So What Club
Start free

Capture and defend margin

Subscription and recurring revenue shift

Examples checked

In one minute

Moving from one-off sales to customers paying regularly for access.

The big idea: A subscription swaps a large payment today for smaller payments over time, so revenue dips before it grows. It creates value when customers stay long enough that their lifetime payments beat the old one-off sale, and the steady revenue is worth more to investors.

Works when
When customers use the product often, the company keeps improving it, and churn stays low.
Fails when
When customers use the product rarely, see the subscription as a price rise, and cancel.
Check this number first
Churn and average customer life. Decides lifetime revenue.
In the worked example
Lifetime profit per customer, subscription: USD 928 (USD per customer over their life, subscription). See it add up

What it is

Under a one-off sale, the customer pays once and owns the product. Under a subscription, the customer pays every month or year for access, updates and service. Software, media and some hardware makers have moved this way. Recurring revenue is the revenue you expect to repeat, such as annual recurring revenue (ARR) in software.

  • Licence to subscription. Software sold as a yearly or monthly plan instead of a one-off licence.
  • Product as a service. Hardware paid for by use or by month, with service included.
  • Membership. A fee for access to lower prices, delivery or content.

Why companies do it

The economic logic, most important first. A move usually rests on one or two of these.

  • Customer relationship. Regular contact gives data on use and more chances to sell more.
  • Risk. Recurring revenue is more predictable, and investors usually value it more highly.
  • Pricing power. A lower entry price brings in customers who could not pay the one-off price, and prices can rise as the product improves.

When it creates value, and when it destroys it

Creates value when

  • Churn is low, so customers stay for years.
  • The product is used often and improves over time.
  • The company can survive the revenue dip during the switch.

Destroys value when

  • Customers use the product rarely and see the fee as paying forever for something they used to own.
  • Churn is high, so customers never pay back the cost of winning them.
  • The switch is forced on loyal customers, who leave for rivals that still sell licences.

The numbers to check

Ask for these, in this order, before you recommend the move.

  1. Churn and average customer life. Decides lifetime revenue.
  2. Lifetime value against the cost to acquire a customer. LTV should be several times CAC.
  3. Revenue dip during the switch. Year one subscription revenue is far below the one-off price.
  4. Net revenue retention. Revenue from last year's customers this year, after churn and upgrades.

Worked example (illustrative)

Rounded numbers for a made-up business, shaped like real ones. Positive lines add to profit; negative lines are costs.

A software firm sells a USD 1,000 licence plus USD 200 a year in upgrades, which customers buy for two years. As a subscription it would charge USD 400 a year; customers stay 4.2 years on average and cost USD 60 a year to host and support. Winning a customer costs USD 500 either way.

Worked example for Subscription and recurring revenue shift, in USD per customer over their life, subscription. Illustrative figures.
LineUSD per customer over their life, subscription
Fees: USD 400 a year x 4.2 yearsUSD 1,680
Hosting and support: USD 60 a year x 4.2 yearsminus USD 252
Cost to win the customerminus USD 500
Lifetime profit per customer, subscriptionUSD 928

Check: the lines above add up to the total.

The numbers that decide it

Lifetime profit per customer, licence: USD 1,000 plus 2 x USD 200 minus USD 500
USD 900
Year one revenue under subscription as a share of the licence
40 percent

So what: Over a customer's life the two models earn almost the same (USD 928 against 900), but in year one the subscription brings in only 40 percent of the licence revenue. The switch pays only if churn stays low and the lower entry price brings in more customers.

Real examples

Companies that made this move, by region, with what happened and a source checked on the date shown.

  • Adobe

    United StatesCreated value

    Adobe moved its design software from one-off licences to subscriptions. In fiscal 2025 subscription revenue was USD 22.9 billion, 96 percent of total revenue.

    The lesson: Software used every day suits a subscription: customers stay, and each update adds value they keep paying for.

    Source 1: Adobe, annual report on Form 10-K for fiscal 2025 (US SEC) (opens in a new tab), checked .

  • Spotify

    EuropeCreated value

    Spotify reached 300 million paying (Premium) subscribers in the second quarter of 2026, up 9 percent on a year earlier; Premium brought in EUR 4,331 million of its EUR 4,777 million revenue in the quarter.

    The lesson: Scale and low churn turn a thin margin per subscriber into a profitable business.

    Source 2: Spotify Technology, second quarter 2026 shareholder deck (Form 6-K exhibit, US SEC), 4 August 2026 (opens in a new tab), checked .

  • Anghami

    Middle EastDestroyed value

    The music and video streaming company grew revenue 27 percent to USD 99.3 million in 2025, but in its subscription business the cost of revenue (USD 119.3 million) was higher than the revenue (USD 89.2 million). It lost about USD 89.6 million, and its auditors raised substantial doubt about its ability to continue.

    The lesson: A subscription only works when each subscriber earns more than the content and service cost.

    Source 3: Anghami, annual report on Form 20-F for 2025 (US SEC) (opens in a new tab), checked .

  • Newgen Software

    IndiaMixed

    The software company is moving customers to subscriptions. In 2025-26 subscription revenue grew 24 percent to Rs 525 crore, but total revenue grew only 6 percent.

    The lesson: During the switch, subscription growth can hide slow growth overall, because licence revenue falls at the same time.

    Source 4: Newgen Software, press release on fourth quarter 2025-26 results, 30 April 2026 (opens in a new tab), checked .

How to recommend it in a case

Answer first, then the reasons with numbers, then the risk and the next step. Three sentences, said out loud.

I recommend moving to subscription for new customers first, because lifetime profit is about the same (USD 928 against 900) and the lower entry price can widen the market.

The model works if customers stay about 4.2 years; existing licence customers keep their terms, which softens the revenue dip, as year one subscription revenue is only 40 percent of a licence.

The risk is churn above plan; next I would track monthly churn by customer group and check that cash can carry the dip for two years.

The numbers to quote: Churn and customer life; Lifetime value against acquisition cost; Revenue dip in year one; Net revenue retention.

The figures in the answer come from the illustrative worked example above. In a case, use the client's own numbers.

Classic interview traps

  • Comparing one subscription year with the one-off price. Compare over the customer's life.
  • Ignoring the revenue dip during the switch.
  • Assuming customers will stay. Ask what churn looks like and why.

Where it is common

Sources

Practise it

Where this move comes up in cases

Related moves