Understanding a Subscription Model
A competitive market has immense revenue generating ability, so does an idea that takes a spot in it. The revenue model, a key component of business illustrates the revenue stream and consequently, the financial potential of a brand. Saturated markets, by definition, is the frontier where businesses of similar value compete for customers. Since customers get to choose from several brands, how would a business affirm brand loyalty? The answer is, subscription.
Subscriptions offer a product or service to a customer paying a recurring fee, for the period of their association with the company. The earliest such subscriptions were print media- newspapers and magazines. In the recent years, subscriptions entered the business landscape as a strategic “model”. These models are becoming popular in highlighting a business’ revenue stream and seeing adoption in a start-up’s fabric. While there are access and product-based subscription models, this article will address the latter.
Razor Blade business models have been notorious so far. Dollar Shave Club founded in January of 2011 disrupted the space, picking-up from the pain-point of expensive traditional shaving blades. Subscription is the backbone of their model. Several other brands followed. Gillette, the then monopoly, daunted by the uprising, took a position of their own- It is now seen selling its blades with subscriptions.
Amazon, unarguably the largest and most preferred retailer, charges an annual membership fee for their extraordinary prime service. Additionally, Amazon does offer a “Subscribe & Save” option to many of its consumer products. Their “dash button” was most certainly an innovation within the subscription economy. Quite clearly that is an “Amazon Effect” offset by AWS or their market capitalization.
Subscriptions seem promising to maximize revenue, nevertheless, a sound model requires them to overcome the perils emanating from a customer’s behavior. Churns
Customer churn is when a customer stops using the product or service consequently ending their relationship with the company. Companies with subscription-based revenues, work tirelessly to reduce churns and in most cases the acquisition costs may surpass the lifetime value, during the effort. ProfitWell, a SaaS start-up provides analytical solutions to maximize revenue of subscription-based businesses. They aptly refer to customer psychology as “decision points”. More the decision points, more the tendency for churn- one of the reasons why an annual membership is better than a monthly one. Interestingly, ProfitWell’s findings show that about 40% of the churn is linked to delinquency.
Delinquent churn is involuntary, occurring due to payment failures such as, credit card expiration. ProfitWell has prescribed several measures to overcome this barrier. Intuitively, one may recommend replacing credit cards with a constant payment source, such as checking accounts. While this is not a feasible alternative to online transactions, Planet Fitness, the top-rated fitness club utilizes this method for their annual memberships plans. I find Razor Blade and personalized subscription models to be more successful in this broad spectrum. If you are longing for a customer’s loyalty, personalization seems to be the answer. Companies like Curology, Gainful, Firstleaf and many more are doing the same in health, personal care, and lifestyle segments. Subscriptions must present a value that ties into an average customer’s lifestyle or routines, just like the “Subscription Box” type does. Such products are Bespoke to you.
Talking about Bespoke, Bespoke Post is a brand that delivers unique products based on psychographics. However, I wonder if churn rates are high here as the company surprises you with some premium non-essential accessories. An average subscriber may find themselves hoarding such items and decide to churn or freeze their account.
To sum up things- I believe subscription models are a trending characteristic of businesses, in saturated markets. They have enormous revenue generating potential and personalized subscription boxes are the most promising ones. Businesses can operate in saturated markets- customers can often be segmented, and you get a piece of the pie. However, customers are presented with several options and the “hop” is inevitable. Subscription models and the relevant churns further emphasize the significance of innovation- it is important for the product/service to be unique, if you want to control the “size” of the pie you get.