By now, most people are familiar with having a subscription service of some kind. Many of us have multiple subscriptions both digital and physical that allow us access to a product or service. In fact, 86% of Americans say that they are paying for at least one subscription service.
It is no wonder that many businesses are adding this pricing model as an option for their customers. Gartner reports that 75% of the organizations selling directly to consumers are projected to offer subscription services by 2023. This is because the subscription business model is one of the most effective business models for businesses that want to retain customers, deepen their customer relationships, and create some recurring revenue.
While this business model doesn’t work with all types of businesses, many would benefit in some way by utilizing this model. Previously, we wrote about why some subscription model businesses fail. Now, in this article, we’ll take a look at why the subscription business model works.
What is a Subscription Business Model?
The subscription business model is a modern strategy wherein customers commit to paying a recurring fee for a product or service. This fee is typically monthly or annually. This is done instead of making a one-time purchase to have access to the same product or service.
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
Many subscription-based models empower consumers with the choice to modify or cancel their plans. Businesses have used this flexible option to attract and retain customers. This is important since, for companies offering a subscription model, retention is pivotal.
Predictable Revenue Streams
Predictable revenue streams are important to a business’s stability and growth. While this is especially true for startups, established businesses also benefit from this luxury. This element of the subscription business model offers an advantage where companies can anticipate the revenue that will be generated in a specific timeframe.
This makes it much easier to plan budgets. It also makes it easier to allocate resources. If a company can look ahead and know what their cash flow will be for the next 3 months, they can decide what the best use of that money will be.
This could be in the form of research and development, infrastructure enhancement, or customer service improvement. This financial stability also gives investors confidence. That’s because the business appears less susceptible to market fluctuations.
Deepening Customer Relationships
The subscription business model is more than just a transactional approach; it fosters deeper, ongoing relationships between businesses and their customers. Instead of a one-off transaction, businesses and customers engage in an ongoing dialogue. This creates a relationship where both parties benefit from sustained engagement. This consistent interaction can deepen the relationship if done correctly.
By emphasizing recurring interactions instead of isolated sales, the business stays connected. Each subscription cycle presents businesses with an opportunity to connect. A subscription model should use this opportunity to understand their customers better and gather feedback. Then, they should use that feedback to make their product or service better for each regular subscriber.
Another way the subscription model deepens relationships is by offering perks to subscribers. The perks can be things like loyalty programs or exclusive offers. For platforms that produce content, they can give certain subscribers access to exclusive or personalized content.
These kinds of relationship-building activities are harder to do with some non-subscription business models. A business utilizing the subscription model should take full advantage of this opportunity in order to create a stronger bond between the business and the customers.
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.
The subscription business model inherently caters to modern consumers’ craving for convenience. At its core, the model streamlines the acquisition process: once subscribed, customers are relieved from the repetitive act of making purchasing decisions for products or services they regularly consume. Instead of manual repurchases, the product is delivered or made accessible routinely.
For digital services like streaming platforms or software suites, this means uninterrupted access to content or tools. For physical goods, it ensures timely deliveries right to one’s doorstep. This consistent and reliable delivery mechanism makes life for the customer much easier. It is hard for a convenience-focused customer to say no to this.
Many subscription-model businesses are flexible with their offers. For customers, it is easy to upgrade, downgrade, or pause services. All usually with a push of a button.
Scalability and Flexibility
The scalability and flexibility inherent to the subscription business model serve as vital ingredients for sustained growth and resilience. Scalability means the ability of a business to expand its operations and customer base without a proportional increase in costs. The subscription model definitely offers this advantage. Their services can be expanded seamlessly to accommodate a larger audience. Usually, easily going beyond geographical boundaries.
Flexibility, on the other hand, refers to the capacity to adapt and modify for changing market dynamics and customer preferences. Subscription-based businesses can quickly pivot their strategies. This could be in its pricing, features, or service tiers. This allows them to respond adeptly to customer feedback or market trends.
This flexibility can also allow for experimental approaches. Companies using this model can easily test new features or services within a subset of their audiences. All without committing to a full-fledged launch.
Leveraging Data for Personalization
A powerful tool to elevate the customer experience is through personalization. Leveraging data analytics, companies can dissect various facets of customer behavior. It can also identify preferences and needs. This process allows for the customization of products, services, and communications to suit individual customer profiles.
Also, data can be utilized to predict future trends and preferences. This helps companies to stay ahead of the curve. This is done by offering what the customers need even before they realize it themselves. Personalization can transform the customer journey. Especially, when it is backed by data.
Data-driven personalization can create a connection that feels personal and unique. However, data should never make a customer feel like they’ve been violated or as if the business is intruding. The data should only be used to help the customer feel more at home using the services
Not Perfect But Really Good
Although all of these things may make it sound like the subscription model is the perfect strategy for a business, it is not without its downside. For one, businesses must work tirelessly to maintain the quality of their services. If customers see a drop in quality, they are likely to unsubscribe quickly. Subscription fatigue is when customers get tired of accumulating subscriptions, especially ones they are not using, no longer find valuable, or think are too costly.
Recently, the TV and movie streaming industry has seen signs of possible streaming fatigue. The percentage of consumers subscribing to at least one subscription video on demand (SVOD) service dropped to 82% in 2023 from 89% in 2022. Meanwhile, the percentage of respondents getting two or more of the top five SVOD services dropped to 61% this year from 71% last year. Those getting three or more of the services fell to 43% from 50%.
The cause of this slight drop is not clear. However, it could be due to an increase in prices. According to a Digital Media Trends survey, about half of respondents said they “pay too much” for SVOD services.
The ease of customers being able to leave at any time makes this a downside for businesses wanting to use this model. The key will be to understand the customer’s needs and try to align your service with their needs at a price they think is fair.
The subscription business model has proven to be a potent tool for fostering business growth and sustaining a loyal customer base. The combination of convenience, personalization, and continuous engagement makes the subscription model a win-win proposition for both businesses and consumers. Entrepreneurs considering this model must be thorough with their research and need to understand their customers well enough to know if this model will work.