Nov 12, 2021

Is A Subscription Business Model in Your Future?

Business Model Innovation
Business Model Pattern
by Maximilian Böger

A subscription business model generates revenue by charging customers a recurring fee at regular intervals. Instead of the one time transaction, you are building a long term relationship and more sustainable revenue stream.

In the past ten years the subscription business model has seen tremendous growth. According to the Subscription Trade Association, the industry has a compound annual growth rate of over 17%. The subscription box market alone is expected to reach $15 billion in sales by the end of 2021.

Many business publications claim that the subscription business model will be around for the long haul and will continue to grow. Some proclaim that every business will in some way incorporate this model into their business.

One time sales can turn into recurring sale and build brand loyalty, compounding value of those customer relationships. If they see a value in your product or service, they will continue to be a subscriber. The longer they are a subscriber of your product or service the more valuable they become.

Sample of Subscription Strategies

These are just a few of the ways you can develop a subscription strategy. Many variations of each can be developed.

Flat Rate Subscription Business Model

This model has a flat rate or fixed subscription revenue subscriber. All recurring payment amounts, and frequency, is predetermined up front. Examples of this model include:

Pay-Per-Use Business Model

The pay-per-use pattern has a variable subscription revenue subscriber. The amount and frequency are determined by use. Examples of this model include:

Hybrid Subscription Business Model

This model uses both fixed (like monthly, quarterly or yearly) and variable (pay-per-use) elements as options. Examples of this model include:

  • Cell phone services

  • Meal kits

  • Dollar Shave Club

History of the Subscription Business Model

Many industries use the subscription business, and that number is increasing. Some have experienced disruptive innovation in their industries which either put them out of business or, if they paid attention, required a complete change in their product or service. Other innovative business owners entered the market, such as Netflix, to fill a void. Netflix continues to innovate and expand into new areas of the entertainment business.

You may recall such disruptions in industries like book clubs (Book of the Month Club – now digital), music clubs (Columbia House – now digital services), and movie subscribers (Blockbuster – now online services). Entertainment industries like these who once delivered physical products were forced to evolve into online delivery – or they are no longer in business.

The subscription publication model can be traced back to the seventeenth century English book trade. Book subscription holders were often mentioned in the books themselves and in local news papers.

Why Use the Subscription Business Model?

One industry that has been forced to change with customer demand is the Software as a Service (SaaS) industry. Customer acquisition costs are up as much as 50% and customers are no longer willing to pay for SaaS. Most are now sold as a monthly or yearly subscription service and offered over the cloud.

According to a survey by McKinsey & Company, 46% of customers already pay for an online streaming service and 15% have subscribed to an e-commerce service within one year of the survey.

Major brands in this space have all gone to this model, such as Microsoft, Adobe, and Intuit. Just look at the online services you pay for each month. You can trace most of them back to a day when the software was only available by disc. Some transitioned into online downloads, but now all are only available online. With a subscription service, your monthly charges may increase with periodic upgrades, but you will realize less churn.

Another area of growth is the subscription box. Let’s look at the Dollar Shave Club for example. Their model was based on monetizing convenience for their customer base and a personalized strategy to receive product right when they need it.

Meal kits subscriptions are popping up everywhere and use a convenience-based model. People are busy and they want the ability to personalize their subscription for various dietary needs.

Many of these businesses offer add-ons and upsells to capitalize on the willingness of customers to pay more for specialized services. This demonstrates how to boost average revenue per user (ARPU) through expansion revenue.

The biggest impact to your business is that it adds another dimension to your revenue stream. You move from having one-time purchases to many transactions from the buyers. Revenue can increase exponentially.

But the benefits go beyond profits. As we have all experienced some affect of the pandemic, a subscription can make your business more resilient by offering the following:

  • Predictable revenue stream

  • Building strong customer relationships

  • Responding to customer demand

  • Gathering valuable datasets

How to Make a Subscription Business Model

Several industries have reported using a form of these strategies to create increased revenue and growth for their business.

Five steps to create a successful subscription business model

1. Start with detailed goals

Determine if you are looking for more revenue or faster growth. This must be determined early in the subscription business model so you can ensure the best pricing strategy.

Once you have your goal determined, it is now possible to identify your buyer personas and match them to your offerings and develop the right marketing strategy.

2. Build a great onboarding experience

The sign up process needs to be as simple as possible. Link to it in all marketing channels to keep a steady flow of new customers. It should be seamless online, on mobile, or in an assisted sale.

You will experience churn each month, so you need more coming in than going out. Simply, more customers = more revenue.

3. Billing should be seamless

An unreliable billing system will quickly cause your customers to move on. Your customers are evaluating you at every step, so don’t lose them over something as important as a strong software to handle the traffic.

Understand how your customers want to pay by experimenting on different forms of subscriptions to find the best sweet spot of product-market-pricing.

4. Build strong relationships

Fostering relationships will keep your subscription business strong. Keep them happy and remind them of the value they are receiving from your service. This needs to happen continuously for customer retention.

Buy knowing your customer persona you can keep in line with their expectations. Know what they need and provide that next step. Each new renewal cycle requires you to offer extra value.

5. Be ready for growth

The best models are scalable. Having predictable monthly income evaluated against churn rates and operating costs can ensure growth is sustainable. Otherwise, you may overload your infrastructure.

The subscription model is the only business model that provides this kind of consistency. Adjustments can easily be made when you track MRR, ARR, and churn rates effectively.

Having a subscription business means you offer strong customer service. It is at the core of this model. Without strong customer relationships no sustainable recurring growth can occur.

And as we have learned or experienced, it is less resource-intensive to grow from existing customers than to acquire new ones.

Subscription Pricing Strategies

Pricing is directly tied to acquiring new customers, increasing the value of existing customers, and reduction of churn. It can be a complex process but worth every hour of development and preparation.

Deciding on one price to fit all is not the final answer. You don’t want to leave out additional recurring opportunities for downsells and upsells, or other options to meet the needs of the customers.

Pricing strategies may include different tiers based on the functionality of the offer, or a reduced price if bought in bulk. Some services can be metered according to usage. Some may give reduced per unit pricing for longevity or amount of usage. Spend some time on this to find the best fit for your chosen persona.

An article by Zuora states other options to include:

"…adjusted to incentivize activity from particular geographic regions, term-based to lock in long-term commitments, or adjusted in cooperation with partner promotions. There are overage charges, free trials, virtual coupons, early bird offers, freemium to paid plays…"

In closing, why choose a subscription business model for your business? It is the best way to increase revenue and grow your customer base in a sustainable way.

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