The subscription business model isn’t new. It’s been around for centuries. But for the most part, subscriptions have historically been used for newspapers, magazines, and select services.
Today, businesses are using this model with physical products (and enjoying enormous success).
A subscription business model is pretty simple to understand. It’s based on the idea of selling a product or service in order to receive recurring monthly or yearly revenue. The primary focus is on customer retention, rather than acquisition. Much of the energy is poured into maintaining satisfied customers through high-quality products and exceptional service.
Most people are familiar with magazine subscriptions, but these aren’t the only businesses using this model. The last five years have produced significant growth in this area – largely as a result of new innovations.
“With the rise of technology and software as a service (SaaS) products, many companies are moving from a business revenue model where revenue is made from a customer’s one-time purchase to a subscription model where revenue is made on a recurring basis in return for consistent access to the delivery of a good or service,” Investopedia’s Evan Tarver explains.
Just how much growth has occurred in recent years? Well, take a look at a small sampling of companies and industries where subscription models are thriving, from changing the way people prepare for travel to providing customers with a customized selection of wine or having a blast from the past and building their own vinyl record collection. This is just a small sampling of this business model. From food and drink to music, jewelry, fashion, and electronics, there are no longer limitations to the subscription model.
The subscription model, as with any business model, has its own distinct set of advantages and disadvantages. To understand the sharp rise, it’s helpful to recognize the pros and cons. Let’s start with the pros:
- Predictable revenue. Without a doubt, the biggest advantage of the subscription model is predictable revenue through recurring sales. You know what your baseline revenue figures will be at the beginning of a month, which helps you project and budget with accuracy.
- Subscription models tend to offer a variety of “plans.” This means customers can scale up and or down depending on their current needs – rather than just canceling.
- Lower costs. When you know how many units or materials you need for an upcoming purchase, you can lower your cost of goods and reduce the risk of dead or stagnant inventory. This boosts the bottom line.
Subscription-based businesses are far from perfect in many instances. There are also a number of disadvantages. These may include the following cons:
- The biggest risk of running a subscription business model is the susceptibility to big issues. In a normal business, a quality issue can be quickly remedied with minimal consequences. But with a subscription service, you might not identify the issue until after all products have been shipped and delivered. This magnifies what would have been a minor setback and makes it a major problem.
- Subscription services often guaranteed delivery on a certain date – such as the first of the month. While this sounds nice in theory, it means all of the packing, shipping, and delivery must happen at the same time. This creates “all or nothing” cycles, which limits efficiency.
- Customer fatigue. Finally, there’s the possibility of customer fatigue. When a customer receives the same type of product over and over for a few months, the novelty eventually wears off. If it isn’t a necessity – like shampoo or trash bags – the customer may eventually cancel the subscription.
It obviously depends on the product or service being sold, but there are very few limitations. Product categories that were once thought to be untouchable are now experiencing enormous success with subscription services.
As of last count, an estimated 5.7 million people purchase subscription “boxes.” The demographics tend to skew towards college degree, liberal politics, female, household income more than $100k annually, and children ages 3-5 in the home.
As more proof rolls in that this business model works across a variety of industries, experts believe subscriptions will become even more commonplace.
Buckle up – this is going to be a fun development to watch!