Businesses have been selling goods and services on subscriptions for ages. For example, print magazines are probably one of the most common examples that resonate with our constantly distracted minds. You sign up, pay a monthly fee, and have it delivered right to your mailbox. Now, this model has moved online, and with it brings even more potential for business growth and success.
Suddenly, subscription-based businesses have become the talk of the town all over again, so much so that they’re even being crowned with arguably the most coveted title in the world of business – “disruptive”.
According to a recent study by Zuora, subscription-based business models have increased their sales by 15.1%, versus 1.7% for the revenue of firms in the S&P 500, with retail sales accounting for 3.6%. It claims that this concept of a subscription-based model heralded by startups, presents a great opportunity for Software as a Service (SaaS) providers embracing this new business model. In other words, if you aren’t thinking about utilizing the subscription economy, you should be.
The Rise of the Subscription-Based Business Model
The numbers definitely look positive. The triumphs of Netflix, the undisputed champion of subscription business, and Amazon Prime, a paid membership program that provides members with free two-day shipping and free access to books, movies and music, have supposedly garnered 80 million subscribers worldwide.
“80% of companies are seeing a change in how their customers want to access and pay for goods and services and 50% of these same companies are changing their pricing models as a result.” – The Economist
In addition, the fact that the big guns like Sephora, Starbucks, Walmart, Adobe and Adidas have recently launched subscription programs themselves, presents a rosy picture for the subscription economy. Not only are the big players testing the waters with keen interest, but an even a larger number of start-ups are taking the plunge as well- catering to industries such as private jets, toothbrushes, flowers, groceries, underwear – and everything else in between.
The Benefits of a Subscription Business Model
Recurring revenue for a company is perhaps the most important aspect of a subscription model. Once a customer converts into a subscriber, they tend to become more inclined to buy again. This model makes it easier for you to ensure consistent revenue and lasting customers.
A good example is with an Amazon Prime subscriber versus a regular Amazon customer. While the latter spends about $500 per year on an average from the e-commerce site, this figure goes up to $1500 for a Prime member.
The reason is simple: when you’re a member or a subscriber, your brand is right up there in your audience’s mind space. They have more compelling reasons to communicate with your brand and hence, decide to take the vital step towards you. Recurring revenue also adds value to your business if you’re looking to attract potential investors or buyers.
Unlike traditional businesses, which are product–centric, the subscription model, fueled by digitization like scalable cloud infrastructure, requires customers to be at the center of everything they do.
The subscription economy is intended to depart from the redundant notion that one-size-fits-all.
Customers today prefer personalized, customizable services even if it comes at a slightly higher cost and – even if they need to take one thing off their checklist. Subscription-based businesses are more than happy to accommodate that behavior. It becomes a win-win situation as businesses get to monitor customer behavior and form a longer lasting relationship, which in turn leads to more predictable revenue streams, keener competitive edge and a more secure foundation.
Netflix, which curates movies and TV shows based on your preferences, is a solid case of mastering customer behavior. Another big advantage of knowing what your customers want is that you can predict the products and services you can offer next. Thus, subscription economy definitely imparts more control of your business.
Things to Consider: Criticisms of a Subscription-Based Model
Despite the immense growth potential, a lot of subscription based companies grow quickly during the first few months or years, before hitting a plateau. According to Digital Pulse, a digital content site by PricewaterhouseCoopers, an average subscription length lasts only 125 days, adding that most consumers partake in only one or two services – while only 13% subscribe to three or more. This typically happens when people sign up for a free trial and cancel after the period is over.
It’s inevitable that pricings fluctuate based on market variables and competition. This could cause subscribers to lose their trust in your brand. Customer retention, therefore, poses the biggest challenge for a subscription-based economy that depends on constant cash flow from recurring subscribers.
Subscription boxes, which gained good prominence in the initial stages, seem to be approaching a bursting point. The market is flooded with boxed products and the element of surprise seems to be fading. Therefore, companies would do well to be innovative in their approach so that the audience is able to differentiate their products and continue to see value in what they have to offer.
The Nine Models for Future-Driven Subscription Businesses
John Warrillow, the author of The Automatic Customer, a book that outlines the ins and outs of subscription-based economy, feels that subscribers are the key to increasing cash flow, triggering growth and fostering a company’s value. While there isn’t a single established business model that works in all cases, Warillow highlighted nine models that a subscription-based business can look to adopt. These include:
The Network Model: wherein the subscriber growth is directly proportionate to the value of a company.
The All-You-Can-Eat Library Model: which has been successfully followed by Netflix and Spotify – where a range of unlimited content is on offer – to subscribers for a specific price.
The Surprise Box Model: which sends curated boxes of products that include everything from food, cosmetics, pet toys, vinyl records and shaving kits.
The Private Club Model: a useful podium to offer access to exclusive products and services of limited supply.
The Front-of-the-Line Subscription Model: here a company provides various subscription packages and accords priority access to customers paying for high end packages.
The Membership Website Model: provides access to specialized and quality content such as articles, videos, webinars etc. on subscription. In this model, content is definitely the king.
The Peace of Mind Model: similar to selling an insurance premium; a customer pays a monthly sum for unforeseen but possible future hazards.
The Simplifier Model: requires customers to subscribe for a service and establish a contract to continue that model. Examples include cleaning and maintenance services for home.
The Consumables Model: involves offering a subscription to a product that the customer needs to replenish on a regular basis, for example, groceries.
Each model has its own set of nuances and is vastly different from the other. Anyone looking to kick off a subscription business would do well to factor in other aspects like business objectives, capital and workforce as well.
The Importance of the Customer Relationship
The value of a subscription-based economy is directly proportional to the relationship you have with your customers. An unsure customer generally translates into unpredictable and dwindling revenue growth. Therefore, as a subscription company, you need to realize that customer relationship is not merely a value addition; it is its very lifeblood of your business.
Understand what your customers’ desired outcomes are and develop strategies to delivering them. While your existing customers remain your priority, communicating with customers who did not convert into paying subscribers after the free trial – or those who churned – can give you a good idea about what you might be doing wrong.
Your customers subscribe to your business because they want to gain more than what they’re getting from conventional business models.
Thus, the key lies in differentiating yourself from traditional models where the relationship with a customer ends after a sales transaction.
In a subscription revenue model, pricing can be a complex process, but it’s also one of the most useful tools to attract new customers, all the while creating value from existing customers and reducing customer churn.
To attract new subscribers, consider offering promotions in the form of free trial and early bird registration prices. To ensure these subscribers do not cancel the subscription after the expiry of a free trial and continue to ‘feel important’, back it up with suitable upgrades.
Experts opine that if you’re changing your pricing, it is not a good idea to ask your existing subscribers to pay more. Pricing should also encompass cross-selling new services to existing customers. It is impossible to hold on to static pricing; therefore, every subscription economy should be flexible and adaptable to evolving customer needs and market trends.
A frequent challenge for a subscription business is to be able to evaluate key metrics that offers an insight into future directions. Traditional metrics don’t work with the new model, and subscription businesses need to focus on newer ones such as Monthly Recurring Revenue (MRR), Customer Lifetime Value (LTV or CLTV), Customer Acquisition Cost (CAC), and churn/retention rate. Figuring out which metric imparts maximum value to your company can pose a challenge in itself. But, once you get past the dilemma, it can prove to be beyond valuable.
Key Takeaways of the Subscription-Based Business Model
A subscription-based model is the new way of doing business where customers occupy center stage and recurring revenue is the norm. There are, of course, a few roadblocks along the way, but that isn’t going to hurt the growth of subscription economy any time soon.
There’s a reason why companies like Amazon, Starbucks, and Adidas are embracing this model with infectious enthusiasm. Competitive pricing, advances in technology, measuring subscriber data, and better customer relationships will help these brands leverage their subscription business to good effect – and bring about transformative changes and success.
Do you run a subscription-based business? Leave your questions in the comments below.