Subscription Models Graphic

From Netflix to the business cloud – more and more companies are offering subscriptions. Renting resources and services instead of buying them is becoming increasingly a part of our daily lives.

What is a subscription model?

The subscription model usually means that users do not buy a product but rent or have access to it for a certain period of time.

How long this period lasts and what the cancellation period looks like often depends heavily on the product itself. While you can cancel your Netflix subscription at any time, for example, business applications usually have annual cancellation periods. Other models let customers choose between annual payments that are cheaper but can’t be cancelled before the year is up and monthly payments which usually mean paying more but can be cancelled anytime.

In addition, many companies, especially for products that are aimed at B2B customers have Basic, Pro and Enterprise offerings that address different levels of usage and vary in prices.

Subscription models meet a customer need

Whereas ten years ago the subscription model was mainly for book clubs and newspaper subscriptions, it is now part of our everyday life. Furthermore, subscriptions are also catching on in everyday business life. Between 2011 and 2016, the subscription market grew 100% annually from $57 million in 2011 to $2.6 billion in sales in 2016 (source: stanford.edu).

In an interview with Stanford Business, business expert Tien Tzuo explains that it is rarely about the physical product, but about what the customer wants to achieve with it. It is precisely this customer-centric approach that forms the basis for identifying what is suitable as a subscription model and what is not. Incidentally, this can also be combined with classic product sales.

One example would be the Peloton Bike, an exercise bike that is much more expensive than other exercise bikes but offers additional service subscriptions that enable professional training at home. Peloton’s revenue is therefore a combination of the bike sales (and additional equipment) as well as the monthly subscriptions to the many trainings that Peloton offers its customers. Even though the subscription fee is relatively low (to compete with physical gyms), they do provide long-term customer loyalty.

 

 

Subscription models can therefore be used to strengthen customer loyalty and identification with the purchased product.

The change to subscriptions requires investments

In the interview, Tzuo explains that companies initially experience a slump in sales when they switch to subscription models. This is certainly due to the fact that there is a switch from high-priced one-time payments to low-priced tiered payments, which impacts short-term sales. The costs for the company also go up at first, as investments have to be made for the new business model. After the successful transformation, however, the cost of doing business decreases and revenue increases again.

Subscription models for better customer journeys

With loyal subscription customers, the quality of customer data also increases, because if a customer uses your services regularly, you can learn much more about them than if they only occasionally buy a product. With more customer insights, customer journeys, marketing and service can become much more individualized. In turn, they can create stronger bonds with customers through personal, positive experiences.

In his talk, „The Subscription Economy,“ Tzuo explains how the subscription model means that companies need to think about their offerings in a customer-centric way. If they do, they can unite marketing, sales and service into a seamless customer journey or ecosystem. Subscriptions can be the foundation of communities, where subscribers not only receive a product or service, but benefit from their participation in the community, networking with each other and discovering common ground as a result.

 

 

Especially during the pandemic, many interactions and services have shifted to digital. Research by the payment provider Paysafe showed that every second (surveyed) customer has two or more subscriptions. Every fourth plans on increasing the number, with younger demographics being more prone to subscribe.

Advantages and disadvantages of subscriptions

Advantages

  • Subscriptions are easier to manage
  • Subscriptions offer more than other services and products in terms of price/performance ratio

Disadvantages

  • Customers sometimes have no overview of their subscriptions
  • Customers find it difficult to cancel subscriptions

What do you have to consider with a subscription model?

  • What needs do customers have and how can these be covered by a subscription? (outsourcing of maintenance and support, more flexible use of software or easy access to resources).
  • Can the subscription be combined with products and services? (training for a product, additional options for a service)
  • Are different subscription models suitable for our customers? (a free basic level for consumers or as a demo, enterprise models for individualized customization, monthly or annual payment)
  • How can we communicate the subscription to our customers? (marketing, legal principles, simple booking and cancellation processes)
  • Is the subscription model worth it for my company? (ROI calculation and long-term business model)
  • How can the subscription model be used for customer retention? (regular newsletters, individual service support, additional offers, up-/cross-selling, loyalty programs)

ec4u helps you with your eCommerce strategy. Whether for subscription models, D2C or a simple online shop – we work with the right partners to help you become the Digital Champion of your customers. 

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