Why New & Old Businesses are Jumping on the Subscription Model
We’re in the midst of a seismic shift1 in the landscape of commerce. More and more, consumers are migrating their purchases to a subscription model with a multitude of companies2 sprinting to offer their goods and services for low monthly fees, rather than large upfront sums. It seems that while consumers love trying and discovering new products, they favor doing so with minimal upfront commitments.
It’s not just newly formed startups that are jumping on the subscription bandwagon, either. Old and new companies alike are embracing this change. Software, like Microsoft Office3 and Adobe Photoshop4, can be had for just a few dollars a month, and it’s even likely that your next iPhone will be leased5 instead of purchased.
Big brands can’t ignore this trend.
Businesses that view the subscription model as a fad are missing a huge opportunity. Consumers are happy to take on subscriptions if it means not having to remember to purchase wine [6] for the month — they’re also surprised and delighted7 by packages arriving on their doorsteps, full of new products for them to try.
Aside from creating immense value for consumers, which is in and of itself a competitive advantage, here’s why big brands should pay attention to subscription boxes:
1. They create consistent and predictable revenue. Consumers are never as predictable as businesses would like. Historic revenue offers insight into a company’s financial future, but past data can’t compete with the predictability of the subscription model. If revenue is unpredictable, it’s hard to make bets and invest in growing a business.
Establishing a subscription-pricing model allows customers to make purchase decisions regularly — without thought or effort — with a company. This level of stabilized revenue is unmatched by any one-time purchase.
2. Subscriptions have a lower cost of customer acquisition. Acquiring customers is expensive. If your brand is selling a product for $15, you probably don’t have much wiggle room in your marketing budget for paid customer acquisition. However, if you turn that $15 into a monthly subscription, the lifetime value of the customer skyrockets. The higher loan-to-value ratio opens up new marketing channels to your business that would have previously been cost-prohibitive.
3. A higher growth potential exists. By sticking to the traditional pricing model, companies are putting caps on potential growth and creating space for more innovative competitors. The razor blade industry, which has been relatively undisrupted since 19018, received a rude awakening by both Dollar Shave Club9 and Harry’s10 in 2012. The subscription-based model grabbed about 10 percent11 of the U.S. market, which finally pushed companies like Gillette12 to reconsider its pricing model.
By ignoring this trend in subscription-based services, businesses are missing out on a huge opportunity. Switching to or adding a subscription program doesn’t just provide customers with the convenience they desperately crave — it also makes sound financial sense for businesses looking to stick around for the long haul. This is more than a trend; it’s a shift to smarter pricing practices. Businesses that pay attention will reap the rewards.
About the Author: Yahya Mokhtarzada is the co-founder and CEO of <em>Truebill</em>, a service that allows users to track, manage, and cancel any paid subscription with one click. Prior to co-founding Truebill, Yahya served as vice president of business development at Nanigans, an advertising technology platform focused on social and mobile channels. Yahya is also a former instructor at the Startup Institute and is a mentor at 500 Startups.
References
[1] https://www.chargify.com/blog/subscription-business-trend-predictions-for-2016/
[2] https://info.zuora.com/rs/zuora/images/EIU Zuora WEB Final.pdf
[3] https://account.microsoft.com/services/about
[4] https://creative.adobe.com/plans
[5] https://mashable.com/2015/09/09/iphone-upgrade-plan/ - kxlFgxFahGqY
[9] https://www.dollarshaveclub.com/
[11] https://money.cnn.com/2015/12/18/news/companies/gillette-sues-dollar-shave-club/
[12] https://gillette.com/en-us/products/razor-blades/all-razors
