Why the subscriptions business model is the future
From food delivery to Microsoft Office to Webflow—it seems like there's a subscription service for everything these days. What's evident in the trend is that the subscription economy will only grow in the years ahead. In fact, 70% of business leaders say subscription business models will be key to winning over prospects over the next few years.
Consumers are quickly becoming accustomed to the luxury of not dealing with traffic and crowds and instead having all of their necessities, goods, and services delivered straight to their doorstep (or digital devices) every week, month or at any other increment of their choosing. It's more than mobile apps and cable. Subscribers can now enjoy things like spin classes, movie nights, gaming, and so much more from the comfort of their own living room. Blockbuster movies now premiere on Amazon Prime, HBO Max, and other streaming services, so the need to head out to a movie theater to catch an award-winning movie is likely a thing of the past.
Today's trends are only the beginning.
Meet the subscription business model: What it is and who uses it
Businesses of all kinds use subscription business models to sell products and services and in exchange receive monthly or yearly recurring subscription revenue. The subscription revenue model focuses on customer retention and collecting subscription fees instead of managing their customer acquisition cost and seeking one-time purchases. Subscription companies include Netflix, Dollar Shave Club, Lucidchart, and Unbounce, to name just a few.
Benefits of a subscription-based model
Now let's go over why the subscription business model will dominate in the next decade.
Convenience for subscribers
Consumers want more. Subscriptions enable subscribers to budget for things on a regular basis and pause things when money is tight or if they find they aren't in need of the subscription service as frequently. Overall, consumers can get more bang for their buck by subscribing to many services as opposed to buying one-off items. Here's how:
Predictable costs every billing cycle
When people shop for a subscription product, they're looking at a fixed price (often billed on a monthly, quarterly, or annual basis. As it turns out, predictable costs over a consistent period of time make for a good customer experience. Now a buyer can budget their own finances more effectively, making room in their wallet for your monthly subscription offer instead of you. The cash flow savings work them as well as benefitting your company.
Consumers enjoy temporary ownership
Who likes to be tied down? Ironically, committing to a subscription-based service appeals to many consumers who are growing to enjoy the benefits of "temporary ownership." It's no surprise that services as wide-ranging as Rent the Runway and furniture rental have exploded in popularity: Today's consumers prefer to spend money on experiences instead of owning things—meaning, they would much rather spend $2,000 on a trip to Mount Kilimanjaro rather than $2,000 worth of "stuff" that will accumulate around their home. Consumers with an "experiences over things" mindset may even forgo owning a car and instead use Uber as their main method of transportation so that more of their budget can go towards traveling, skydiving, and other "bucket list" experiences instead of gas, parking, and car maintenance.
Additionally, it makes much more economic sense for most businesses to pay a relatively small fee for applications and software each month instead of shelling out hundreds of thousands or even millions of dollars every few years for entire company upgrades for new suites of Adobe Creative Suite, Microsoft 365, and so on.
Convenience for merchants
The convenience of subscription models is evident for consumers, but this convenience also significantly benefits merchants. The subscription revenue model stays relatively constant. That allows merchants to stay extremely organized. Especially for physical products or subscription boxes that could require a long lead time, a merchant knows better what to expect each month or quarter because their orders are consistent and prescheduled.
More predictable revenue
When the majority of sales are prescheduled, the merchant has a much more predictable stream of revenue. This recurring revenue helps ensure the viability of the business, even in times of turbulence and financial fluctuations . It also helps keep your business operations up and running smoothly.
Subscription model companies do better than their non-subscription model competitors
Looking for proof that consumers are hooked on the feelings of convenience and variety that subscription services provide? Subscription model companies now do better than their non-subscription model competitors.
To understand why this is happening, you need first to understand the subscription model vs. one-time payment. In a one-time payment model, you make a sale and get the profit, but to continue making money, you have to continue selling items. On the other hand, the Monthly Recurring Revenue (MRR) model allows businesses to accumulate revenue very quickly with a guaranteed resale month after month.
For example, Adobe and Microsoft, two software giants, have in the last decade moved from perpetual licenses of software packages like Creative Cloud and Office to subscription models that allow them to derive more revenue this way.
When Adobe was using a traditional business model, it could only collect a one-time fee of $999 from customers for Adobe Photoshop. Once the one-off purchases were paid, the company had no way to get further revenue from its customers unless they wanted to upgrade to a new Photoshop version, which happens every few years at the most. Now, Adobe offers their product on a subscription basis of $9.99 per month. That's 100 times less than the one-time cost of $999. However, customer loyalty can offer a steady stream of revenue as long as customers want to use Adobe's Creative Suite services.
This trend holds particularly true in the media world, where newspaper sales and are plummeting.
Publishers are finding that relying solely on advertising revenue is no longer a winning proposition because all of the different social media platforms have taken away all advertising dollars. Instead of simply getting the local newspaper delivered daily or weekly, consumers now have the choice to pay for an online subscription service for the news they care most about, from the New York Times and Wall Street Journal to Business Insider and Medium. Magazines are usually associated with the subscriber model, but word is spreading. Annual subscriptions to local news is already here, and so are subscription-based revenue models for local publishers.
Another reason why subscription models are so successful is that they are extremely functional.
They make the ultimate gift. Subscriptions literally are a gift that keeps on giving. Whether it's a digital product or a physical one, the gift invites a consumer (who loves experiences) to share their experience with a potential customer who can pick up the subscription basis. Depending on the types of subscription business you manage, it's likely that an adoring current customer will gift your product to others while also boosting the chances that the gift recipient gets hooked on your goods or services and turn into a loyal customer.
The subscription business model enables a multitude of pricing strategies
Subscription pricing is far from monolithic. Here are some common examples of subscription pricing strategies:
Fixed recurring model
This subscription pricing strategy works best for companies that provide a product for a single price that's charged on a recurring basis. Examples of this include streaming services like Sling, Twitch, and Starz. If your product offers exclusive access to something that includes its own variety (so you don't have to offer much customization yourself,) then a fixed recurring strategy offers a predictable revenue stream so your business team can focus on operational efficiency. This model is also seen in monthly box subscriptions like BarkBox and Rocksbox.
Quantity-based pricing is best for companies seeking to dynamically increase or decrease the price of their services based on the quantity purchased. Take Quizlet as an example, where subscribers can access a certain amount of quizzes for free but must pay for more of their digital product. In this strategy, your customer relationships can literally turn into dollars.
This model is best for companies with transactional businesses who want to allow customers to only pay for what they use. For example, e-card website JibJab doesn't charge a monthly service fee. Instead, customers pay for each e-card that they make, when they make it.
The subscription business model works for almost every industry imaginable
Many companies believe that subscription-based revenue models wouldn't work for them. Still, even those companies previously steeped in the one-time sales model have seen enormous success by switching some or all of their business to subscriptions. Peloton is a leading example: many critics doubted that home exercise bikes would ever be sold with a subscription. Fast forward after a global pandemic that confined people to their homes, and the company now rakes in billions of dollars per year.
You would never expect that a company that sells swimsuits, like Speedo, could have a market for a subscription-based business model. But they do. Instead of selling swimsuits on a recurring basis, the Speedo subscription allows swimmers to track their swims, connect with other swimmers worldwide, and view engaging and informative content for about $8/month.
As you can tell by now, there is quite literally a subscription for everything these days. No business or industry is immune from the benefits of adopting a subscription-based model.
Tracking business performance under the subscription business model is simple
At this point, you may be asking yourself, "what metrics do subscription business model companies need to track?" Here's what we recommend:
Monthly Recurring Revenue (MRR): MRR refers to all predictable revenue you can expect each month, including all invoiced recurring charges, credits, and refunds from active subscribers.
Average Revenue Per Customer (ARPC): This average shows you how much revenue you can expect to get over each customer lifetime.
Churn Rates: the total number of subscribers who have chosen to end their subscriptions over a particular time period; typically separated into whether the cancellation was voluntary or involuntary. (Involuntary churn happens more than you might expect.)
Churn MRR: The amount of monthly recurring revenue lost from customer cancellations.
Trial Conversion Rate: The rate at which people who sign up for a free trial become paying subscribers.
Subscription model companies with the right tech stack will see success
Another key requirement to launch a successful subscription-based model is that your tech stack needs to be on point in order to serve your global customer base through both one-time and subscription offerings. Some of the components of a robust tech stack include:
Support for a variety of currencies and payment methods. At Recurly, we support over 140 currencies. You need a stack that has the capabilities to take credit card payments, direct debit, PayPal, Apple Pay, and more. Today's consumer wants the freedom to choose how they pay for their subscription.
The ability to back up payment methods with the right set of payment gateways. A payment gateway works like a digital version of a physical point-of-sale (POS) terminal and facilitates transferring funds from the customer to the merchant's bank account. Different payment gateways are more suitable for different regions, industries, and business models, so it's important to find a subscription billing platform that supports multiple gateways.
If you're ready to move to a subscription business model, count on the expert team at Recurly. We're a complete subscription management and billing platform that helps countless customers manage and run their entire subscription businesses smoothly.