Subscription & Membership Website Valuation
Subscription and membership websites often get confused with SaaS businesses because they both operate similarly and generate recurring revenues. However, the differentiation between the two is the product that is being subscribed to and whether or not it is “software” driven, and whether a “product” is truly being sold. Most membership sites are selling content – purchase a monthly subscription and get access to ‘X’ content.
For example, I run a membership website that is a chat room for day traders and swing traders. I generate monthly recurring revenue by selling subscriptions that allow people to participate in the chat room. My business is not driven by a proprietary software that was built specifically for my website. It’s driven off of a wordpress chat room plugin. Buy a subscription and get access to the content that my community produces.
The differentiation between SaaS and subscription/membership websites is important because SaaS valuation multiples are above and beyond those of subscription websites. Despite the two types of online businesses being valued off of similar metrics, subscription sites are still inherently less valuable. SaaS multiples are driven off of the proprietary software. Subscription and membership websites usually do not have this proprietary barrier built around them that creates a defensible business model.
Membership and subscription websites sell for multiples of approx. 2.25x to 3.5x earnings. While these multiples are lower than SaaS multiples, they are above that of most other online business models as the recurring revenue nature of these businesses is highly attractive.
Subscription box e-commerce stores
If you have a subscription box store, I would guide you towards the e-commerce valuation multiples. These business are more akin to traditional / physical inventory ecommerce stores than to the types of membership sites I’m discussing here that primarily sell access to content.
Top 5 Subscription & Membership Website Valuation Factors
- Membership style
- MRR & ARR
- Customer churn
- LTV and CAC
- Age, trends, and owner involvement
1. Membership style
Membership sites sell subscriptions that are either:
- Recurring, fixed-term access (monthly, quarterly, annual, etc.)
- Non-recurring, lifetime access
The difference is “pay $97/month to get access” vs. “pay $997 and get lifetime access”. Membership sites that sell fixed-term access generate recurring revenue which is the gold-mine to the highest valuation multiples.
Selling a lifetime access website is more difficult, because: (1) there is less predictability or guarantee of future revenue, and (2) the new buyer has to continue to support the existing members that you already took the money from and ran with.
The only time selling lifetime memberships is worth it is when you know that the one-time revenue you will generate is greater than the recurring revenue you would generate from a customer. And if this is the case, you probably don’t have a good enough product. Do you think Netflix would sell lifetime subscriptions? Probably not – because they know a customer is going to continue to be a customer for years to come and that is consistent recurring cash flow for them.
2. MRR and ARR
Above, we determined that membership sites that sell lifetime subscriptions are less valuable than those selling recurring subscriptions because the existing customers provide zero value going forwards.
If you sell monthly, quarterly, or annually recurring subscriptions, congratulations, you’re membership site is awesome. However, sites that sell monthly subscriptions are more valuable than those that sell annual subscriptions. This might seem counter-intuitive, but it makes sense when you consider how valuation works.
A buyer pays for a business based on a multiple of earnings. Let’s say you sell 1 annual membership for $1,000 and 100% of it is profit. If the buyer buys your website for a 3x multiple, he just paid $3,000 for that one customer. Annual memberships tend to have way higher churn rates than monthly memberships. If that customer churns off before his renewal, the buyer just paid $3,000 for a customer that he is never going to receive $1 from. Even if the customer doesn’t churn off, the buyer might have to wait 11 months to get the next subscription payment.
MRR is better than ARR.
3. Customer churn
Churn is measured monthly and/or annually and represents the percentage of your total customer base that is unsubscribing either every month or every year. Low churn equates to higher LTV’s, more MRR/ARR, and longer customer life-cycles.
As I discuss below, with using LTV to calculate the average customer life cycle, churn can be used to evaluate the quality of the membership product. If you have a 10% annual churn, that means your average customer life is 5 years.
Churn plays a big role in long-term business growth. If your churning 20% of your members annually, you have acquire new members at a >20% growth rate every year to keep your membership numbers increasing.
Overall, 20-30% annual churn is an acceptable level for membership websites. Sites that have sub-20% churn rates will sell for a premium.
4. LTV and CAC
LTV (lifetime value) is the amount of revenue a member will generate for you over the lifetime of their membership. CAC (customer acquisition cost) is how much money it costs, in marketing and overhead dollars, to generate 1 new customer.
Having a high LTV and a low CAC is important because it means that a new buyer has a lot of gasoline it can add to the fire, with respect to marketing spend, to drive member growth. While there is no secret formula here, having a LTV that is 3-4x your CAC, or a CAC that is ~25% of your LTV is an ideal ratio.
LTV is also one of my favorite tools to analyze the perceived value of the “product” that is being offered to members. You can divide the LTV by the average subscription price to get the average amount of time a customer sticks around your platform for. If a member continues paying for their subscription for 3 years on average, you probably have an awesome platform that is extremely valuable. If the customer only sticks around for 3-6 months before churning off, you probably don’t have an offering that satisfies members needs, or there is a competitor who offers a better product.
5. Age, trends, and owner involvement
I’m doing a 3-for-1 here. Age, financial trends, and the level of owner involvement required are big factors for all online business models.
Buyers like to see 3+ years of history for membership websites. While online business models like advertising and affiliate can get away with 2 years, membership site buyers prefer 3+ since having enough accurate data to calculate churn, LTV, etc. is important. Age also provides more financial history which can help a buyer predict or forecast future performance.
Every one wants to see a consistent trend of revenue and profitability growth. As a buyer, I actually like things that are really flat and consistent, but that’s because you can buy them cheaper than things that are going up and to the right! Selling a membership site that is declining, or churning through more customers than it is acquiring is extremely difficult to sell.
Lastly, owner involvement is important here. A lot of membership sites require the owner to continue adding new, fresh content, otherwise a customer is going to leave once they’ve consumed everything you have to offer. If this content creation is outsourced, great! If not, consider outsourcing it prior to selling your membership website otherwise you might take a valuation hit.