Advantages and disadvantages of subscription model
The introduction of the subscription-based business model has opened up new opportunities for positive interactions between companies and consumers globally. Rather than relying on sporadic one-off purchases, subscription-based businesses can now offer a recurring fee structure for their products and services. This drives consistency in revenue and meaningful customer relationships. The model’s uptick in popularity is testament to the convenience and tailored experiences that it offers to its customers. ERP Today substantiates this in its recent article on a new report that revealed the average consumer spends $133 a month on subscriptions which amounts to about $1,600 a year. This article ventures into examples and benefits of subscription models, the nuances it poses for both businesses and consumers, whilst offering guidance to businesses considering this model.
July 10, 2024
What is the subscription model?
A subscription-based business model is when a company opts to charge for its products and/or services via a recurring fee structure. Customers subscribe to a weekly, monthly, or annual payment plan instead of making one time purchases for goods and/or services.
From streaming services to subscription boxes, there are a range of vast and varied subscription-based services.
The model taps into the value of good customer relationships but also how the company can benefit from a consistent recurring revenue for as long as the customer lifetime value. The subscription business model pros include steady and predictable income, which helps in managing customer retention and churn rates effectively.
Whether a business is trying to drive customer loyalty or product innovation, the subscription model offers a blueprint for sustainable growth and consumer engagement.
Examples of subscription business models
There are several types of subscription models that customers can opt into. Below are some of the most popular subscription services.
● Streaming services - For a monthly (and occasionally annually) charge, users of popular streaming services, such as Netflix and Spotify, can access films, television, audiobooks, podcasts, and music, providing them with an extensive amount of entertainment options.
● Beauty & personal care – Various cosmetic companies offer monthly or quarterly subscription boxes including carefully curated beauty products, allowing customers to sample physical products to see if they like them.
● Books – With a monthly membership to the likes of Audible, avid readers can readily enjoy literature by listening to an unlimited number of audiobooks.
● Software as a Service (SaaS) – Individuals can access an array of creative tools through SaaS providers. Marketers, and other like-minded creatives, may use software offered in the Adobe Creative Cloud (like Photoshop and Illustrator), which are often paid through a monthly subscription.
● Gaming – Instead of players buying individual physical games from a video store, they can now access an entire suite of games through gaming subscriptions services, including PlayStation Now and the Xbox Game Pass, for a monthly fee.
● News – Most magazines and newspaper outlets now offer digital subscriptions, providing their readers with premium, dynamic stories and multimedia content.
Advantages of the subscription model for businesses
Subscription-based business models provide many advantages for both the consumer and the business. So, what are the key advantages for corporations?
Predictable income
Compared to traditional business models which relied on one-time fees and sporadic purchases, subscriptions generate stable and foreseeable revenue. Subscription services sell a single product that is guaranteed to the buyer, in return the buyer guarantees payment.
This level of stability provides companies with the ability to plan their resources and effectively, thanks to the assurance of consistent revenue flow.
Customer relationships
A devoted customer base is cultivated from subscription-based business models.
Instead of prioritising customer acquisition and gaining new customers, there is greater focus on existing subscribers. Businesses can create a sense of community amongst customers and position them as integral parts of the brand.
Subscription-based modelling allows companies to learn about their customers’ values and what they’d like to get out of your brand.
This feedback can allow businesses to further develop and improve their models, increasing customer satisfaction and retaining customer relationships in the long term.
Vendor relationships
For subscription services that send product samples, they can develop key relationships with vendors – which is a great pro for both the service and vendor!
Vendors automatically receive marketing that comes from their product being part of the monthly subscription box. For the company itself, it comes with great publicity as the vendor may begin selling their product directly through them.
It also encourages an ongoing relationship between the two, with an ever-changing stream of products they can offer to the subscriber.
Innovation
A subscription business model can serve as fertile grounds of innovation, fertilised by customer feedback.
Key insights gained for forecast purposes can also drive improvements in products and services, the introduction of new business offerings, and the personalisation of the customer experience.
Netflix is a fantastic example of this. The company changed the way movies and television could be rented and watched back in the early 2000s. They saw the limitations of movie rental stores, like Blockbuster, and explored untapped markets, turning DVD rentals into the online subscription service we all know and love.
Innovation helps to extend customer engagement and long term relationships, but also consolidates the trust consumers have in a brand.
Advantages of the subscription model for customers
Instead of having to shop around for the item, subscriptions offer customer’s an easy shopping experience with many advantages.
Predictability
Subscription services, whether they be digital or physical, are predictable and reliable.
Once a customer signs up for a service, they become aware of what their monthly budget is for that product.
Not only are they able to budget for their subscription payments, but they gauge a clear understanding of what they can expect from the product/service they are subscribed to.
Customisable
Many subscription services offer customisation tools to better understand their customers. Whether that be personalising the experience by allowing customers to inform them of their likes and dislikes, or using a tailored algorithm that assesses this for them.
In one form, or another, there is a level of personability that comes with signing up to subscription models.
Whether an individual is having monthly food deliveries or the ease of watching any movie on demand, they are provided with endless options, that may branch out of their typical shopping patterns, at ease.
Savings
Subscriptions tend to offer customers the potential for huge cost savings.
For example, paying a monthly fee for unlimited media to stream allows individuals to consume an endless amount of content, rather than having to pay to watch or listen to it each time.
Disadvantages of the subscription model for businesses
Like all business tactics, there are also disadvantages of the subscription model.
High churn risk
While subscription-based business models tend to have a steady and predictable income, there is a high churn risk due to cancellations.
The unexpected cancellation of subscriptions by dissatisfied customers directly impacts a company's income.
Establishing robust customer relationships and consistently delivering a high quality of products and/or services will help maintain customer loyalty.
Difficulty maintaining value
Retention rates can plummet when a customer no longer perceives the subscription service as providing value for their ongoing investment.
Maintaining customer’s interest can become challenging, even more so when a product and/or service’s value proposition is relatively straightforward.
To prevent the novelty from wearing off, regularly enhance and update the subscription offerings to sustain customer engagement.
Pricing
The alignment of pricing and plans is critical to the subscription model. Misalignment between these elements may prompt subscribers to seek more affordable alternatives, creating a decline in customer retention.
Ensuring harmony between pricing and the relevant plans is essential in justifying the value proposition.
Contracts
Consumers naturally become hesitant around opting into a contract. They commit them to a product or service that they may not be interested in having further down the line or no longer being able to afford it.
To prevent this from affecting customer acquisition, put a focus on demonstrating the ongoing value during product marketing.
Disadvantages of the subscription model for customers
Although, the subscription model offers customer’s products and/or services at their convenience with minimal effort, subscription payments still come with downfalls.
Overspending
Subscriptions offer customers a far larger number of products and services than they would necessarily purchase on their own accord.
Once signing up to a subscription, consumers receive that product or service whether they truly need them or not.
Minimal options
Traditionally, when shopping around, customers had plenty of options. Not only were there a variety of brands and styles of the product or service that they’re looking for but also a clear comparison of the value and price of items or services.
A subscription removes the flexibility of price and brand choice from the consumer.
With this being a regular occurrence, many customers experience friction and frustration when trying to opt-out.
Companies can make the navigation of their website difficult when users are trying to quit, making it a difficult process.
Some businesses may even charge a cancellation fee for customers who have decided to unsubscribe.
Deciding if subscription model is right for your business
Transitioning your business to a subscription-based model involves more than a shift in dynamics, but careful consideration of its impact on your operations.
Businesses should consider the following to ensure gains in cash flow when moving into the subscription economy:
● Ensure it’s the right fit – Businesses should assess whether a subscription aligns with its products and/or services. Its offerings must be able to scale with the customer’s evolving requirements, ensuring it maintains value and relevance. Subscription-based businesses often face challenges such as churn, customer acquisition costs, and revenue optimization, making it essential to understand customer needs and foster strong customer relationships.
● Have clear goals – A company must have clear objectives for implementing a subscription business model. This could be anything from faster growth, increasing revenue, or expanding clientele.
● Create a pricing strategy – Customer preferences and feedback should assist businesses in the creation of diverse pricing packages which cater to different target audiences.
● Enhance user experience – Strong customer relationships are the key to business success. Regularly monitor and enhance products and/or services based on customer feedback and engagement levels. An approach like this can educate customers about subscription features, foster loyalty, and guarantee ongoing improvements
● Streamline the billing process – Well-crafted subscription packages and a simple onboarding process all contributes to successful renewals. Having a robust billing system that is capable of seamlessly handling recurring payments is crucial to an affluent business.
Conclusion
Fundamentally, the subscription model has altered the commerce landscape, offering benefits for both business and consumers alike.
By providing predictable revenue and fostering customer loyalty, businesses can comfortably enjoy steady growth and development. For consumers, the model offers convenience, customisation, and in many cases, cost savings.
Companies considering this model must thoroughly consider the pros and cons, as well as if it fits with their offerings; ensuring clear objectives are set and that they continue to enhance the customer experience.
The subscription model presents a promising pathway for sustainable success for many businesses. The subscription business model pros include steady and predictable income, better customer retention, and the ability to manage churn rates effectively.
