From Netflix's reimagining of DVD rentals in the early 2000s (and their subsequent evolution into streaming and original content), to Spotify's transformation of the notoriously volatile music industry, subscription-based business models have been one of the innovations of the century so far.
However, developments in delivery have now enhanced the concept and made it more widespread, with implementations across a variety of industries. As a reliable form of cash flow for organisations that operate in this way, it offers numerous advantages over other models, and is soaring in popularity.
But how does it work? And is it the right model for your startup?
What is a Subscription-Based Business Model?
Built upon the concept of receiving a product or service for a set monthly (or annual) fee, the subscription-based model is nothing new; magazines and newspapers have relied upon it for decades, after all.
A flexible model, it has been adopted in numerous sectors, including:
- Retail – Companies such as StichFix, Birchbox and Dollar Shave Club send themed boxes of retail products based on customer preferences.
- Media – Spotify and Netflix deliver content curated on what customers want to experience. These models have since spurred changes for legacy businesses, such as Disney, Apple and Amazon, who are now offering their own subscription services.
- Software – Tools such as Adobe Photoshop and the Microsoft Office suite are now offered as subscription-based services, as opposed to selling a single license for each product.
- Services – Cloud computing, data storage and cybersecurity firms offer their services within a subscription-based payment structure to ensure ongoing coverage for customers.
Yet while this diverse expansion across industries illustrates the model's value in the current landscape, how do you know if it is the right one for your organisation?
To give you a clearer idea, we've taken a look at some of the key pros and cons of a subscription-based revenue model:
Pro: It Offers Predictable Business Flow
One of the main selling points of this model is that it establishes a regular and reliable source of income for your company. With customers signed up for recurring payments as often as once a month, you can count on a steady cash flow, which is vital for forecasting income and making better business decisions.
This is particularly important for small and new businesses, as regular cash income is something that many entrepreneurs struggle to establish. By implementing a subscription service, you immediately overcome the initial hurdle of finding repeat business and creating a stable economic floor for your company.
A constant and renewable source of income isn't the only positive that comes with predictable business, either: you can develop better relationships with your customers as you interact with them on a more regular basis. This builds trust and loyalty, and allows you to implement other customer-focused initiatives, such as reward schemes and programmes, thereby further solidifying your customer base.
Depending on your industry, there are also logistical benefits to operating a subscription service. You can better predict how many products you will be shipping (and the exact dates you will be sending them), enabling your inventory and staffing needs to be more efficiently managed. The more you know about what your business will be doing in both the short and the long term, the more you can do to be ready for it.
Con: There Are Cancellation and Cost Risks
Of course, on the flip side, the biggest risk of a subscription model is what is known as churn: the percentage of subscribers who will cancel their subscription within a given period. No matter how well-structured your service is, there will always be customers who decide to leave, for a whole variety of reasons beyond your control.
How well your company can manage this churn is key to how successful a membership-based revenue model will be for your business. Therefore, when you are considering a subscription service for your company's products or services, you should consider the following questions:
- Is your company's product a necessity or a luxury? Clients are more likely to be dedicated to a subscription fee if they need the product.
- Are you making continuous improvements to the product? If customers do not see any increased value in the service, then they may start to look elsewhere.
- Is the product reasonably priced? One of the appeals of a subscription service is a low point of entry for the customer, which is eventually recovered as fees continue. From the customer's point of view, do these costs equal the perceived value of the product?
- Does your product continue to hook the customer? You may have acquired a subscription customer with a great offer, but are you maintaining their interest? If not, the customer may get bored with the service and unsubscribe.
Make an honest assessment of the product or service that your company provides before you launch a subscription service. If you are unable to provide convincing answers to these questions, then it may not be the right choice for a membership-based model.
Pro: It Allows for Strategic Flexibility
Having a dependable customer base that is committed to a subscription means that you can utilise greater flexibility in how you deliver your products. When committing to regular deliveries, you now have a chance to develop better solutions for your customers, increasing the value that they see in the service and making it more attractive to new clients.
For example, if your business provides software as a service, you can continuously unveil and deliver upgrades and features in order to improve and stabilise the existing product. This is a massive improvement on the software industry's traditional model of providing entirely new software versions every 12 months – both for your consumers and your developers. It allows your company to implement new features inside the subscription instead of risking the release of a disappointing full-priced version that erodes customer trust.
Your company will also gain flexibility in how it budgets for customer acquisition. Specifically, a membership-based model will let you increase your budget for attracting new clients and reduce it for customer retention. After all, your current customers can be counted upon as a revenue stream as long as your company continues to provide a high-quality service. You can then focus resources on finding new customers instead, increasing your revenue and allowing you to improve your product.
Con: It Is Susceptible to Interruptions
Another aspect to consider before launching is that subscription-based services depend on regular, uninterrupted fulfilment. In most businesses, if there is a vendor issue or an inventory problem, then you can simply stop selling a product or postpone service until the issue is resolved. However, if a subscription goes unfulfilled, then it can have significant consequences.
As a result, you need to make sure that your business can manage the scope of delivery that a subscription service entails. If your entire revenue is dependent upon delivery and you suffer a major service interruption, then it could mean a widespread loss of customers and potentially even the end of your company.
Another issue that many subscription-based services run into is what is known as contract nerves. People can often feel pressured by the length of a contract, causing a barrier to subscription sign-ups. If you fail to meet the agreements of the subscription laid forth in that contract, it may not just result in an unsatisfied customer – there could be legal implications, too.
Of course, if you have the correct level of infrastructure in place, and a product that can is suitable for this type of business model, then a subscription-based service is an excellent – and popular – choice. However, it is not the only one that exists: you can even change between models as your business grows or evolves in a specific direction. The key is to identify and understand your options and conduct a thorough level of market research before you launch, and be honest about whether your product has the potential to diversify and keep people interested in the long term.
What do you think? Are subscription-based models the way forward in today's digital world? Let us know your views in the comment section below!