Business Model: Subscriptions

Customers understand service and unique offering

In order to shift consumer behavior to adopt a subscription offering, customers need to clearly understand and value the material benefits of shifting from fee-for-product or fee-for-service. Blue Apron promises high quality meals. Birchbox promises new discoveries in beauty products. Canvas promises ease and convenience vs. rental car companies. Netflix promises variety and unique content like House of Cards only available on their service. Companies seeking a subscription model hone the offering and value proposition to match a primary niche customer segment, and validate their product/market fit early on.

Find the right pricing fit

Successful subscription business experiment with costs and bundled subscription offerings over time, testing and experimenting to get the best outcome, and then managing the cost to deliver the service in relationship to the price.

Recurring revenue and smoothed out demand

Subscription models are the favorite of venture investors because of the predictability of revenue streams, and smooth “demand curves” that can occur once the company figures out how to retain their subscribed customers. Also the cost of customer acquisition is favorable if you are able to keep churn low, because you have a built in installed based of customer that just renew over time. Investors tend to place a higher value on subscription models vs. one-time downloads or product sales models. The compound value of multiple subscribers renewing over time translates into higher predicted future cash flows.

Business model tradeoff: subscription requires strategic focus

The subscription model can often fail to deliver if it conflicts with the dominant business model of a company. Newspapers and magazines are primary examples of this trade-off. While the media industry may have invented the subscription model, they moved on to the larger potential market of advertising revenue based on circulation.

Media companies became less interested in developing a core offering for their reading/viewing audience, and instead focused on gathering a target demographic type of audience who was valuable to their advertiser. When advertisers started to pull their money out of print media to digital and other formats, these media properties were unable to calibrate their cost structures and value proposition to deliver a compelling reason to subscribe. While some hyper niche publications like The Financial Times and and The Economist have made the transition well, others have struggled to make a profitable shift.

Lower cash upfront

Companies that once sold software licenses or other products who shift to a subscription model often see short term effects on cash. Intuit recently described the accounting shift as they moved their business over to a model in which customers pay a smaller amount over time, verses an upfront payment. Adobe had to keep both models, licenses and subscriptions, running at the same time before they made the big switch. For startups, this means that cash flow may not grow at a fast enough pace to offset the costs of acquiring a new customer.

Shifting cultural trends:

From things to services: in an attempt to simplify and declutter, we seek experiences that are temporary, rather than assets we have to store (especially in an urban apartment)

From shopping as pleasure to shopping as a time suck: especially for daily needs like food and beauty products, we want time-saving convenience which reduces our cognitive load

From ownership to rentership: especially for 20-30 somethings who grew up during the recession, cars, mortgages and other big ticket items are seen as a risk rather than investment

From lump sums to monthly fees: we perceive a cost savings in a monthly subscription, and that the value of convenience, simplicity, and time savings is worth the value

Anything in a box

Every day a new subscription company is born, as flowers, cosmetics socks, razors, international foods, spices, licorice, and artisanal chocolates are offered via a monthly promise to send a “surprise in a box.” There is likely to be only one dominant player in each niche, so companies seeking to build slow growth lifestyle businesses may be eclipsed by the substantial amount of seed and venture capital driving the growth of these businesses.

Pay for access

The 20-30 something generation that grew up under the weight of the 2008 recession and student loan debt has a different attitude towards ownership. For some, mortgages and car loans are seen as a risk, rather than an investment. “For many in the millennial generation, assets are viewed as a yoke restricting their mobility,” John Warrilow, The Automatic Customer. Paying for access to cars (Zipcar), closet space (Makespace), fashion (RenttheRunway) and hundreds of other startup ideas is being driven by economic necessity as well as a desire to share, and borrow.