If you haven’t noticed, subscription services are all the rage. Nearly every business sector has been impacted as the subscription model of revenue has become quite trendy. For a number of reasons, a subscription model can be quite attractive. But are subscriptions services really something that every business should consider? Will everything in the future be “subscriptionized” and affect every product and service we use?
Some seem to believe this will be the case. While the subscription model accounted for only $57 million in revenues in 2011, it climbed to $2.6 billion in 2016. Likewise, more than 40 percent of all retail revenues are acquired via subscription services today. As the Information Age and the Internet have advanced, so has the subscription model. But just how far subscriptions services will extend remains a bit of a guess.
Why is the Subscription Model So Attractive?
Just ask Bold Leader Tien Tzuo, the Founder and CEO of Zuora who coined the term “subscription economy” and authored the book “Subscribed: Why the Subscription Model Will be Your Company’s Future – and What to Do About It.” In contrast to buying a product or service when needed, a subscription model allows ongoing access to these items. Just look at Netflix, Spotify, SalesForce, Amazon, and others who have jumped on this model.
Both consumers and businesses find this type of approach attractive for a few reasons. For consumers, subscription services tend to be more psychologically appealing since a larger upfront payment is not needed. Likewise, the model allows customers to quit anytime. And most subscription models have fewer ads and marketing interactions, which is also preferred.
For businesses, the subscription model also offers attractive benefits. Naturally, subscription services provide more predictable, recurring revenues over time. This is particularly appealing for investors. Likewise, the subscription model allows price diversification strategies based on customer needs. And customers tend to be more engaged in the product or service being provided. Lastly, though costs can be higher initially, subscription services ultimately increase profits and lower costs. These advantages help explain why subscription services have become increasingly popular.
Are All Businesses Suited for the Subscription Model?
For companies like Zuora that specialize in helping businesses adopt subscription models, they foresee this being a universal trend. But others are not so sure. Clearly, businesses that provide content to consumers, such as information, education and entertainment, are ideal candidates for subscription services. Likewise, software programs and other cloud-based services similarly adapt easily to a subscription model. Businesses like Adobe and Netflix have done extremely well in this regard. Even attorneys, dentists and other professional services now offer subscription services as well.
But what about other companies that provide products? Companies like Blue Apron and Dollar Shave Club have proven that subscription services work for products also. But these types of products have unique features. For one, both provide products that are needed on a frequent and recurring basis. Likewise, they address the needs of a specific consumer segment. This does not apply to all companies and products in the marketplace. To suggest that all products might be offered through a subscription model appears to be a stretch.
“People won’t tolerate a world where everything is subscriptionized,” he said. “For the things that you really care about, you’ll definitely subscribe.” – Eddie Yoon, author of Superconsumers
The Bottom Line for Subscription Services
It should be recognized that a subscription model differs from other revenue models. It tends to shift the focus away from new customer acquisition and onto customer retention. Yet, for businesses that have yet to reach adequate scale and size, balancing both pursuits can be challenging. This is especially true when companies provide products and services infrequently since new customer demand will be higher. In these instances, the costs associated with a subscription model may be too high.
An increasing number of businesses will adopt a subscription model in the coming years. In many regards, this makes logical sense from both a revenue and consumer side of things. But for businesses that offer products and services infrequently to customers, a subscription model will not likely work. In these instances, customers will prefer traditional purchasing models. And these types of businesses will realize better profits through traditional approaches as well. While a subscription model is very attractive for many companies, it is not a one-size-fits-all.
