Today’s consumer is changing their behaviour. They are no longer purchasing products and services in the same way they used to and this could be very stressful for you and your business.
However, there is an opportunity available, one that could be more beneficial to you than trying to change the purchasing behaviours of customers: the online subscription business model.
What Is The Subscription Business Model?
The subscription model is very simple. The consumer pays you a regular fixed amount for access to certain products or services. In the last five years, the use of this business model has expanded significantly and now there are a number of products on the market being offered through a subscription.
One of the most commonly accepted subscription models is for online resources. This is often where a subscription offers access to software, articles, online tools or forums. A good example of this would be Adobe, who have now changed their Adobe Photoshop and other products from pay once, use forever to now being on a subscription model.
Another good example would be the magazine NZ Fishing News, where you can subscribe to a digital copy of the magazine.
Ecommerce is a major growth area for subscription businesses. Amazon have their Amazon Prime subscription service where consumers get access to free next day delivery as well as the latest TV and films through their service.
Food via a subscription service is now very common in the United States and Europe. Yet there are also subscription companies like this elsewhere; like New Zealand’s My Food Bag. Even men’s grooming (dollar shaving club) and clothes shopping (Le Tote) have taken to the subscription business model.
What Are The Benefits Of A Subscription Business?
So, what are the advantages of a subscription service? On the UK’s acclaimed Dragon’s Den, a show where entrepreneurs pitch business ideas for a cash injection from five high profile investors, subscription services were very prominent business ideas on the recent series. Yet the ‘dragons’ often asked simple questions that demonstrated a lack of understanding for the business’ core attributes.
For instance, when they were pitched a clothing line, they asked:
- How would they make money if someone didn’t like any of the clothes they were sent?
- And how do they determine what clothes the customer would like?
Both of these factors are fairly simple to answer. Firstly, most subscription services that operate under the ‘surprise and delight’ subscription niche, charge a flat fee for sourcing and delivering the clothes. The second question was simply about noting customer behaviours and recognising trends (i.e. customer likes dark clothes).
It is by answering the first of these questions that you can determine the biggest advantage of a subscription business – a regular, fixed income.
By knowing exactly what your customer is going to be paying each period, you can have a fairly accurate income projection. This is highly useful in your business planning. You can then set budgets accurately, determine what resources you can afford and distribute them to where you need them at exactly the right time. This makes the subscription business model more cost effective and many have much less waste than other businesses with other models (especially when selling consumable goods like food).
In addition, subscription businesses have a higher level of loyalty. This means that you are more likely to retain your customers and have a higher level of Customer Lifetime Value. The improvement in the customer lifetime value can also be supported by having a price that would be higher over the average customer lifespan than if the customer just bought the product outright.
Subscription businesses can also gain customers that competitors would not be able to. This is because subscription businesses have a lower initial investment cost than a pay-once, use forever option. This lower initial investment removes barriers from customers who might not be able to afford otherwise.
For example, Adobe used to charge $200 or more for some of their software packages. This was rather expensive and did limit the number of people who could afford the package. Now their charges are approximately $8-$10 per month which is much more affordable for the majority of potential users.
All these benefits make subscription businesses look very attractive.
Top Tips For Running A Successful Subscription Business
Subscription businesses may have many advantages; however, they are not perfect. The same problems of customer acquisition exist, especially when marketing and growing awareness for your brand.
By having a strong product and good subscription model, you can build the best foundation for growing your business. Here are some tips on how to make your subscription business a success:
- Offer an introductory month – many businesses offer new customers a cheaper or free first month.
- Keep your subscription price to roughly your full product cost divided by customer lifespan – this is to ensure you aren’t undercharging. Ideally you want to be above this level.
- Have a couple of subscription levels – customers love choice and offering a few subscription levels can improve signups.
- When running a content based subscription service don’t worry about the amount of content – you can always start early and charge less and improve the price as you establish your presence and gain more content.
- Communicate often with customers – subscription services are all about the customer. Therefore, you need to keep communicating to retain them.
- Be efficient – one of the advantages of a subscription business is the waste of resources that can be prevented. However, this can only happen if you are efficient and know how to supply your business properly.
Customer behaviours are changing. They are demanding products of a higher quality but they don’t want to pay a fortune. They are also leading busy lives, making it difficult to find time for some of the luxuries in life. This allows forward-thinking business people the chance to create subscription services that provide for these needs.
Subscription businesses have numerous and significant advantages over their competitors. Over the long term, with the right marketing and operational strategy – subscription businesses find they can increase revenue and customer lifetime value while decreasing waste, costs and the amount of energy needed to run and maintain the business.