Why all businesses should consider the subscription megatrend.
The subscription business model is exploding and it’s no longer just the domain of streaming services or cheese-of-the-month clubs. Businesses from coffee shops to law firms and even airlines are jumping aboard monthly payment plans. Could it be an avenue for your business to create a new revenue stream?
The subscription business model is far from new. It dates back hundreds of years to the delivery of everything from clean drinking water to fruit and books in Europe.
But it never really set the business world on fire. Then Netflix happened.
In 2007 the company’s new streaming service had about 7 million subscribers. By the end of 2021 that had exploded to 222 million, riding the wave of a huge shift in consumer behaviour.
Now, people can get everything from their morning coffee to home maintenance and legal advice on a subscription basis, showing just what can be achieved by hitching modern technology to an old-fashioned business model.
In the past three years, Australians have nearly doubled their spending on subscriptions from $32/month to $62/month, with about two-thirds of us holding at least one retail subscription, according to a PayPal survey.
Yet despite their growing popularity, only about 17 per cent of Australian businesses have a subscription offering. For those who do, it has paid off, with these businesses reporting an average revenue boost of 34 per cent after implementing a subscription model. In the US, data collected by the Subscription Economy Index indicates subscription businesses have been growing five to eight times faster than traditional businesses.
Why have subscriptions boomed?
Two big shifts set the stage for take-off:
- Technology – Rapid advances in online payment systems made it simple and secure to collect small, recurring fees instead of large annual charges. Companies leveraged this to offer packages that were as simple to cancel as they were to sign up to. Tracking user data and formidable AI opened the door to greater personalisation. Faster internet speeds allowed digital content delivery, and economies of scale and automation facilitated faster and cheaper delivery of physical goods.
- Demographics – The consumer baton passed from baby boomers to Gen X,Y and Z. Boomers raised in a frugal post-war era prioritised price. Younger generations value convenience, personalisation, experiences, excellent service and exclusivity – things successful subscription services deliver in spades. Younger consumers don’t seek to own things as much as they want to access spaces and services. Subscription businesses focus on nurturing and monetising relationships rather than just shifting units.
What’s in it for consumers?
- Flexibility: A recent survey found that Australian consumers rank the ability to opt-in and out of subscriptions easily, rather than being locked into long contracts, as their primary consideration. Free trials (without hidden conditions) can give hesitant consumers the confidence to commit longer-term.
- Convenience: Membership models with automated payments and digital or home delivery allow consumers to set and forget, divorcing the pain of paying from enjoyment of the product.
- Personalisation: Consumers feel valued and seen when businesses tailor experiences and products to their tastes.
Value: Subscriptions always have a value hook at their core, although perceived value can take many forms including price, convenience, environmental friendliness or social cache.
What’s in it for businesses?
- Drives loyalty: It’s not a one-time purchase experience, it’s a relationship. Consumers who commit to a subscription have a vested interest in engaging to get maximum value for money.
- Easy personalisation creates value and aids retention: Subscriber data allows businesses to track what customer use and personalise offerings better, which in turn increases perceived value. One of the keys to the success of Netflix was the Netflix Prize, a US$1 million public reward to improve the company’s existing recommendation algorithm. This boosted the company’s ability to target recommendations, increasing the time consumers spent on the service and therefore perceived value. This promotes organic word-of-mouth marketing. Companies can also use detailed user data to more accurately target potential new customer segments.
- More predictable revenue: A subscription base allows for more stable cash flow forecasting and planning.
- Efficiencies: Subscriptions can stabilise inventory management, driving greater efficiency and profit margins.
- Opportunities to upsell: The ongoing relationship makes it easier to offer upgrades or additional related services.
- Greater return on acquisition costs: Subscriptions are long- terms relationships that, if nurtured correctly, can extend a customer’s lifetime value to many times acquisition costs.
- Long-term customers can also be leveraged and rewarded for making recommendations to friends and family.
The downside
Consumers can be quick to cancel subscriptions if they don’t see the value, and there can be a high churn rate on trial memberships.
Businesses implementing a subscription strategy need a clear understanding of what they offer that consumers not only need, but can’t get elsewhere. To minimise churn and create value:
- Create online communities for customers to engage and share tips. This helps reinforce the perceived value and belonging.
- Manage renewal processes and show appreciation through discounts, referral bonuses or limited subscription pauses.
- Seek feedback and provide support to new subscribers to ensure their early experience is positive. Focus on simple and responsive customer service.