Subscription Models in Business

Subscription models are more than just trends driven by hype-they work. Historically used by newspapers and magazines, they faded with the internet's rise but are now making a strong comeback. Take WhatsApp, for example. Without any ads, it attracted 450 million users by charging just "$1 a year after the first year." This simple subscription fee turned users into loyal customers who brought in more users, fueling its rapid growth. Learn how businesses, big and small, like WhatsApp, are using subscriptions to boost profits and stay ahead of competitors.

The Rise of Subscription Services

Many familiar companies are now offering subscription services, which have become extremely popular. There are three main reasons for this resurgence.

1. The "access generation" prefers access over owning things. They value being able to use things without having to own them.
2. More people are comfortable making financial transactions online nowadays. Back when the internet was new, people only trusted big companies with their credit card details. But now, that fear is gone.
3. Data has become crucial in today's economy. Subscription-based companies rely heavily on collecting and using data.

Because of these changes, many successful companies are shifting to subscription models. For example, Apple launched a Joint Venture in 2011 to help businesses use Mac products for a yearly fee. Microsoft shifted Office to subscription from retail, joining the subscription economy, enabling tailored services, and increasing market rivalry.

Amazon, for instance, has found great success with Amazon Prime. For $99 a year, subscribers can stream movies and get free two-day shipping on most purchases. Prime members often choose to shop on Amazon instead of local stores, especially for items like running shoes. Amazon also introduced AmazonFresh, where groceries over $35 can be delivered with no shipping charge. These services let Amazon compete with both small and large businesses, including major retailers like Walmart and Target.

Benefits of Subscriptions for Entrepreneurs

Switching to subscriptions isn't just about financial perks. It makes life easier for entrepreneurs. Subscriptions increase your company's value because they provide a steady cash flow, which appeals to investors. For instance, a home security business that charges monthly for monitoring is more attractive than one that relies on one-time installation fees.

Subscriptions simplify many aspects of business operations. With steady subscribers, you can accurately predict demand, optimize resources like labor and materials, reduce excess inventory, and plan more effectively. Payment through subscriptions is also more reliable, with fees usually paid on time via cards. Moreover, recurring revenue from subscriptions offers protection during economic downturns. Subscriptions build stronger client relationships based on loyalty, as customers trust consistent service in exchange for regular payments. This loyalty often leads to increased customer engagement and potential for expanding services, ensuring customers aren't just one-time buyers.

Subscription Models for Online Goods

Online sellers can adopt two subscription models:

1. "Consumables model": Companies offer subscriptions for products that customers regularly need to restock. For example, the Dollar Shave Club sends disposable razor blades directly to members' homes by mail, adding fun with blade nicknames like the Humble Twin and the Executive. They focus on their brand image by not revealing the manufacturer's name on their packaging.
2. "Surprise box model": Companies send themed packages of various goods to subscribers. Bark Box, for instance, curates and ships dog treats and toys regularly. Companies using this model may face challenges sourcing different products monthly from various manufacturers, as not all are flexible with one-time orders.

These surprise boxes can also act as marketing tools. Conscious Box, for instance, offers monthly subscriptions for natural product samples, aiming to encourage full-size purchases online.

Build Product or Service Communities

Different approaches exist for building communities around products or services. One way is the private club model, where companies offer exclusive services to wealthier customers. They pay high fees for access to networks, goods, or services. For example, Joe Polish's Genius Network charges $25,000 annually for entrepreneurs to meet and share ideas. This model aims to maintain exclusivity and social status.

In contrast, the network model encourages growth with each new member benefiting the entire community. WhatsApp exemplifies this by allowing free communication among subscribers who invite friends. Building such a network is challenging as members need to be geographically or digitally connected. Zipcar tackled this by focusing on building localized networks before scaling up globally. However, rapid growth can lead to problems if dissatisfaction spreads, as seen with World of Warcraft, which lost players after initial rapid expansion due to word-of-mouth advertising.

Simplifier and Peace-of-Mind Subscription

Some companies focus on aiding customers when they need help the most. Surprisingly, these companies also offer subscription services. The simplifier model is designed to assist busy, well-off customers with ongoing tasks, like those offered by Hassle Free Home Service. Customers pay a monthly fee for routine household chores such as changing light bulbs and servicing doors and windows. This ongoing relationship often involves regular communication, which presents opportunities for additional sales. Hassle-Free Home Service, for example, offers extra tasks for an added fee during their technician visits.

Not all simplifier subscriptions require frequent contact. Companies like Mosquito Squad provide scheduled insecticide sprays without customers needing to call. Alternatively, the peace-of-mind model, like that of the pet-tracking service Tagg, offers reassurance rather than performing tasks. It monitors pets and alerts owners if they stray from designated areas.

Site24x7 exemplifies this model by monitoring websites to prevent downtime, ensuring peace of mind for their users. The main challenge lies in pricing subscriptions higher than the cost of services provided, requiring precise estimation of customer needs.

Models for Selling Information-Based Services

If your business offers intangible products like content or information, specific models can cater to your needs effectively.

• "Membership Website Model": Customers pay for access to expert knowledge behind a paywall. This model is ideal for business-to-business sales, where businesses are willing to pay regularly for relevant information. For instance, ContractorSelling.com charges $89 monthly for insights tailored to contracting businesses.
• "All-You-Can-Eat Library Model": This model offers unlimited access to a wide range of content. Popularized by online music streaming services like Spotify, it appeals to consumers seeking diverse content choices. Even smaller organizations can adopt this model, as seen with New Masters Academy, which offers accessible art classes through subscription-based recorded sessions.

Front-of-the-Line Subscriptions

Ever noticed frequent flyers breezing through airport security? They're part of a special club that offers them priority access. This concept isn't limited to airports; it's everywhere. For instance, Salesforce.com offers faster support to customers who buy their top-tier packages. Thriveworks takes this idea further in counseling services. Instead of waiting weeks for a callback, subscribers can see a counselor within 24 hours for a fee. It's all about offering quicker, more personalized service to those willing to pay a bit extra.

Implementing this model involves treating these customers with care. Whether it's a special welcome counter or a dedicated phone line, companies like United Airlines provide exclusive perks to their Mileage Plus members.

Remember, while it's great to prioritize these customers, good overall customer service is still crucial. They should feel special without compromising the standard service others receive. And even though there might be a small fee, this model can generate significant revenue as the customer base grows.

Strategies for Success

Subscribing to services can be beneficial yet complicated. For providers, the main challenge lies in measuring progress effectively.

Traditional metrics like the profit-and-loss statement (P&L), which show how much money a business keeps after expenses, become misleading with subscriptions. In a year, customer payments are just a fraction (1/12) of the total, while expenses remain constant. To gauge a subscription business's health, venture capitalists suggest a rule: customers should ideally be worth three times what it costs to acquire them. However, waiting for subscription revenues to grow can make funding difficult.

There are three main strategies:

1. Reinvest Profits: Like Basecamp, which started by reinvesting earnings from web-design projects into subscriptions.
2. Seek External Funding: Be cautious not to give away too much control to investors, despite their insights. Venture capital can be risky for founders.
3. Charge Upfront: Some clubs, like TIGER 21, charge members for the entire year upfront in January.

Attract and Retaining Customers

If you've decided to add a subscription model to your business plan, the next step is crucial: attracting new customers and keeping them. Here's how:

• Use Comparisons: Instead of just talking about savings, show potential customers dramatic differences. For example, "New Masters Academy offers a $29 monthly subscription, much less than the $600 - $800 cost of a private art course."
• Create Unique Offers: Make your subscription stand out by offering something exclusive. For instance, "John Warrillow's consultancy shifted to subscriptions only, removing other billing options."
• Offer Trials: Let customers try your service with a trial period to experience its value firsthand. For instance, "Osler Bluff offers a $2,500 trial membership to decide on a $57,000 full membership."
• Reduce Churn: Keep customers from canceling by making your product essential to them. For example, "Customers of Dollar Shave Club use their products daily, making them less likely to leave."
• Charge Upfront: Consider upfront charges to increase customer commitment. For example, "Wild Apricot found that offering a 10% discount to prepaid customers increased their commitment."