The popular subscription business model isn’t for everyone. A subscription-based business model is the way customers consume goods and interact with service providers. Nowadays, it seems nearly impossible to listen to music, watch movies, or shop online without using a monthly subscription plan.
The constant interaction between the seller and the buyer and the ability to cancel the deal at any time help to avoid the unpleasant feeling of losing large sums of money, for example, for software licenses.
Endless libraries (like Netflix and Spotify), 24/7 customer support, constant software updates, and algorithmic curation all contribute to the appeal of subscriptions.
This business provides the ability to properly assess companies’ profitability forecasts, develop deeper relationships with consumers, and collect data to identify shopper habits as they engage in the subscription process.
According to an October 2019 report released by subscription software vendor Zuora, subscription revenues grew about five times faster than the companies included in the S&P 500 stock index basket in the first half (18.2% versus 3 , 6%).
Given the enormous revenue potential, it should come as no surprise that many companies have recently begun converting all or part of their revenue to a subscription model. For example, industry rumors suggest that Apple may introduce an iPhone subscription plan bundled with services such as Apple Music and Apple TV +.
However, many companies trying to make this transition do not realize that the key steps to building a successful subscription-based business are evaluating product compliance with market requirements and implementing effective change management. Otherwise, a business turnaround will rob them of their consumer base and ultimately threaten their existence.
Benefits of the subscription-based business model
Before the subscription model evolved into a software-provided service (SaaS) and e-commerce subscription boxes, it lasted for a while as a gym membership, grocery loyalty program, and DVD mail-order service.
Salesforce, a customer relationship management software company, first adopted the SaaS model in 1999. Building on the growth of broadband and mobile technology in its early years, Salesforce has now established itself as an industry leader. But unlike companies that later transitioned to a subscription model, Salesforce started out as a SaaS company right away, avoiding the negative effects of the turnaround.
In a company that already has subscription customers, there is a certain degree of confidence in the projected income statement.
As a result, there may be an upfront increase in cash flow at the beginning of each renewal period, which usually results in a stable financial position for the remainder of the month or quarter.
This model not only positively affects the company’s financial performance, but also brings monetary benefits to consumers. A subscription helps financially constrained companies avoid the significant upfront costs of software and IT hardware licenses such as servers.
Adobe is a model of a successful transition to a subscription model. In 2012, the company released a monthly subscription plan for its creative software suite. Surprisingly, a year later, the overwhelming majority of positive reviews for the new pricing model prompted Adobe to stop selling licenses for the entire package.
Business and consumer users overwhelmingly preferred to pay in lower monthly installments of $ 50 and use the software as a subscription rather than buying a license for the main Adobe collection for $ 2,500 up front.
Consumers also benefited from regular software updates. This gave them the feeling that they could regularly receive something new from it – in the same way, in turn, the retention of the product in the market was encouraged, preventing its obsolescence.
In addition, the subscription also allowed the company to use its engineering projects more strategically. Previously, it was necessary to wait for development products to launch for a long period of time within the company’s annual release cycle.
Continuous updates through the subscription model open up a whole new channel for collecting and analyzing data. Ecommerce companies looking to upgrade to a subscription can analyze actions such as refund rates, cancellation rates and plan for upgrades or containment. Price adjustments, refund policies and other changes will be informed by consumer data analysis, which is carried out to improve the quality of the subscription.
Business Challenges When Choosing a Subscription Model
Jumping on the subscription bandwagon without examining your product’s market fit can hurt your business. According to McKinsey’s 2018 Consumer Subscriptions report, a consumer will not hesitate to cancel their subscription if they feel they are not delivering satisfactory results. The decisive factors can be the level of convenience, compliance with the consumer’s ideas about the product, its value or its type.
A clothing subscription service that delivers new clothes on time every month but does not provide a personalized curation service will have a high churn rate if their target audience values personalization over convenience.
The failure to move to subscription-based models is largely attributable to poor change management. The subscription business requires finance, sales and product teams to re-prioritize and redefine milestones.
For example, salespeople now need to understand that the first deal with a new customer is the beginning of a potentially long-term relationship, not the end of the sales process. The benefits of the subscription model — reliable cash flow, increased profitability, and higher customer retention — can only be achieved if employees and management are in the right mindset to create support systems and procedures.
In addition to these factors, there are external factors that need to be assessed before migrating and maintaining a subscription model. For example, the Zuora Subscription Economy Index estimates that media and publishers have the highest churn rates of 37.1% and 28.2%, respectively, over a seven-year period. When it comes to streaming services, it’s likely that the combination of intense competition between major players (Netflix, Amazon Prime Video, HBO) and new entrants to the industry (Disney +, ApplyTV +) will keep churn rates high.
The meteoric rise and fall of Blue Apron’s food subscriptions can be attributed to a variety of reasons, including logistical problems, poor market presentation, and disruption to the grocery space by large players (such as the acquisition of Amazon Whole Foods).
The company’s inflated marketing spend and high churn rate (72% of users canceled their Blue Apron subscriptions within the first six months) indicated that they could never fully convince new customers of the value of their services. Blue Apron plummeted from a peak valuation of $ 2 billion to a current market cap of $ 36 million (as of March 2020).
Despite these challenges, the e-commerce subscription industry has grown from $ 57 million in 2011 to $ 2.6 billion in 2016.
The emergence of major players such as Walmart Beauty Box and Unilever’s $ 1 billion acquisition of the Dollar Shave Club (razor subscription) have helped evaluate box subscriptions as a viable business.
Nike’s Adventure Club, a service that delivers kids’ shoes on a monthly basis, complements bi-monthly or quarterly a host of brands experimenting with e-commerce subscriptions. The service solves the problem of constantly buying new shoes for children due to the fact that they quickly grow out of it.
Here, the strength of the subscription model lies in its ability to benefit from recurring purchases. Nike Adventure Club is removing the complications of repeatedly buying new kids’ shoes and working to instill loyalty in its youngest users. With the launch of the service, there may be plans to introduce subscriptions to other users with recurring purchases such as marathoners – Nike’s future plan.
Will subscriptions take over everything?
For many of us, it’s hard to imagine our media consumption or product delivery taking any form other than subscription. Voluntary monthly spending has become so ubiquitous that we have now opted for delivery services that regularly supply us with toothbrushes, cosmetics, and cooking ingredients.
But is the subscription model practical for all service industries, and does it make sense for more companies to switch to it?
Zuora CEO Tian Zuo thinks so. In an interview with Stanford Graduate School of Business, when asked what other industries he expects to adopt the subscription model next year, he replied, “There are already subscription-based companies in real estate, education, finance and pet care. … The reality is that possession is dead; now we are really talking about access to goods as a new law ”.
His solid opinion is borne out by the growing prominence of the sharing economy and the trend towards access to property. But there are doubts whether sharing will do well in industries where there are strong ownership incentives. Only time will tell if the subscription model will take up most of our lives – in all likelihood, we are on the path to using everything that is available and not owning anything at all.