It’s no secret subscription services are more popular than ever. In fact, the average consumer spends an average of $111.61 a month on subscriptions. I know I can speak from experience, as I pay $140 a month on subscriptions. Besides being popular, why are subscription models beneficial for the average company?
In a typical transaction, a customer pays for a product or service once and then you’ll likely have to sell them on another product in order to make more profit of them. However, with a subscription model, you create what’s called monthly recurring revenue, which is predictable revenue the company expects on a monthly basis. You could see the difference between non-recurring revenue vs. monthly recurring revenue (MRR) in these charts from Price Intelligently.
In theory, the subscription model sounds great, however, it does come with its drawbacks. For example, Adobe used to have a $1,000 price tag attached to their software. For designers, it was almost necessary to buy the program and they would often wait a while to upgrade, if at all. Adobe then switched to a subscription model where they then charged $9.99 for Photoshop per month, which is significantly smaller than the $1,000 price tag. Essentially, you’d have to have one customer pay $9.99 a month for eight years for you to gain $1,000 from them. So how is this viable? Simple, it’s all about quantity. Adobe reduced the barrier for entry for individuals to “buy” Photoshop, which in turn gained them more customers. This was very risky for Adobe, but it turned out to be fruitful for them in the end.
Another drawback is the cost to acquire and retain customers. Since you have to gain more customer, you, therefore, have to spend to gain them. Whether it’s taking a hit on offering a freemium model, or some serious target marketing work, you are paying to gain the customer. As for retention, customer service is the name of the game and that costs. So, paying to have an ample customer support team and invest in updating the software to fit customers shifting needs. However, this cost still will not trump how much it costs to win-back a customer.
So how can a company introduce a subscription model?
First, decide what type of subscription model you want to put in place. Are you selling a physical product? Then try going for a subscription box service. Are you looking to teach HIIT classes from home? Then look into a streaming service model. This article by Unscreen goes in-depth into five types of subscription services that anyone could use.
Second, calculate the costs it would take to successfully run your subscription model and think about how you could scale it later. It’s better to consider growth and scaling during the early planning stages than when it’s later and manufacturers and programs have to be switched entirely because it cannot handle the growth.
Third, and probably most important, study the customers and their price sensitivity through surveys, cost-sensitivity analysis, a/b testing, trials, and other testing methods. You could charge as much as you want, but unless customers see the value in your subscription service, they will not pay – no matter the cost.
So before you hop on the subscription train, I implore you to think if your business will be viable using this method, and how a subscription would not only add to your business, but to your customer’s livelihood. Businesses, after all, should be customer-centric first, because those are the main stakeholders of our businesses.
Feel free to check out more posts on subscription models here.