You can now buy a subscription for everything from dog treats to razor blades. Music subscription services are booming as our appetite to buy tracks is replaced by our willingness to rent access to them. Starbucks now even offers coffee on subscription.
Why are so many companies leveraging the subscription business model? The obvious reason is that recurring revenue boosts your company’s value, but there are some hidden benefits to augmenting your business with a subscription offering.
Table of Contents
- Instant Customer Feedback
- Improved Cash Flow
- Brand Loyalty
- Different Types of Subscription Models to Consider
- The Network Model
- The Surprise Box Model
- The All-You-Can-Eat Library Model
- The Private Club Model
- The Front-of-the-Line Subscription Model
- The Membership Website Model
- The Simplifier Model
- The Consumables Model
- The Peace of Mind Model
Instant Customer Feedback
Market research can be very expensive. By the time you pay attendees, rent a room with a one-way mirror and buy the little sandwiches with the crusts cut off, a focus group can cost you upwards of $6,000. A statistically significant piece of quantitative research, done by a reputable polling company, might approach six figures.
With a subscription company, you get instant consumer feedback for free. Netflix knows which shows to produce based on the viewing behavior of its subscribers. No need to ask viewers what they like, Netflix can see what they watch and rate.
For a business owner, a subscription offering can allow you to test new ideas and with real-time customer interaction, you can see what your customers like first hand.
Improved Cash Flow
Many subscription companies charge by the month and then have to wait months—sometimes years—to recover the costs of winning a subscriber.
But if you change up that model a bit, sell your subscription for a year’s worth of business up front, you’ve got instant cash flow. That’s what the analyst firm Gartner does, and it means they get an entire year’s worth of cash from their subscriber on day one. Costco charges its annual membership up front, which means it has billions of dollars of subscription revenue to float its retail operations.
With so many social platforms enticing consumers with so many options, customers can be promiscuous. You may have a perfectly satisfied customer but if they see an offer from one of your competitors, they might jump ship to save a few bucks. However, if you lock your customers into a subscription, they may be less tempted to try a competitor since they have already made an investment with you.
One of the reasons Amazon Prime is so profitable is that Prime subscribers buy more and are stickier than non-Prime subscribers. Prime subscribers want to get their money’s worth, so they buy a wider swath of products from Amazon and are less tempted by competitive offers.
The obvious reason to launch a subscription offering of your own is that the predictable recurring revenue will boost the value of your company. And while that’s certainly true, the hidden benefits may even be more important.
Let’s take a look at some effective subscription models as detailed by Value Builder that you can leverage to help your business:
Different Types of Subscription Models to Consider
The Network Model
With a network model subscription, the value of the service offered is directly proportional to the number of users, allowing for businesses to offer incentives for users to recruit more subscribers of their own volition.
An example of this would be a communication platform like WhatsApp. Without a wide network of users, the platform has limited use. However, if every one of a customer’s contacts is using it, it’s a practical and useful method to communicate.
This is an excellent model for businesses whose customers are tech savvy and being connected socially is a motivating factor.
One key consideration is the experience your product provides. Your product must be considerably and distinctively better than the alternative, otherwise consumers will not be compelled to share and grow the network.
The Surprise Box Model
This subscription model most benefits companies who sell physical retail products. If you’ve established a good reputation with your line of products and feel confident that customers are passionate about them, this is a creative method to encourage and cultivate further consumer buy-in.
With this model, your company would create a specially curated package of products on a recurring basis. For example, if your company sells soap, you could offer the latest scents with each shipment and expand to offer candles as part of a “bubble bath” package. The degree to which these packages can be customized has no limitation and the types of products and services offered can be expanded by leveraging partnerships with similar products.
The surprise box model is a way to keep your latest offerings at the forefront and give customers a sense of excitement. Rather than being a mundane recurring expense, it is instead a periodic surprise, more akin to receiving a present than paying for goods.
The All-You-Can-Eat Library Model
This subscription model is primarily used by businesses who provide digital services. With the all-you-can-eat library model, businesses offer a subscription to a vast library of content as opposed to more nuanced, curated products and services as seen in other models.
Industry titans that leverage this model include Netflix, Hulu, Spotify, Apple Music, and the myriad other digital media subscription services that offer streaming for film, television, music, and literature.
This model is effective for consumers looking for variety. That said, it’s critical that there is a substantial degree of “evergreen” content (content that will always remain relevant or useful) as well as the implementation of new content over time.
The Private Club Model
This model appeals to a customer’s desire for exclusivity. If you have products, services, or offer an experience that is limited in terms of its availability, this model can prove highly effective.
The private club model appeals to highly affluent customers seeking out opportunities that are unique and not widely available. Examples could include art that is limited to a certain number of prints of reproductions, annual retreats for thought-leaders in an industry of choice, or membership to professional sports clubs.
According to Value Builder (2017), the most effective means to make this model work is by forcing your customer to make a decision: if they want access, they have to commit long-term.
The Front-of-the-Line Subscription Model
This model involves offering tiered membership opportunities. A common example would be ad-free subscriptions to media streaming services for a higher price. With this model, an increased pricing plan would come with additional perks.
This model is highly effective in boosting revenue of your subscriptions as customers recognize their need for top-of-the-line service that goes beyond the basic subscription package offered.
Additionally, once customers have experienced the higher level of service and support, whether through a complementary free trial or reduced “new subscriber” cost, they are more inclined to retain the premium subscription at the higher price point.
The Membership Website Model
This model is effective for niche or specialized products and services. If what your business offers is unique, the membership website model can be an effective way to establish yourself as the de facto resource for quality information and content.
Value Builder (2017) cites The Wood Whisperer Guild as being an effective example of this. The founder offers an annual subscription price for access to the website, which includes the sharing of highly specialized and specific knowledge for woodworking.
The membership website model is highly effective in business-to-business transactions that involve solving critical problems and offering “must-have” information.
The Simplifier Model
With the simplifier model, a business is able to set a recurring subscription for services, thus eliminating the need to consistently re-up on existing customers. This model allows for an automatic transaction on a regular basis and eliminates the need for the company to reach out to past customers and remind them to renew. It also allows customers to know that their need for whichever product or service they are subscribed to will continue, uninterrupted.
The Consumables Model
With this subscription model, the business provides a recurring replenishment of disposable products and/or services. The main appeal of this model for consumers is in replenishing products or services that might not always be on their mind such as razor blades, diapers, dog food, and printer ink.
The consumables model allows for your company to provide products and services to consumers who experience no inherent joy or positive emotion in having to shop for these items.
In providing this recurring service, your company is able to eliminate the need for the consumer to expend effort in shopping for what ultimately amounts to a necessary annoyance.
The Peace of Mind Model
Lastly, the peace of mind model offers insurance on your products or services. Depending on what kind of products or services your company sells, there might not be a recurring need to purchase.
For example, if your company sells major appliances, it is unlikely that the customer will need to replace it any time soon pending an accident or disaster.
With this model, things like warranties and protection plans can alleviate the consumer’s concern that they wouldn’t be able to afford a replacement in the event of unforeseen catastrophe.
As you can see, there are numerous options for implementing the recurring revenue model of a subscription service. Depending on both the needs and offerings of your business, there is no shortage of opportunity to establish an ongoing relationship with your customers through one of these tried and true methods.
Whether it’s in offering something highly specialized or simply providing customers with a robust library of content, each variant of the subscription model has its own unique benefits.
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