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What Does The Subscription Economy Mean For Startups?

Subscription models have gained understandable popularity, but they’re not for every company

25Jan

Where the subscription economy was once almost exclusively dominated by magazines, the digital revolution has seen it proliferate into a dominant and diverse strategy. Today, the notion of buying CDs or DVDs has been all but usurped by the likes of Spotify and Netflix’s open catalogues, and consumers are now paying monthly for a host of products, from car rentals to razorblades. There has been a shift away from a pay-per-product model and towards a longer-team relationship with customers through smaller, regular payments.

There are many areas in which a subscription makes a great deal of sense. In industries where consumers demand either regularity of service (the timely delivery of razorblades, for example) or variety of service (a selection of TV shows), a one-off payment no longer caters for the need. The growth is part of a wider cultural shift towards services and away from ownership, with car rental being an obvious example. In 2014, a report by The Economist Intelligence Unit found that 80% of consumers were demanding new models of purchase, be it sharing, leasing, or subscribing, and companies have answered the call. Subscription-as-a-service (SaaS) now dominates B2B products too, and the likes of DropBox and Salesforce are gleaming examples of its success.

‘We’ve been evangelizing this shift to the subscription economy for almost 10 years,’ Zuora CEO Tien Tzuo says. ‘We could feel that there seemed to be this tipping point in the subscription economy, but we never had any data to prove it. Now we can show that the economy is shifting. People are not buying more CDs and DVDs; the growth is in streaming music. People are not buying more software; the growth is in software as a service. And pretty soon you will start seeing car sales down because they will move to subscription.’

Subscription ultimately benefits both consumer and business. For the consumer, the relatively low monthly (or yearly) price is far more accessible than a bulk outright sum. Service providers can also be switched, giving the consumer more power once purchase has been made and avoiding lengthy return processes if the product isn’t up to scratch. Essentially, it makes the consumer more valuable to the brand by definition, a relationship the latter should look to nurture for long-term revenue and a more consistent income.

But this more balanced relationship isn’t just a win for the consumer; it also benefits the brand. For one thing, income from subscriptions is consistent, cash flow is steady, and future revenue can be more accurately predicted. Regular cash flow is one of the ‘most compelling factors in a company valuation,’ according to Entrepreneur.com, because recurring revenue is a persuasive safety net. Inventory and supply chain concerns are also simplified with a subscription model; being able to accurately predict monthly sales nullifies a lot of headaches.

This isn’t to say that your brand is necessarily ripe for a switch to subscription. Some products fail to capture the necessary returning audience. The Drum point to Walmart’s failed Goodies service, a subscription-based snacks delivery, which closed down just a year after being introduced in 2012. Ultimately, diversification is key to long-term survival.

Take beauty brand Birchbox as an example. The company’s regular ‘beauty box’ deliveries have been bolstered by gift options, a thriving content department, and even brick-and-mortar stores. Any startup tempted to abandon their current model in favour of subscription should consider diversification rather than overhaul. Subscription can be a great opportunity for smaller businesses to introduce some stability to their revenue streams, but it doesn’t have to negate a company’s core business. Subscription models found popularity thanks to their flexibility, don’t be overzealously inflexible in their implementation. 

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