As Internet access becomes a more and more indispensible commodity, new ways of doing business have also emerged. As a society, we’ve experienced ecommerce boom and on-the-go shopping with mobile apps. As Internet usage grows, it’s logical to think that the focus of online businesses would be on increasing the volume of transactions proportional to the number of online shoppers. However, the exact opposite seems to be unfolding: innovative businesses are leaning more towards fewer transactions.
It seems counter-intuitive, yet it makes perfect sense. By abandoning the traditional retail model and shifting towards a subscription-based system, companies are reaping benefits that have not existed in the past. Pioneers such as Netflx, the Dollar Shave Club, Salesforce and Menguin have all captured large chunks of their markets en route to exponential valuation.
What is the Subscription Business Model?
The subscription model is hardly a new concept. At its core, the model is about having people commit to pre-buying products which will be released or accessed periodically. It makes sense to the buyer due to the elimination of hassles and the lower cost of subscription compared to the accumulation of single purchases. To the seller, the model works because of the certainty of multiple purchases over a period of time.
The subscription concept was born when newspaper and magazine publishers realized that people would rather have their periodicals delivered regularly instead of going to the newsstand each time a new issue comes out. The publishers, on the other hand, received guaranteed sales that allowed them to show advertisers greater circulation numbers. These days, the print industry may have fallen to hard times, but the subscription business model is resurgent in online product, software and even service sectors.
Why the Subscription Model Works for a Lot of Companies
If you’re thinking of starting a new business or if you’re considering a shift in business model, consider the following points when making the case for a subscription-based setup:
- Convenience – Customer focus is an integral part of today’s business climate. Consumers want as little hassle as possible when dealing with you, so make sure to think of their convenience in every step of your sales process. Having a website with a user-friendly interface is great and it’s even better if you have a helpful customer support team that responds quickly. You can complete the convenience package by offering your product or service as a subscription so they don’t have to keep ordering from your website or app.
This way, the customer gets what he or she wants on time while you get paid promptly. This eases some burdens from your billing and sales departments, allowing them to turn their attention to other more productive tasks.
- Better pricing – Since a subscription is a commitment to multiple purchases over time, the seller gets some guarantees as to how much revenue will be generated. As you may know, the longer a buyer-seller relationship lasts and the more transactions occur, the greater the overall profits are for the business.
This concept is known as customer lifetime value (CLV) and it allows us to quantify the value of a business relationship. Since CLV grants the seller better insights and greater certainty on overall profitability, the business gains more flexible with pricing. This ultimately translates into discounts for subscribers that just aren’t possible through independent transactions.
- More accurate sales forecasts – A subscription-based business is easier to forecast sales and revenue for due to the fixed engagement lengths and revenue that each customer carries. This makes sales and income forecasting easier to put together and more accurate. Proper business forecasts guide management on making critical business decisions that can make or break a company.
- Higher business valuation – Companies with subscription-based business models tend to be valued higher than their retail and retainer counterparts by as much as 800%. This is because investors feel more secure about the added certainty of having customers subscribe and commit instead of leaving things to chance.
- Better Customer Loyalty – The phases of a customer’s lifecycle is built in and spelled out when he or she subscribes to your product or service. This eliminates guesswork as to what frame of mind a customer is in at a particular point. This helps you intervene and provide support at just the right time, translating into higher levels of customer satisfaction.
Satisfied customers are more difficult to pry away from you by competitors. Once a subscription is confirmed and your company is able to nurture the relationship, it would take months or years for your competition to even attempt a heist of your valuable clients.
Having said all of that, not all businesses are a great fit for the subscription model. Products or services that involve large investments and barely any repeat purchases over long periods of time are particularly incompatible. Bottom line: make sure that whatever business model you choose, it’s the one that serves the best interest of your target market.