3 Important Principles to Remember when Evaluating Subscription-Based Businesses

Subscriber-based businesses are businesses whose revenue comes from selling subscriptions. Such businesses include companies such as Netflix or Amazon Plus. When estimating registered companies' value, you must remember 3 essential principles.

The first principle is more means more. That is, if the company sells more subscribers, its revenues are higher, and therefore its value will be higher.
This is why one of the ways to test a company's success is to try indicators such as MRR and ARR.
MRR = means monthly recurring revenue. That is, how much revenue the company manages to generate every month.
ARR = Annual Recurring Revenue. That is - how much revenue the company generates per year.
In principle - a company with an MRR of 10,000 dollars generates revenues of 10,000 dollars every year. It will be equal when the company manages to increase its revenues to $20,000, and its value will increase.
But that would be true if you didn't read the second rule. What is the second rule?
The second rule means that the use made by the users of the system must also be taken into account.

The second principle means that the more users use their subscription, the more the company's value will increase. The reason is that the more frequently the users use the system, the more they will use it every day and not every month. They will feel more dependent on the system. And therefore, they will be more loyal to the product. The result will be that the value of the company will increase more.

This affects the churn rate of users. The abandonment rate means how many percent of the company did not renew the subscription. A company where the churn rate is lower will be worth more.
This is why a company with an MRR of $10,000 and a churn rate of 10% per year can be worth more than a company with an MRR of $20,000 and a churn rate of 60% per year.

And this leads us to the third principle, which I call - the "what else" principle?
The principle of what else means - where we will check what else the company can sell to its existing customers? How can it generate additional revenue from its customers?
The more a company can sell its customers more and more products and services - its value will increase.

This is why a company with an MRR equal to $10,000 and the ability to sell its customers products and services worth $2,000 per month can be worth more than a company with an MRR of $20,000 per month and the ability to sell its customers additional products and services worth $500 per month.

The conclusion is that when evaluating the value of an established registered company, it is worthwhile to examine the company's MRR, but it is forbidden, simply forbidden, to ignore the abandonment rate and the ability to sell additional products and services. These factors can fundamentally change the value of the company.

Conclusion

To recap- Here are 3 essential principles that we have learned from our customers:
✔️The "more means more" principle. That is, if the company sells more subscribers, its revenues are higher, and therefore its value will be higher.
This is why one of the ways to test a company's success is to adopt KPIs such as MRR and ARR.
✔️The "higher is higher" principle: The higher use by a subscriber creates a higher value.
✔️The "what else" principle: What can the company sell to its existing customers? The more a company can sell its customers more and more products and services - its value will increase.

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