I’ve usually been a SaaS or marketplace guy. But then something interesting happened at Duolingo…

A year ago, I looked at the Consumer subscription market and I didn’t see a lot of big winners. What I did see were crowded markets, high advertising costs, and scary churn.

But Duolingo’s rise made me take another look at this category.

The language learning app’s stock has more than tripled since the 2022 low. Its market cap now sits at $10 billion.

I had to admit it: consumer subs can produce outcomes of the highest order.

What the public market is telling me is, “Send us more like this.” Message received.

But how can we separate a great consumer sub company from the rest?

Looking for Big Markets

Duolingo has 26.9 million Daily Active Users (DAUs). I’m one of them. I learn Portuguese on Duolingo most every day.

The paid version of Duolingo is $7/month. With prices that low, you need a lot of users to make a big company.

This means you have to be addressing a major need.

Lots of people want to learn a language. Even more want to lose weight — good news for Noom.

Stick to those big markets, and we have a chance of success.

Death by CAC

One of the biggest reasons I pass on consumer subscription startups is high Customer Acquisition Cost, or CAC.

I’ve seen consumer subs with a CAC that’s roughly equal to their Lifetime Value (LTV). This means that however much the company makes from a customer, they already paid out just as much to find them!

A business like that isn’t viable.

I like to see an LTV:CAC of 12:1 or better at the early stage. The number is likely to get worse as the company grows and saturates one ad channel after another.

The best Consumer Subscriptions tend to grow virally, a lot like social media. So if a startup is bringing in tons of customers at $0 CAC, that’s a powerful sign.

Keep an Eye on Churn

Some subscriptions bring on lots of users but can’t keep them. It’s usually a sign that the platform isn’t providing enough value.

So what level of churn is good, and what’s a problem?

For this, I turn to Lenny Rachitsky, who knows more about this stuff than just about anybody. Here are his benchmarks:

Good retention (at 6 months): 40%
Great: 70%

What we don’t want is to have to rebuild the company every year because all our users left. It’s very hard to get to Duolingo’s size doing that.

Wrap-Up

Now that I’ve been investing in startups for almost 3 years, I’m tempted to think I know everything. This kind of company is good, that kind is bad.

But any good investor watches the market and learns. When the market proves me wrong, I have to adjust.

So now, I’m looking for consumer subscriptions that address a real problem lots of people have. And I want to see both fast and cash-efficient growth.

Somewhere out there is the next Duolingo. I intend to find it.

What do you think of consumer subscriptions? Leave a comment and let us know!

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