Why the subscription business model will dominate in the next decade

From food delivery to Microsoft Office to Webflow—it seems like there's a subscription service for everything these days. This trend is only set to become more evident 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.

how-subscription-businesses-can-implement-financial-operations-that-scale

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. 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.

What is a subscription model?

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 over customer acquisition. Subscription-based business model examples 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

Subscriptions enable subscribers to budget for things on a consistent 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 sign up for a subscription service, they agree to a fixed price divided evenly across their billing cycles—often a monthly, quarterly, or annual payment. The predictable cost allows consumers to budget much more effectively and often provides great cost savings for the consumer. 

Consumers enjoy temporary ownership

Many consumers have gotten used to subscriptions and 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. With a subscription-based program, merchants are able to stay extremely organized and have an overall better understanding of 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.

recurring-billing-skyscraper-2x

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 revenue model, it could only collect a one-time fee of $999 from customers for Adobe Photoshop. Once the sum was 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's subscription model for Photoshop costs $9.99/month—100x less than the one-time cost of $999. But as long as customers want to use Adobe's Creative Suite services, they will continue to pay that consistent amount every month. 

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.

Another reason why subscription models are so successful is that they are extremely functional. Subscriptions make the ultimate gift because gifting a subscription allows the gift-giver to literally give a gift that keeps giving, instead of a one-time gift. This ultimately increases the chances that your subscription gets gifted to others from adoring customers, while also boosting the chances that the gift recipient will also become hooked on your goods or services and turn into a loyal customer.

img-2020-10-how-subscriptions-and-gifting-1200x500

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 model is 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. This model is also seen in monthly box subscriptions like BarkBox and Rocksbox.

Quantity-based pricing

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 to access more content.

Usage-based model

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.

Quantity-based pricing vs. usage-based billing blog image

The subscription business model works for almost every industry imaginable

Many companies believe that the subscription business model 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): Tells you how much revenue you get from each customer, on average.

  • Subscriber Churn: 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. 

  • 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.

Check out more metrics every subscription business should keep an eye on.

Subscription model companies with the right tech stack will see success

Headless Commerce

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.

Thousands of companies worldwide depend on Recurly to manage and optimize their rapidly-growing subscription businesses. Here's what some of them have to say:

"Now that our subscription metrics are integrated directly into our billing platform, we lean on them heavily for insights into the health of our business."

John Thorton,  CEO

Recurly is a much more flexible platform. It's much more responsive to the real-time needs of its customers. There's a culture of innovation at Recurly that just simply wasn't present with our previous provider.

Jin Sha,  Chief Strategy Officer

I think subscriptions are just continuing to grow and grow. Everywhere I turn, everything’s moving toward a subscription, like movie tickets and consumer services from companies like Apple. Everything we think of will probably be on subscription soon—even food!

Waifa Chau,  CFO

Table of Contents