CLV Part III: Per-subscriber
Now that we have our feet under us a bit, let's dive into a customer lifetime value ("CLV") model. Here is a CLV model in Google Sheets and a link to download as an excel file. The post below will walk through the first tab ("Per-sub Money Stuff"). To guide us, we'll build a CLV model for a hypothetical newsletter start-up: Big Dean's Boardwalk Wings, a weekly exploration of innovative wing recipes.
Determining Per-subscriber Economics
The first step is to iron out our per-sub economics, or how much we expect to earn from each subscriber. Let's assume Big Dean's charges $10 per month. To get out of the gate as fast as possible, we use Substack for distribution. Our variable costs are the 10% revenue share to Substack and payment processing fees (~6% of revenue). After paying our variable costs, Big Dean's earns $8.41 per sub, per month in contribution profit.
Already, we've side-stepped one of the more common mistakes in CLV modeling: using revenue. But let's not fool ourselves. The above doesn't take into account a lot of costs, many of which are more fixed relative to revenue. This may include other important costs that support the creation of the newsletter. Like a computer, internet, co-working space, and research & development for wing recipes.
Useful Back-of-the-napkin Math
With our per-sub contribution margin, we can estimate subs needed to break even on fixed costs. And we can explore how break-even changes at various levels of investment.
Before we get too excited, the above does not consider the opportunity cost of your own time. Or, perhaps more tangible, the money you need to pay for food, shelter, and so on. We would want to far exceed break-even to make sure we’re able to cover our personal living expenses.
There’s some other useful scenario planning we can do at this stage. Some of you may be exploring what has to happen to fully replace income from full time employment. We can explore annual contribution profit across different prices and subscriber counts. For example, let's say we're earning $100,000 in income at our current job. To break-even, with a $5 subscription price, we need to believe we'll reach a steady-state of ~2,000 paying subs. (Or 1,000 subs at $10, or 650 subs at $15.)
It's important to keep in mind the figures above represent a "steady state". It takes time, effort, and a touch of luck to build up any type of subscription business. In other words, with our $5 product, even if we reach 2,000 subs by year-end, our earnings will fall short of $100,000. We would need to average 2,000 each month to reach $100,000 in earnings.
We'll dive deeper into this dynamic when we build our operating plan in the next section. For now, let's continue through the CLV model, turning attention to customer lifetime.