Advantages of Subscription Model Businesses

Many companies are moving away from the traditional one-time payment model of buying a product or service. Instead they're asking customers to pay monthly or yearly in order to receive the same benefits they may have previously paid upfront. This may seem like an unfair practice, but there is a good reason behind this decision. 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 makeup subscription boxes or candy (yes, candy) or as lofty as sports cars. Food boxes, razors, furniture, project management software, music, and TV streaming services, all of these products and services are now available through subscription. The big question is why? What is a subscription business? A subscription business is a company that sells a product or service on a recurring basis. Subscription businesses are usually characterized by the following: A customer who subscribes to the company's goods or services. The customer pays for their subscription on a monthly, quarterly, semiannual, or annual basis. The customer can often cancel their subscription at any time without penalty. The customer receives goods or services from the company on a regular schedule (usually monthly). The price of goods and services is fixed for the duration of the subscription period (e.g., $10 per month). Subscription businesses work because they offer convenience to customers who don't want to worry about ordering products every month or year. Why do companies move to subscriptions? The subscription model is more profitable for companies than the purchase model. It's also more convenient for customers. Subscriptions offer customers a chance to try out products before they buy them and make it easy to cancel if they don't need it anymore. This section discusses why companies are switching over to the subscription model and how it benefits both companies and customers. 1. Consumer 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. 2. Effective business model for recurring payments 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). 3. Eliminate high upfront costs for customers 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. Should I start a subscription business? If you are considering starting a subscription-based business, there are many factors that you should consider before launching. For example, how often do you want to charge? What will your customer get in return? How much will they pay? You'll also need to consider how to register your business and whether it should be incorporated or a sole proprietorship.