It was not too long ago when people considered that luxury goods were only for the rich. Owning a car was the only way for people to commute at any time, watching a movie was only restricted to the ones available on DVDs, buying a furniture would be for a lifetime, and the only way to wear a designer cloth would be to buy them. But fast forwarding to the present day scenario, you will see a drastic shift in the buyer’s persona.
With the growth in technology, while the availability of options increased, the willingness of the consumers to shell out huge amount upfront, reduced and the preference to rent out services or products and scaling it up based on requirements, started hogging the spotlight. Hence, the subscription business model, for today, becomes the right fit.
In an industry moving to Subscription Economy, we need a subscription business model that benefits the consumers and businesses alike.
The Growth of the Subscription Model:
The subscription business model has grown exponentially in recent years. Below chart indicates that the revenue growth for subscription companies have outstripped the global S&P 500 sales index. Between the year 2012 and 2017, the Subscription Economy Index registered an annual average growth rate of 17.5% in comparison with the S&P 500, which grew at 2.2%.
(Source – Zuora)
So, What is a Subscription Business Model?
Subscription business model is based on the idea of selling access to products or services and in-turn receive a recurring revenue. Here a single customer pays monthly payments to have access to products or services. The revenue is thus tied to retaining and keeping the customer happy throughout.
Customer is King
Subscription model relies on keeping the customers happy and gives them a lot of advantage:
- Pay a smaller on-going cost vs a large upfront cost
- Customers receive regular updates and additional value periodically
- Customers have the flexibility to scale service or stop completely
What is in it for the Business?
- Establish a long-term relationship with the customers
- Leverage on the relationship to upsell new offerings
- Build strong brand loyalty
- Have a stable cash flow
- Constantly look at product innovation and offer it to the existing customers, without having to look for new customers to begin with
- Plan ahead and invest more with a predictable revenue to back them up
You may think that the Subscription Model is weighed in favor of a customer. And you would be right. However, the ability to execute it successfully gives a competitive advantage.
Gartner** report predicts that SaaS will reach 45% of the total application software spending by the year 2021. On top of that, the customer expectations have changed. Thus having a strategic subscription-based business model becomes all the more imperative.
Let’s take a look at three companies that were able to disrupt incumbents and take away market share from them with a subscription-based business model.
A Unique Concept – Dollar Shave Club
Who would have thought of getting shaving razors on a monthly subscription?
Dollar Shave Club, started their business in 2011 as an online razor retailer, with exactly this proposition – Subscribe and pick any product for $1 when you become a member. Positioned itself as men’s lifestyle club, Dollar Shave Club, a 5-year-old startup then, was bought by Unilever for a whopping $1 Billion. This move put the young brand as a strong competitor to the 116 years old brand Gillette.
Music on the go – Spotify
At a time when the music industry was going downhill due to the prevalence of piracy, Spotify, a music streaming company that was founded in the year 2006 turned out to be a game changer. It introduced the freemium concept, where the user could either opt for listening to music tracks, free of costs and the revenue would be generated by the audio ads playing after every 6th song or go for an upgrade and become a subscriber with a subscription fee of $9.99/month. This strategy, not just promoted anti-piracy & encouraged more artists to come on to this platform, but also grew the music industry’s revenue by 2X. The company with 157 million users, is now valued at $26 Billion.
Redefining Video Streaming – Netflix
In an era where companies like Blockbuster with the business model of charging the user a flat fee dominated the video rental industry, Netflix, founded in the year 1997, smartly shifted to the subscription-based model, relying heavily on analytics and logistics.
A subscriber would get personalized video recommendations, unlimited videos on rentals without due dates, late fees, shipping, and handling fees, delivered to their doorstep or later via the internet. This made the entire experience hassle free, encouraging more and more users to subscribe. Netflix today is valued at $12 Billion with 125 Million subscribers worldwide.
The shift to the subscription economy is rapidly growing. Companies that aim to be ahead of its competitors and maintain long-term customer relationships must start planning their transformation. After all, a job well begun is half done.