Why your online business should adopt a Subscription Model
When we think of subscriptions, the first brands that come to mind are usually Netflix, Spotify, Disney+ or even the Dollar Shave Club. These brands have gotten so much traction that it can be tempting to jump in on the subscription model bandwagon.
But is it really as profitable as it sounds? We’re here to discuss the intricacies of this model and determine whether your business would benefit from using it or not.
In this guide, we’ll be listing the categories a brand can fall into when implementing this strategy, along with the pros and cons they come with.
So, is a subscription model right for your business? Before we can answer that, let’s take it back a few steps first.
What is a Subscription Model?
A business that uses a subscription-model service uses recurring payments as a way to charge consumers for using their products or services. These are usually charged in either monthly or yearly increments but some services can be fortnightly or even bi-annually.
Even though the most common type of subscriptions we know are software-related (think SaaS), it isn’t in any way limited to this type of business. In fact, virtually any niche from any industry can adopt this model. When it was first invented in the 17th century, business owners used it to gain recurring revenue for book, newspaper and magazine releases. Nowadays, almost every type of product or service has been procured using a subscription model.
A study by Stephanie Chevalier found that 30% of respondents (business owners worldwide) are considering changing from a transactional model to a subscription model. Combine this with those who already offer and those who plan to implement a subscription model, the numbers stack up to a massive 60%.
The 3 Types of Subscription Businesses
Before you start trying subscriptions, it’s best to know the different kinds you can utilise. Here are the 3 main types of subscription businesses.
Usually well-thought off and original, Curation is designed to attract consumers through bespoke packages. This type of subscription service is made to induce a sense of excitement because you don’t know exactly what you’re going to get. Kind of like receiving a gift, it surprises customers with unique content while still giving some insight on what’s going to be inside through themes.
The Curiosity Box by Vsauce for example provides subscribers with small educational trinkets every three months and has a specific theme for each. It targets audiences who love learning new things. They send packages with themes such as physics, puzzles, maths, experiments and much more.
This type of subscription model is for businesses that can provide their customers with personalised products. It’s less focused on large quantity supply management and more on building new sets of items on a routine basis.
The Curiosity Box by Vsauce
Providing consumers convenience. Replenishment is a type of subscription service where businesses make the lives of their customers just a little bit easier. This model is often used by brands that sell everyday necessities. By subscribing, individuals no longer have to worry about running out of these items and can instead rely solely on the brand that provides it to them on a recurring basis.
A popular example of a business who uses this type of subscription service is The Dollar Shave Club. By giving their customers dirt cheap, yet high quality razors, subscribers are assured that they will no longer be caught in frustrating situations such as needing to shave and not having any razors.
Choose this type if your business sells something that consumers can’t live without. The most common products in this category include coffee, vitamins, pet food, and skincare.
Image courtesy of the Dollar Shave Club
Mainly used by brands who provide a service (or services leading to products). In the modern age, we see this as access to certain digital media such as images, videos, or software to name a few. The Access type of subscription can be used to varying degrees, giving businesses the option to provide either all the services they offer in one recurring payment or by segmenting it into tiered packages. So a consumer would get a portion of the overall service, and the size of that portion would start small but then scale up, along with the price.
Netflix is a great example of this. They give their customers the choice of which platforms you can watch from (desktop & mobile), how many user profiles you can have, and the video quality.
Choose this type if you have a service-based business. Popular examples include Netflix, Spotify, Disney+, and Amazon Prime.
Image courtesy of Netflix
Each subscription type is designed to accommodate specific businesses. Choosing the right one is crucial to the success of the subscription model for your business. Here is a detailed graph of each aspect to consider when picking a category.
The Pros of a Subscription Model
1. Attractive Pricing
Who would have thought that you can cut down prices without losing revenue? This business model specifically makes your products and services more affordable to the consumer. This opens up your brand to a wider audience which will lead to higher chances of accumulating recurring customers.
Moreover, these customers will also have the freedom to “try” your products first before fully committing. It’s a good strategy for pulling in cold audiences and a great way to solidify your place in the market.
2. Predictable Revenue
Compared with a traditional transaction model, subscription lets you have more control with managing revenue. Yes, both can use brand loyalty to predict revenue, but the latter is more precise due to the fact that consumers have “signed up” for future purchases, as opposed to the former, where brand credibility and constant promotions are needed to attain consistent numbers.
While most subscription customers churn after 1-2 months, those who stay have a high chance of continuing for 4-6 months, and a low chance of remaining subscribed for under 2 years.
With this, we can deduce that the subscription model gives businesses more financial stability and room for scaling.
3. Easier Cross and Up-Selling
It’s much easier to offer other brand services and products to a customer who’s been enjoying your subscription service for 6 months rather than from a one-time payment. This is because it takes considerable effort for a business to maintain service quality for a long duration.
When a customer has no hiccups on a subscription-based business, their perceived trust and authority of the brand skyrockets and leads to easier up-selling.
The Cons of a Subscription Model
1. High Churn Rate
While we’ve mentioned that quality subscriptions with little to no hiccups make amazing pathways to easier upsells, poor performance can lead to high churn rate and heavy losses. A subscription-based model relies on recurring payments to mitigate low pricing. So when the desired quota isn’t met, it can force businesses to restructure their strategy entirely. To avoid this, most businesses tend to consider marketing automation services for better customer experience and growth planning.
2. Complex Processes
Subscription models are much more complex by nature compared with transactional ones. That’s why you won’t see many, if any, drop shipping businesses that have adopted this model.
3. Mistakes Deal Heavy Blows
When a transactional business makes a mistake, it can offer returns, repairs, or refunds. However, for a subscription-based business, it could spell disaster since you’ll have to consider the customer’s next delivery date. If the resolution comes too close to the next delivery or payment time, it becomes a problem that’s hard to compensate for. If for example, you offer a monthly subscription, it’s best to solve the issue at least 2 weeks before next month’s delivery.
The Subscription Model has been around for centuries and has adapted to the digital age with vast success. For some time now big brands such as Netflix, Dollar Shave Club, and Birchbox have been taking advantage of this model and enjoying its many benefits, some of which include easier customer acquisition, the ability to promote affordable pricing and much more.
The 3 types of subscription services are designed to meet the demands of various industries. They’ve been segregated to cater to the different needs of consumers, from personalisation, to convenience, to flexibility.
However, this model also comes with a cost. Since subscriptions rely on recurring payments, it’s crucial to maintain high-quality products and services in order to retain customers. Without proper management, a subscription-based brand can experience heavy losses.
To mitigate this, SMBs, SMEs, and Large corporations often all choose to partner with credible digital agencies. Not only do they prevent high churn, but also provide consistency since they are independent of the business’ workforce.
Contevo is Australia’s leading digital agency and has been helping brands achieve their business goals for the past 15 years. Since then, the agency has improved the digital performance of big brands including Disney AU, Goodyear Autocare AU, Swarovski and much more. All with affordable pricing and guaranteed results.