Economic crises are characterized by a decline in economic activity due to a drop in spending. Whether it’s a mild downturn, a substantial recession, or a severe depression, consumers get more vigilant about their spending. As a result, business owners can experience decreased cash inflow, mounting expenses, poor growth, layoffs, or, in the worst cases, needing to shut down their businesses.
Businesses that sell subscriptions for products and services have proven to be more stable under poor economic circumstances than their traditional counterparts. Customers often prefer subscribing rather than making a one-time purchase, especially if the subscription options are easy on their budget and don’t require a long commitment. For businesses, a subscription model can be preferable because it provides a predictable cash flow via recurring revenue from their customers. Businesses that typically make one-time sales can consider switching to a subscription model to reduce the impact of an economic crisis and generate more stable revenue.
In this article, we’ll look at how businesses can benefit from switching to a subscription model for more sustainability and better business health.
Characteristics of a traditional business model during a recession
The traditional business model revolves around the idea of transferring ownership of products when a sale is made. During poor economic conditions like recessions, this business model might not be reliable. Here are a few reasons why:
When economic conditions are poor, consumers want to cut down on spending money. They may be spending less because they’re feeling cautious, or they may not have the funds to purchase products like they normally do. Psychologically, it’s a long shot to try to persuade customers to purchase a product and make full payments at such a time.
No customer retention
One of the biggest drawbacks of a traditional business model is there’s little attention paid to customer retention. Customers come into contact with a brand’s touchpoints, evaluate a product, and make a purchase, but then the relationship between the two entities ends. With this model, the Customer Life Time Value (CLTV) of each customer is limited and there’s no guarantee of selling to them again, especially during a recession.
Lack of an ongoing customer base
Over the years, more businesses have started to recognize that one of the easiest methods to generate revenue is by up-selling and cross-selling to their existing customer base. However, this doesn’t help traditional businesses during economic downturns, since there is no lingering relationship with customers and no active customer base to market products to.
Advertising is crucial
When customers get apprehensive about spending, businesses’ Customer Acquisition Cost (CAC) rises, which can strain their marketing budgets. Eventually, companies begin to reduce that spending, which can unfortunately make it even harder for them to reach customers. This problem affects traditional businesses most heavily since their revenue generation model relies on selling products to new customers.
Unpredictable cash inflow
Whether there’s a recession looming or not, traditional businesses always have unpredictable cash inflow. Forecasting revenue can help, but it isn’t necessarily accurate since minor changes in the market ecosystem can trigger exponential changes. During an economic downturn when steady cash inflow is uncertain, making strategic business decisions for the future becomes a challenge.
Characteristics of a subscription business model during a recession
Unlike traditional businesses, subscription businesses rely on predictable revenue from a relatively stable base of continuing customers. This model means that they’re less vulnerable to economic downturns, and can even thrive during lean times. Here are some reasons why subscription businesses can strive amidst poor economic conditions:
Subscription businesses are often able to offer the customer more for their money than traditional sales, whether it’s a lease on a self-driving car or streaming access to a huge library of movies. In times when people don’t feel skeptical about spending, it’s easier to persuade them to purchase something that’s clearly a good deal. Subscription businesses can also boost their customer appeal by offering free trials—and while some of those customers will leave at the end of their trial, plenty more will choose to stay.
More customer value
The subscription model relies heavily on customer retention, so subscription businesses devote energy to customer engagement and retention strategies that help improve their relationships with customers. This results in increased retention rates, which leads to higher Customer Life Time Values (CLTV), and that translates to more stable recurring revenue for businesses. In the simplest terms, keeping customers around longer makes them more valuable.
Selling to existing customers
According to Marketing Metrics, “The probability of selling to a new prospect is 5-20%. The probability of selling to an existing customer is 60-70%.” In recurring revenue model businesses, the relationship between the brand and the customer lasts until the customer chooses to unsubscribe. This means the business has an active customer base for up-selling and cross-selling other products and services—and since they have already shown interest in similar products, the business has some idea what else they may like. During economic downturns, this means an additional source of income that doesn’t come with a huge marketing price tag.
Recurring revenue without advertising
It’s already been established that a significant portion of the revenue generated by subscription businesses comes from existing customers. During times of crisis, while traditional businesses are struggling to acquire new customers, subscription businesses can reduce their advertising without losing their revenue stream. That leaves them free to focus on creating additional value for their existing customers, who are their most important asset.
Predictable cash inflow
Forecasting is a little different for subscription businesses. Instead of guessing how many customers will make purchases in the next month, they can see how many active customers they have and how many are churning each month. This gives a much clearer and more reliable estimate of how much money the business can expect to receive in the near future. With a better understanding of future revenue comes better cash flow management and an easier time prioritizing operational, capital, employee and other expenses during a crisis.
By adopting a subscription model, businesses can set themselves up to make the most of recessions and other unfavorable economic conditions. The subscription business model provides recurring revenue and a continuing customer base, which translates into the stability that businesses need to be sustainable. Across many industries and types of products, businesses stand to gain by offering value propositions to customers on a subscription basis and maintaining a reliable revenue stream even when advertising budgets are limited.
Zoho has been in the SaaS industry for over 23 years and our expertise in the subscriptions domain comes from handling recurring billing for more than 50 million of our own users. Having seen a vast number of use cases and challenges over the years, we’ve perfected the solution for handling different recurring billing and subscription management scenarios. Take our subscription billing tool for a spin to find out if it can help your subscription business.