and ascend people into subscription.

Yeah, and I like, I like free subscription to paid service models. So, so I think that we do it. You can get a free subscription to our dashboards, for example, for scalable or for Epic. You can get free subscriptions to tools and things like that that we offer. You can get free subscriptions to newsletters and that provides the opportunity then, because those have continuing utility for us to then say if you don't want to do it yourself now we can help you or we can consult with you or we can provide this other thing. And now our payment comes from having aggregated the attention and eyeballs providing useful, you know, but incomplete because it might be complete for 80 or 90% of our market and that's fine, or of the market that's using it. But for the people that value their time, money more than money or value the, you know, feel that they don't have the extra expertise that they need or guidance or want kind of next level services or even want more white glove services, those would all be great subscription things to give for free. If your cogs isn't, you know, too high and then you're selling that higher end model, I, I think that's, that's probably the biggest positive use of it unless it's a infrastructure critical communication kind of thing. What do you think?

Yeah, yeah, I think that's a great suggestion. You kind of have to sprint to either side. You really either need to stop selling subscription and sell a one off and then ascend people into subscription or make what is currently your subscription the free thing and use that as the reason that people linger around your brand and your subscription more becomes your media, your owned and operated media that you can then use for the purposes of higher ticket, higher margin ascension. It's important to remember subscription is great, MRR is great, but there's also nothing wrong with people just paying you an enormous amount of money upfront and then doing it again at a later date.

Right.

And so what investors are looking at for the purpose of, you know, when it comes to selling a business, they're looking at what's, what's your EBITDA and they're going to look at your LTV to CAC and they're going to look at how often do customers come back and buy again. And so there was a time when yes, if you had high monthly recurring revenue, you could get insane multiples. By and large those days are gone anyway. So what you want to do is just build the best possible business that you can build and for today don't do what we did and back in 2015, 2016 and build a business model just to appease investors.

Yeah, I will say having just recently met with a lot of private equity funds that are buyers, it's still on their minds and it's still going to get you an extra turn or two in your valuation to have subscription. But it's key, the key is churn. And so they're, they're really looking at what percentage of your revenue and profits is subscription based. And, and, and it's not even subscription, it's recurring. So even if they came to your, like if the customer came to your store six times a year and had no subscription at all, but came six times a year, every year for on average five years, that's a form of recurring revenue. That's a higher customer value. And I think that's really where we're moving in terms of, you know, what you've got. Unless you've got one of those businesses that, that is a subscription business that has the, the, you know, that stickiness that, that it needs to have.

So yeah, you said better what, what I was trying to say. It, it doesn't necessarily have to be a subscription. That's that's automatically recurring. If you can just get them to come back again and again again, that's hugely valuable. That's way more valuable than having a quote unquote MRR subscription based business where they only stick around on average, you know, four to six months. Because I can tell you any investor is going to look at that and say you don't actually have a subscription based business. You've got a payment plan.

We're going to coin a term here that is going to just go like wildfire. It's going to be ssr, which is shadow subscription revenue based on the number of times that people return to you. How about that? I like.

Oh, I like it.

We're going to leave you guys with that and we want you to spread the word about how you heard about shadow subscription revenue here on Business Launch. Anyway, if you're in a subscription business, hopefully you found some stuff that was helpful here. If you're not and thinking about it because everybody's saying that you should be, here's some things to definitely think about as you are contemplating the potential of doing that. I think some alternatives, some new evolutions to the subscription model that might help you. If you found this helpful, we would love for you to share it and tell everybody about it. If you didn't, we'd love to hear why you didn't think it was helpful. Because engagement is good no matter where it is. We're everywhere at our names, forward slash engagement. Our name. What is it? Social media site Forward slash our names and we'll see you next time on Business Lunch. Ever wondered how some people build real wealth through acquisitions while others just sit on the sidelines? Well, I'm here to tell you it's not about luck. It's about having the right system system, the right deals and the right guidance. And that's exactly what we give you in the EPIC Deal Fast track. If you've been thinking about buying a business, but you keep getting stuck, whether it's finding the right deal, structuring the financing, or negotiating with sellers, you are not alone. Too many people waste months, even years just thinking about acquiring a business while the real opportunities pass them by. The EPIC Deal fast track is not another course. It's actually an implementation program. And it's designed to get you from the idea to the acquisition in just 16 weeks or less. We work with you one on one to help you find, fund and close your first or next deal. And once you do, we're going to plug you into our elite EPIC board community so that you can keep scaling through acquisitions. We install three powerful systems in your business. The first is the deal flow engine. So so you always have high quality off market deals coming to you. Number two, we give you our offer and funding system so that you can structure offers that get accepted and fund them creatively many times with no money out of your own pocket. And number three, our closing and integration system so that you don't just buy a business, you actually successfully run and scale it once you have acquired it. Plus you'll have direct one on one support from an epic deal advisor every step of the way. And that's people that have actually come up through this system and done these deals themselves. That's the only way to become an epic deal advisor. And if you're serious about acquiring a business this year, don't just sit on the sidelines. Just text I'm in to 334-458-9034 and we'll get you in. So text I'm in to 334-458-9034. We'll get you in. No fluff, no wasted time, just real deal making from people that are actually out there doing deals right now. I'll see you there.