Why Subscription Models Might Not Work For Your Business

Why Subscription Models Might Not Work For Your Business

We all know about Subscription Business Models of the likes of Dropbox, your local gym or your music subscription. It seems that almost every type of business is moving towards the Subscription Business Model.

To run a successful Subscription Business Model, your focus will have to shift towards your customers, building long-term relationships and communities. This is a very different way of running a business compared to what you most likely used to.

There are voices out there who believe that a subscription model is the future and eventually all businesses will move towards this model. But there are some areas where the subscription model is more of a disadvantage than an advantage for you as the business owner and your customers. To better understand this, let’s have a look at what subscription models are:

What is a Subscription Business Model?

With a subscription business model, the customer pays a recurring price at regular intervals for access to a product or service. This model goes back to the 17th century were it was pioneered by book and magazine publishers. Today it is used in almost all business sectors.

There are 3 main types of subscriptions today:

  • Product Subscriptions
  • Service Subscriptions
  • Access Subscriptions

Most of them have different variations or are combined in a subscription package. Let’s have a look at each type:

Product Subscriptions

This is one of the oldest subscription models. It all started with magazines and newspapers and since then has taken over almost all product categories.

Even the likes of Amazon have recently introduced a recurring buying option for many of the products on their site. If they feel that it might be a product you’ll need over and over again, the chances are high that this option is activated.

Product subscriptions are based on buying the same product over and over again until you no longer need another one and you cancel your subscription. Expiring products are the best products for this type of subscription. Think about magazines, food, cosmetics, etc.

In the end, you own each product you buy and canceling the subscription won’t take those away. The products you received are still yours.

Service Subscriptions

This type is used to provide a fixed price for services over a fixed period of time. Well-known ones are service contracts for heating and air-conditioning.

The latest trend in the software industry is to provide the software for free while selling a service subscription for support and updates.

Service Subscriptions are often related to a product, but a dog-walking or cleaning services can be offered on a subscription basis as well. If you cancel the subscription the provision of the service ends.

Access Subscriptions

If you have a Netflix account, you’ve sign-up for access to a vast range of films on their system. Access Subscriptions provide access to services or products for as long as you subscribe to the service.

This subscription type is becoming one of the fastest-growing types in the business world. Almost all film, music, and software products are offered via this subscription model.

Access Subscriptions provide the use of a service or product which is otherwise not publicly accessible. When you cancel the subscription you lose access to the service or product.

Do these Subscription Models really work?

There are many reasons why these models work for some, while others struggle with the idea. And from a business perspective, these models make a lot of sense.

The subscription model turns customers into subscribers for recurring revenue. Digital consumers are much more informed – and many favor access over ownership. The business focus is on gathering insights based on usage data, finding out what customers want and then delivering it as an intuitive service.

Companies using this model replace assumptions and persuasion with accurate insights and actual behavior. The great benefit of subscription models is the data gathering which helps to identify user behaviors and allows the development of products accordingly. Cash flow becomes less of an issue or dependent on make-or-break promotional sales.

Customers become partners

Customers are seen as partners in an ongoing, mutually beneficial relationship and, in a good subscription model, it should even be easy for customers to leave when they want, rather than tricking and tripping them up.

Many companies provide both types of models at the same time. Think of Apple with its music players and music subscription service. But we don’t need to look that high. Most companies offer support services for their products on a subscription basis.

Let’s take the example of Fender, a well-known guitar manufacturer. Fender observed that 90 percent of its customers quit playing the guitar within a year; it launched the Fender Tune app and its Play service to gather data on how customers are using the instrument. The company added a new subscription model based on helping customers become guitar players and music lovers for life.

What about the risk?

Streaming companies like Netflix and Amazon Prime can avoid relying on the risky sink-or-swim blockbuster experiments of earlier companies and take calculated risks on smaller, edgier projects. Success comes from driving down subscriber acquisition costs and increasing lifetime value. Companies like Apple could even offer “Apple as a Service,” with guaranteed phone upgrade and access to content for a monthly subscription fee.

Probably one of the largest companies that made the switch to a subscription model is Adobe. It completely replaced the buy-a-product model with the rent-a-product model and it seems that it worked really well.

Creating a new customer segment

Because of the lower price point based on a monthly fee, new markets opened up. Now, consumers who couldn’t afford the high prices of the one-off product are now in the game – and with the option to cancel the subscription at any time, the risk for the consumer is reduced as well.

This all sounds great, but it comes with some major obstacles. Companies moving to this model have to move from annual to monthly (even daily) updates, set-up billing systems for larger volumes of subscribers and implement new sales commission structures. This isn’t easy to do, especially if you have a well-implemented structure in place.

Is it worth the change?

I guess this depends on your business and market. The subscription model doesn’t work for everyone and requires a lot of changes in your business processes. But I do believe that most markets can use the subscription model either for their main products or for supporting products and services.

In terms of innovation, the subscription model is a big step forward. Consumers become beta-testers for the latest products and services while paying for a subscription. Implementing real agile development and reducing expensive gambles is clearly an advantage. Marketing teams suddenly have a one-on-one relationship with their customers, while sales teams can up and cross-sell like never before.

The subscription model creates a never-ending product with customers as innovation partners. Productivity and inspiration are now continuous without the dreaded peaks and troughs.

Market Research is part of the subscription model which creates a direct connection to the consumer. No more need for focus groups, phone surveys or “hoping for the best” for getting a good product that sells.

Would I recommend it?

Yes, I would. But it is important to understand the impact this will have on your business and your customers. For most, a slow approach might be the best. Pick the products and services that can be converted most easily and invite your customers to make the change over a period of time.

I remember when 1Password moved from being a one-off software product to becoming a subscription product. At first, I did not like the idea. Change is difficult, not just for you but for your consumers as well. It has to be clear what the advantages are and you will need a very good marketing strategy along with the change.

What I would do?

The subscription model is very well known today and as I mentioned prevalent everywhere. You will not stand out from the crowd but join an ever-growing movement. There is nothing wrong with that, but it is hardly innovative.

I would ask myself if there is not a better way, something more exciting. As always for me, it starts with my customers and clients. What is it they want and need and what would help them most to get it? It doesn’t mean that the subscription model for me wouldn’t work. I would wonder if I could tweak it to work better for my customers while standing out from the rest.

John di Stefano

This site Skills for Entrepreneurs is run by me, John di Stefano, teaching and supporting entrepreneurs to learn the skills every entrepreneur needs to create a better life for themselves and the people around them.

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