According to a report by McKinsey & Company, the global subscription industry is expected to reach $2 trillion by 2025. This is an astronomical number but shouldn’t be much of a surprise since 86% of Americans say that they are paying for at least one subscription service.
This trend in subscription services and usage by the public has changed the way many businesses operate. No longer are major companies looking to make one-time sales. Instead, they are wanting to have an ongoing relationship with their customers. Now, even small businesses are looking for a way to take advantage of the subscription trend. But how does this business model work and why is it continuing to dominate commerce. In this article we’ll look at the subscription model, some examples, as well as a few advantages and disadvantage.
What is the Subscription Business Model?
The subscription business model is a strategy where customers pay a recurring price at regular intervals to access a product or service. Unlike traditional one-time purchase models, subscriptions focus on the provision of ongoing value, fostering a long-term relationship between the business and the customer. This model is built on the premise of convenience, customization, and continuity.
This model originated with newspapers and magazines. Now, it permeates various industries, from software applications to streaming services. It also now has spread even to tangible goods like those offered by Dollar Shave Club or Blue Apron. These companies offer subscription boxes that are physically delivered to homes.
Before the boom of subscription services, customers sought to own their products. For example, people valued the ability to buy their favorite artist’s CD or buy a DVD of their favorite movie. These days, buying music is becoming more difficult as many people have access to millions of songs via YouTube Music, Apple Music, and Spotify, just to name a few.
While there are still many people who would prefer to own their media, the general public seems to be enjoying the ability to access instead of own. One survey found 58% of adults said they never buy music albums
This approach often requires businesses to invest heavily in customer service, product quality, and user experience. The goal is to create a compelling value proposition that encourages customers to continue their subscription rather than making a one-time purchase.
Examples of the Subscription Business Model
The subscription business model has been adopted in numerous sectors, showcasing its versatility and effectiveness. Here are a few examples:
- Streaming Services: Companies like Netflix, Spotify, and Hulu have revolutionized the entertainment industry with their subscription-based streaming services. Customers pay a monthly fee to access a vast library of movies, TV shows, and music.
- Software as a Service (SaaS): Known as Software as a Service (SaaS), companies allow users to access, rather than own, software through a subscription. Companies like Adobe and Microsoft have shifted to this model.
- Meal Kit and Grocery Delivery Services: There are many types of subscription food services including Blue Apron and HelloFresh meal kits which deliver pre-portioned ingredients and recipes to customers’ doors.
- Beauty and Lifestyle Boxes: Subscription boxes like Birchbox and FabFitFun, provide a curated selection of beauty, wellness, and lifestyle products delivered periodically.
- Fitness and Wellness: Platforms like Peloton and Calm have introduced subscription models to the fitness industry. Now, customers can access to workout classes, meditation sessions, and other wellness content through apps or websites.
- Clothing and Fashion: Companies like Rent the Runway and Stitch Fix allow customers to rent clothing items or receive personalized fashion selections regularly. This introduced a new business model to the fashion industry.
Advantages of the Subscription Business Model
Reduced Barriers to Purchase
Customers are more likely to sign up for a subscription if they already use your product or service if your business is using the freemium business model. This is when a business offers a product or service for free but give customers to sign up for additional features or services for a fee.
Users can choose to pay a monthly fee for subscription-based businesses and receive the product at no additional cost or for a yearly fee (which usually has a discount). This model is budget friendly because it removes the need for users to make significant investments.
Predictable and Stable Revenue Stream
One of the most significant advantages of the subscription model is the predictable revenue it generates. Businesses can forecast their income with greater accuracy. This makes it easier to create financial plans and also can create some stability for the business.
This predictability is a marked contrast to traditional sales models where income can be erratic and seasonal. For example, a company like Netflix benefits from knowing its monthly subscription income, enabling it to budget for content acquisition and production effectively.
Convenience for the Customer
Convenience is one of the major advantages for the customer. In fact, it is one of the main reasons why many people decide to subscribe to services. One study found that 81% of subscribers stated that convenience was an important reason to enroll with a subscription service. This perk for the customer often leads to better relationhip with the buiness.
The subscription model fosters ongoing relationships with customers, as opposed to the one-off transactions of traditional models. This continuous engagement provides businesses with regular customer feedback and data, which can be used to improve services and customer satisfaction.
For instance, SaaS companies like Salesforce continually evolve their offerings based on user feedback. This ensures that customers always have access to the latest and most efficient features.
Scalability and Flexibility
Subscriptions offer scalability, as businesses can easily adjust their service or product offerings to cater to different market segments. Additionally, customers appreciate the flexibility of being able to upgrade, downgrade, or cancel their subscriptions according to their needs.
This adaptability is appealing in today’s fast-paced and ever-changing consumer environment. A prime example is Adobe’s Creative Cloud, which offers various subscription tiers, each with a different set of tools and features, catering to a wide range of professional and amateur creatives.
Disadvantages of the Subscription Business Model
While it is clear that this business model is an attractive one for businesses, there are some disadvantages to this type of business. Let’s look at a few of those now.
Challenges in Customer Acquisition and Retention
While the subscription model excels in customer retention, acquiring and keeping customers can be challenging and costly. The market is often saturated, and convincing customers to commit to a recurring payment requires significant marketing and an excellent value proposition. For instance, meal kit services like Blue Apron face high competition from newcomers. Because of this, they must continuously innovate and market aggressively to attract and retain subscribers.
Dependency on Continuous Innovation and Updates
To keep subscribers engaged and prevent churn, businesses must constantly update and innovate their offerings. This requirement for continual improvement and addition of new features or content can be resource-intensive and demanding. Streaming services like Spotify have to regularly update their music library and introduce new features to keep users interested and subscribed.
Complexity in Managing Subscription Logistics
Managing the logistics of a subscription-based business, like billing cycles, customer service, and user experience, can be complex and resource-intensive. Particularly for physical subscription services, like those offering monthly delivery of goods, logistics is a challenge.
They need to continue to manage issues with shipping, handling, and inventory management. This complexity requires an infrastructure and can lead to higher operational costs compared to traditional sales models.
While this model is not without its downsides, the subscription model is a great option for many types of businesses. Even already established industries are finding a way to utilize this model. Time will tell if there will come a time when a different business model emerges and the new king. But for now, the subscription model is currently reigning supreme.