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Why A Subscription Business Model Is Good For Both Company And Customer

Steadier revenue and a better customer experience are just two of the positives

28Jul

The digital membership economy is one of the clearest signals of a public that now expects something very different from their money. The value exchange between consumer and brand has become something far less transactional in recent years driven by the subscription boom. Essentially, the notion of exchanging money for a physical product each time that product is required no longer dominates commerce.

Consumers, particularly young people, are now entirely happy using credit cards online, and are comfortable with gaining access, rather than actually receiving anything, for their money - think Netflix, Amazon Prime. Subscription has been a facet of publishing for decades, but businesses are finding innovative ways of turning an otherwise transactional purchase into a subscription system.

Take Dollar Shave Club - often cited as an example of ingenious persuasion to subscription - a Californian company that have placed themselves as a cost-effective subscription service for delivering shaving supplies. A recent funding round has the company at a reported worth of $615 million, having married a consumer necessity with the convenience of a subscription. The company’s tone is deliberately relaxed, and it succeeds in removing the sense of obligation that can hold back subscription services, making it clear that customers can leave at any time.

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And the subscription business model is just as important in the corporate world as it is in the consumer market. Where software was once bought as a one-time purchase on a CD - or, harking way back, a floppy disk - uploaded to a computer and kept, the rise of cloud-based software solutions has completely shifted the model. The idea of Software-as-a-service (SaaS) now entirely dominates, with the likes of DropBox, Salesforce, Marketo, etc., all allowing access to their products for a regular fee.

There are benefits for both company and customer. As subscription becomes more and more accessible, the experience for the customer becomes one of convenience. The effort involved in making a payment happens once, the delivery or access is handled by the company and if the product isn’t to the consumer’s liking they simply cancel the subscription. There’s a reason subscription services are keen to present their model in terms of its simplicity - persuading the consumer to part with cash every week, month or year can otherwise be incredibly difficult.

For the company, subscription offers a stability that other commerce models don’t. The initial shift can be tricky; moving away from lump payments to smaller, regular sums is a significant change in cash flow. Once achieved, though, a company has both a steadier income and the resultant ability to more accurately predict revenue. Recurrent revenue is, according to Entrepreneur.com, one of the ‘most compelling factors in a company valuation.’ Entrepreneur uses the example of Blockbuster’s spectacular capitulation at the hands of Netflix - as soon as the hassle-free, relatively cheap web streaming service hit the market proper, Blockbuster’s valuation plummeted.

‘The more guaranteed revenue you can offer a potential acquirer, the more valuable your business is going to be,’ says John Warrillow, creator of The Value Builder System. ‘Because a high percentage of the revenue of a subscription-based business is recurring, its value will be up to eight times that of a comparable business with very little recurring revenue.’ In a battle between subscription-based companies and other forms of commerce, subscription will usually win out.

Other issues like inventory are made far more manageable when the outgoing product every month or week can be calculated. Pricing can be simplified, product satisfaction can be more easily gauged and customer experience is improved. If your product could be sold on a subscription basis, and your company can handle the initial revenue stream disruption, consider a subscription model to take your business to the next level. 

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