The subscription model is the latest trend covering almost all industries and markets from Retail and Media to Transport, Tech and Finance. As a business model it’s been around for over 100 years and is probably best known from the Media sector where having your newspaper delivered everyday is a good example.
Does this model really work?
There are many reasons why this model works for some, while others struggle with the idea. And from a business perspective this model makes a lot of sense.
The subscription model turns customers into subscribers for recurring revenue. Digital consumers are much more informed – and many favour access over ownership. The business focus is on gathering insights based on usage data, finding out what customers want and then delivering it as an intuitive service.
Companies using this model replace assumptions and persuasion with accurate insights and actual behaviour. The great benefit of subscription models is the data gathering which helps to identify user behaviours and allows the development of products accordingly. Cash flow becomes less of an issue or dependent on make-or-break promotional sales.
Customers become partners
Customers are seen as partners in an ongoing, mutually beneficial relationship and, in a good subscription model, it should even be easy for customers to leave when they want, rather than tricking and tripping them up.
Many companies provide both types of models at the same time. Think about Apple with it’s music players and music subscription service. But we don’t need to look that high. Most companies offer support services for their products on a subscription basis.
Let’s take the example of Fender, a well known guitar manufacturer. Fender observed that 90 percent of its customers quit playing the guitar within a year; it launched the Fender Tune app and its Play service to gather data on how customers are using the instrument. The company added a new subscription model based on helping customers become guitar players and music lovers for life.
What about the risk?
Streaming companies like Netflix and Amazon Prime can avoid relying on the risky sink-or-swim blockbuster experiments of earlier companies and take calculated risks on smaller, edgier projects. Success comes from driving down subscriber acquisition costs and increasing lifetime value. Companies like Apple could even offer “Apple as a Service,” with guaranteed phone upgrade and access to content for a monthly subscription fee.
Probably one of the largest companies who made the switch to a subscription model is Adobe. It completely replaced the buy-a-product model with rent-a-product model and it seems that it worked really well.
Creating a new customer segment
Because of the lower price point based on a monthly fee, new markets opened up. Now, consumers who couldn’t afford the high prices of the one-off product are now in the game – and with the option to cancel the subscription at any time, the risk for the consumer is reduced as well.
This all sounds great, but it comes with some major obstacles. Companies moving to this model have to move from annual to monthly (even daily) updates, set-up billing systems for larger volumes of subscribers, and implement new sales commission structures. This isn’t easy to do, especially if you have a well implemented structure in place.
Is it worth the change?
I guess this depends on your business and market. The subscription model doesn’t work for everyone and requires a lot of changes in your business processes. But I do believe that most markets can use the subscription model either for their main products or for supporting products and services.
In terms of innovation the subscription model is a big step forward. Consumers become beta-testers for the latest products and services while paying for a subscription. Implementing real agile development and reducing expensive gambles is clearly an advantage. Marketing teams suddenly have a one-on-one relationship with their customers, while sales teams can up and cross sell like never before.
The subscription model creates a never-ending product with customers as innovation partners. Productivity and inspiration are now continuous without the dreaded peaks and troughs.
Market Research is part of the subscription model which creates a direct connection to the consumer. No more need for focus groups, phone surveys or “hoping for the best” for getting a good product that sells.
Would I recommend it?
Yes, I would. But it is important to understand the impact this will have on your business and your customers. For most, a slow approach might be the best. Pick the products and services that can be converted most easily and invite your customer to make the change over a period of time.
I remember when 1Password moved from being a one-off software product to becoming a subscription product. At first I did not like the idea. Change is difficult, not just for you but for your consumers as well. It has to be clear what the advantages are and you will need a very good marketing strategy along with the change.
What I would do?
The subscription model is very well known today and as I mentioned prevalent everywhere. You will not stand out from the crowd, but join an ever growing movement. There is nothing wrong with that, but it is hardly innovative.
I would ask myself if there is not a better way, something more exciting. As always for me, it starts with my customers and clients. What is it they want and need and what would help them most to get it? It doesn’t mean that the subscription model for me wouldn’t work. I would wonder if I could tweak it to work better for my customers while standing out from the rest.
There are many other business models out there and I will write about them in the near future. So why don’t you subscribe to our blogs and get them straight to your inbox. You will never miss the latest and who knows, the next blog might just be about the one thing your business needs.