Subscriptions are becoming increasingly common – from newspapers to weekly food shop, many businesses are adopting the subscription business model. Customers pay weekly, monthly or annually for a regular supply of certain products. The regular income and customer loyalty generated by subscriptions benefits a business, while customers can take advantage of not having to regularly source products and possibly lower prices offered by a subscription. For the right product, a subscription can be a lucrative and effective way of running your business. So is it the right business model for you?
How a subscription business model works
In a subscription business model, customers are charged on a recurring basis for a product or service. They generally choose how often they want to receive it and for how long. Typically they can cancel the subscription any time. For instance many people who watch on demand TV pay for it with a subscription that they can cancel any time.
Benefits of a subscription business model
- Regular source of income
Subscriptions make predicting your income straight-forward. They help to sustain a business through good times and bad. As customers are paying you regularly it is easier to budget and within your strategy you can accurately state your resources.
- Convenient for customers
Subscriptions mean that products arrive on a regular basis, there is no need to keep sourcing them. For instance having meal ingredients delivered in regular weekly boxes saves people from having to think of what to cook and buy the ingredients in the supermarket, so they are convenient for people who are busy.
- Customers can discover new products
Some subscriptions, like the food boxes, may contain items that the customer wouldn’t normally buy so they give them the opportunity to discover new products.
- Lower customer acquisition costs
Rather than targeting consumers who have never heard of you, subscription models allow you to reach those who already know about you. This lowers marketing costs. Gaining customer referrals is a powerful advertising tool.
- Form lasting relationships with customers
Subscriptions increase customer loyalty enabling you to have long-term relationships with them. If your customer services provide good support, customers will trust your brand and choose to renew their subscriptions. Research shows if you improve customer retention by only 5%, you can increase your profits by 25% to 95%
- Attract new customers
Providing items more cheaply by subscription will attract new customers. Subscriptions also allow them to spread the cost of a product over a period of time so maybe they can then afford it, rather than having to pay for it all in a lump sum.
- Learn from your customers
You will be able to learn and understand what your subscribers like and don’t like about your provision. This will enable you to improve and grow your business.
Types of subscription models
Subscription models fall into two categories:
- Businesses who offer access to a service
- Businesses who offer a repeat service
- Businesses that offer access
Streaming services allow customers to access films, TV shows or music. The customer pays a set price per month depending on their plan and can access content whenever and wherever they want. Netflix, Spotify and Apple are some of the companies that adopt this model. The monthly amount they charge is relatively low and the amount of choice they offer is high, so they provide good value for subscribers. Their success has changed the entertainment industry and put video rental companies like Blockbuster out of business.
In this digital age, sales of paper publications have been steadily declining. So to generate new revenue streams, news organisations have adopted subscription models. Readers pay monthly to access the content online. This has enabled news providers to survive when sales of paper publications have declined. All major newspapers such as the Times and the Financial Times have adopted this model
Software as a service (SaaS)
Many software providers have adopted a subscription model. Customers pay monthly to use their products rather than buying them outright. This enables users to pay a lower up front price and gives the companies a regular and predictable income. Mailchimp is one such successful company. They offer a variety of plans, depending on a business’s needs. Most businesses pay for access to a variety of software and marketing tools. One such business is exhibition stand contractor Quadrant2Design. They have found that by paying for software by subscription it can be used by multiple staff for a low monthly cost which makes it much more affordable than having to buy software outright.
- Businesses that offer repeat services
If you sell physical products it is still possible to have a subscription model. Customers sign up to a plan and receive certain products every week or month. Subscription boxes are a good example of this. Subscribers to companies like Hello Fresh receive a box of food every week with meal plans and suggested recipes. Amazon also offers products on subscription if you use something regularly which saves consumers from having to regularly re-order items.
The subscription model is changing the way businesses operate and causing disruption in many industries, forcing companies to adapt. There are advantages to both the consumer and business by adopting this model. Businesses receive predictable, regular income, and consumers save time and often get better value.