This Is Why Businesses Are Turning to Subscription Models
As consumer behaviour shifts, businesses are using subscription models to keep up.
Type in ‘subscription news’ on Google and you’ll see a stream of headlines all with businesses either entering or iterating on some form of a subscription model. It’s now possible to subscribe to something as ubiquitous as candy (yes, candy) or as lofty as sports cars. Food boxes, razors, furniture, music, and TV, all of these products and services are now available through subscription. The big question is why?
Attention and commitment
Here’s an impossible question: How do you keep the attention of a generation that’s overwhelmed with options? While there’s no single answer, getting consumers to commit to a subscription model is one way to focus their attention. That commitment is crucial because it means they’ve bought into your offering and have to take action for that commitment to end.
Effective business model
Here’s the thing about subscriptions that make them such an effective business model: businesses only need to sell consumers once to establish recurring payments. And while it’s important to maintain and improve the quality of your offerings, the subscription model ensures revenue will be coming in while those offerings are being iterated. On the topic of revenue, subscriptions also add predictability to an organization’s cash flow. They know month over month (or whatever the cadence of the subscription) how much money will be coming in and can better define the lifetime value (LTV) of a customer when calculating the customer acquisition cost (CAC).
Eliminating high upfront costs
IKEA is piloting a new subscription model through its stores in Switzerland. Think about this for a minute: IKEA is already branded as the go-to for affordable furniture. If they’re exploring a subscription model to lower the cost of entry for accessing their products, that says a lot about the spending habits of this generation, and what they will and won’t spend money on. The reality is that upfront costs are a barrier to entry for many Millennials. If those costs can be spread over a period of time at a reduced rate, then it opens the door for those who may not have been able to otherwise enter.
Not all subscription models are effective. The jury is still out on whether or not car subscriptions will stand the test of time. And if you remember the MoviePass debacle, which is still ongoing, then it’s clear subscriptions aren’t made for every industry. That being said, many industries are still taking the leap and being first to market helps. That’s how Netflix has managed to gain over 130 million paying subscribers and counting. But there can only be one first, so that’s not really an option for 99% of other organizations. The key is really putting together a model that is fair for consumers but doesn’t put a strain on your bottom line. If you’re considering a subscription model for your business, make sure you do a lot of research to ensure it’s a market fit. If it is, there’s potential for a big payoff.