The subscription economy has become one of the fastest-growing sectors in modern business. Over the last decade, it’s expanded by 435% and is projected to reach nearly £2 trillion by 2035.
From Netflix and Spotify to Adobe and Microsoft, subscription businesses have fundamentally changed how we consume everything.
The appeal is obvious, as predictable Monthly Recurring Revenue (MRR) – the amount you can expect to receive each month from active subscriptions – provides stability and makes forecasting easier.
However: despite impressive growth numbers, many subscription businesses don’t become profitable until year two or three. Some never get there at all.
You can be adding subscribers every month whilst simultaneously burning through cash faster than you’re bringing it in. The metrics look healthy on the surface, but the unit economics tell a different story.
This guide walks you through the real economics of subscription profitability – from understanding your true costs to optimising the levers that matter.
Why Subscriptions Have Taken Over
Netflix transformed TV with over 280 million subscribers globally. Spotify changed music with over 600 million users. Adobe abandoned perpetual licences entirely – their Creative Cloud subscription model took them from £200 million to over £14 billion in annual recurring revenue in less than a decade.
Here in the UK, companies Gousto and HelloFresh turned meal kits into subscription services serving millions of households. And there are thousands of smaller subscription businesses aside who offer anything from gin and chocolate to plants and craft products.
While the model feels both simple and powerful, many subscription businesses struggle with profitability for years – and often more than they expect to when starting out.
Why? Mainly because the subscription model front-loads costs. You spend money acquiring customers today, but earn it back slowly over months or years.
Understanding Subscription Profitability
Subscription profitability isn’t about your MRR number. It’s about unit economics – whether each individual subscriber generates more cash than they cost to acquire and serve.
There are four core metrics you need to track:
- Customer Acquisition Cost (CAC): What it costs you to acquire one paying customer
- Lifetime Value (LTV): How much profit a customer generates over their relationship with your business
- CAC Payback Period: How long it takes to earn back what you spent acquiring a customer
- Net Revenue Retention (NRR): Whether your existing customers are spending more or less over time
When you look solely at MRR, if you’re spending £500 to acquire a customer paying £50 a month, you need 10 months just to break even – and that’s before you factor in what it costs to serve them. If they cancel in month 8, you’ve lost money on that customer.
Now scale that across hundreds of customers. You’re burning cash whilst your MRR dashboard looks brilliant.
A subscriber only becomes profitable when what they pay you (after costs) multiplied by how long they stay exceeds what you spent to acquire them plus what it costs to serve them.
Say you’ve got a monthly subscription at £99 with decent margins, it costs you £450 to acquire each customer, and you spend about £15 a month keeping them happy. You’re making roughly £59 in month one after all costs. That means you break even around month 8.
If your average customer sticks around for 18 months, great – you’re profitable. If they’re gone by month 6, you’ve got a problem.
Getting Customer Acquisition Cost (CAC) Right
Most subscription businesses dramatically underestimate their true CAC. And it’s one of the biggest reasons they struggle with profitability.
Your CAC isn’t just your advertising spend divided by how many customers you got. It’s everything it takes to turn a complete stranger into someone who hands you money.
Think about marketing costs – advertising, content creation, all the tools and software, agency fees. Sales costs if you’ve got a team – salaries, systems, time spent on demos. And then there’s onboarding and support costs – customer success time, training materials, and tech support for users.
Then there are refunds and chargebacks. Payment failures occur when you’re essentially re-acquiring customers you already had. All those infrastructure costs, like your email platform and analytics tools, that you’re possibly not even counting towards CAC.
It’s often suggested that your LTV should be at least three times your CAC. Anything less and you’re skating on thin ice.
Managing Churn
Whilst everyone obsesses over getting new customers, churn is the big enemy of profitability.
Even what seems like a small monthly churn rate – say 5% – means you’re losing nearly half your customers every year.
There are two types of churn, and they need different strategies.
- Voluntary churn is when customers actively cancel. They’re not getting value, they found a competitor, or they just don’t need your service anymore. This is the churn everyone focuses on fixing.
- But involuntary churn – that’s when credit cards expire, payments fail, or customers forget to update their billing details. This type is completely preventable, and it often makes up a huge chunk of your total churn.
The fastest win? Fix involuntary churn immediately. Set up automated retry logic for failed payments. Send notifications when cards are about to expire. Make it dead simple for customers to update their payment details.
Onboarding makes a massive difference too. Get customers to their “aha moment” as fast as possible. The quicker they see value, the longer they’ll stick around.
When someone cancels, ask why. You’ll identify patterns you can fix, and can also offer to pause instead of cancel.
Pricing for Profitability
Your pricing structure is probably the most powerful lever you’ve got for profitability. Small changes here can have massive impacts on your bottom line.
Annual plans are excellent for profitability, so they are worth pushing. You get cash upfront, which dramatically improves your payback period. Data shows that annual customers also churn at much lower rates than monthly ones.
Getting Tier Structure Right
Most subscription businesses mess up their tier structure.
If your basic plan is £29 and your professional plan is £299, you’ve created a gap that’s too wide. Customers get stuck on the cheap tier because the jump feels impossible.
Better to use comfortable increments – something like £29, £79, £149, £299. Each tier is roughly double or triple the previous one. Suddenly upgrading feels doable.
Here’s a trick: having a high-tier option makes your middle tier look reasonable, even if hardly anyone buys the expensive one.
Common Pricing Mistakes
Starting too low is a classic trap. You think it’ll help you get customers, but now you’re stuck there. It’s much easier to start high and discount than to raise prices later.
Another key point is that too many tiers just confuses people. More than four and you’ve created decision paralysis. If people can’t quickly figure out which tier they need, they’ll default to the cheapest one.
Get Expert Help With Subscription Business Finances
Building a profitable subscription business is complex. The metrics are interconnected, and getting the unit economics right takes constant attention and adjustment.
At Double Point, we help subscription businesses and SaaS companies structure their finances for profitability. Whether you’re trying to calculate your true CAC, improve retention, optimise pricing, or just figure out which metrics to track, we can help.
Our chartered accountants specialise in recurring revenue businesses. We understand the unique financial challenges subscription models present, and we’ll help you build the foundations for sustainable, profitable growth.
Book a free consultation with us today to discover how we can help you move from growth at any cost to profitable, sustainable scaling.