Subscription businesses have been around for decades. You may be familiar with this business model because you have subscribed to a few services yourself, like milk delivery, cable television, or magazine rentals. The concept of this business model is simple. Customers pay a recurring fee — usually monthly or yearly — to use a product or service. For example, when you subscribe to cable service, you pay a small fee every month to your cable provider, who gives you a connection to your preferred TV channels. The subscription business model isn’t just seen in small, local businesses like milk delivery or magazine rentals. Big companies like Amazon, Microsoft and Adobe used to sell products for a single, flat fee, but now have started selling them on a subscription basis.
So, why is the subscription business model so popular? According to Marketing Metrics, the probability of selling to a new customer is just 5-20%, while you have a 60-70% chance of selling to your existing customers. Subscription businesses focus on selling to existing customers who keep coming back for repeat purchases. Because these businesses provide services for their customers on a long-term basis, the sales and the resultant revenue are set on autopilot. This removes the main hassle of a traditional business model: having to find new customers for each new sale.
Because of its recurring nature, the subscription business model differs significantly from a traditional business model. Here are a few of the main differences.
One-time vs. recurring sales
In a traditional business model, the customers purchase a product or a service when they need it, and they may or may not return — it is a one-time sale. In a subscription business model, the customers make repeat payments for a product or service that they use on a recurring basis.
To illustrate the nature of a transaction in both business models better, let’s look at an example of men’s razor blades. Typically, razor blades get blunt with regular use, and if you shave every day, you have to go back to the store to get new ones frequently. Since razor blades are available everywhere, you might not always go to the same store to purchase them. For the store that sells you the blades, it is a one-time sale of $20. A US-based company called Dollar Shave Club deliver razors and personal grooming products to your doorstep every month for a small recurring fee. Their most expensive razor blade costs you $9 per month. If you use their service for a year, Dollar Shave Club gets a recurring revenue worth $108 for a single customer for the year.
Customer relationships: transactional vs. long-term
In a traditional business model, customers are not considered to be permanent. Once you sell a product or service to a customer, you move on to sell to the next one. The relationship you have with your customer in a traditional business model is purely transactional — once the sale is made, the relationship ends.
Subscription businesses typically focus on building a long-term relationship with their customers. This is because their aim is to provide a product or a service on an on-going basis: a sale that never ends. Subscription businesses look at building trust and loyalty, which results in greater customer retention, which translates into a steady cash flow and a stable future.
New vs. existing customers
The primary goal of every business is to make money. To achieve this goal, businesses often tend to focus on acquiring new customers. Traditional businesses tend to spend more on marketing campaigns and ads to attract new customers than on efforts to retain existing ones.
Subscription businesses have realized that there is a higher chance of selling to an existing customers because their trust is already established. According to Tamara McCleary, an expert in business relationships,existing customers spend 31% more than new customers and are 50% more likely to try a new product. That makes it much easier to cross-sell or up-sell services and increase your cash flow, which means spending less to reach your annual sales target.
Why the subscription model works better
Many companies are switching to the subscription model because of its obvious benefits. In addition to helping businesses achieve stable revenue, it also helps them cater to the evolving buying habits of consumers. Customers today are more likely to subscribe to a service if it’s tailored to their needs, and they prefer to pay only for the amount of product or services they consume. The subscription business model provides this experience.
The subscription business model creates a win-win situation for both the business owner and their customers. Here’s how.
For business owners
Predictable demand and revenue
Selling products or services to customers on a recurring basis lets you know exactly how much stock you will sell and how much you will need to order. You will also be able to forecast how much money you are going to make. This level of predictability not only gives your business stability and makes you feel financially secure, but also helps you plan for the future.
Automate selling and getting paid
In a traditional business model, if you are selling products, you need to source the materials, manufacture the final product (or purchase it from a vendor), and stock up. There is no guarantee that customers will buy your products. Even if you make a sale, in some cases, it might be days before you get paid.
Typically, subscription businesses charge their customers an upfront fee. These businesses can forecast demand, so they can purchase the stock accordingly, and deliver it to the customers in predictable installments. So every month the business owners exactly know how many products they are selling and they can rest assured that they will get paid automatically.
More value for less price
For customers, subscription services offer a lot more value than individual purchases. The customer pays a small fee on a recurring basis rather than make a more expensive one-time purchase. Subscription services also offer more value in terms of convenience. Instead of going through the pain of reordering, the customer gets their products automatically delivered to them on a regular basis. This makes their purchase decision easier.
Let’s take the example of a beauty box subscription. Luxury-brand cosmetic and beauty products are expensive. You need to be absolutely sure that the products suit your skin type before you purchase them; it’s a gamble to buy them when you have no way of knowing whether they are right for you. With a beauty box subscription, you pay a small recurring fee and you can get samples of beauty products delivered to your door. You can try the products before you purchase them. This allows you to be confident that you are buying the right products.
Assurance of great service
Since subscription businesses rely on their existing customers for stable source of revenue, business owners need to keep them happy. Bad customer service can cost them their long-term income and their only source of financial stability. A good subscription business owner will listen to their customers, offer tailor-made services for their needs, and build a trustworthy, long-term relationship with their customers.
The subscription business model is here to stay.
Traditional businesses are shifting to the subscription model because it is more predictable and stable than the individual-sale model. It lowers companies’ risk of uncertainty when it comes to their business performance and revenue.
One of the biggest advantages of the subscription model is that no matter what type of business you are running, you can always find ways to offer subscription services. You can either entirely transform your business to suit this model or offer additional services on a subscription basis. Let’s take an example of a fruit shop that follows a one-time sale business model. The owner constantly has to look for ways to make a sale. Since it is hard to predict demand for fruit at any given point, there is always the chance that the owner will end up with rotting inventory and no revenue. Frrutto.com, an online fruit shop, offers delivery of different fruit packages on a subscription basis. Based on the number of orders they get each month, Frrutto is able to plan their inventory in advance and ensure that there is little or no wastage. They can also enjoy predictable revenue, instead of having to worry about creating new demand every month.
Switching to the subscription business model might seem as tedious as starting a new business. However, with a little bit of creativity and planning, you can think of innovative ways to provide subscription services, and unlock a whole new source of steady revenue for your business. Once you figure out how to make the model work for you, it pays off in the form of financial security and peace of mind.