Subscription
In a subscription business model, customers sign up for periodic access to a product or service.
Moving Beyond Insights and Analytics
Much of data strategy and delivery has been constrained and siloed within the Business Intelligence function inside of companies. Data-as-a-service models move beyond merely enhancing data processes and analytics to inform internal decisions and move to create value for end customers outside the organizations.
Data-as-a-Service vs. Artificial Intelligence / Machine Learning
AI and ML are data science and computational processes that can extend to any digital business model. Data-as-a-Service is a distinct business model approach that seeks to place a value on a data process that customers will pay for.
Business Models in Use
Adobe | Amazon Prime | Birchbox | Blue Apron | Comcast | Dollar Shave Club | Dropbox | Microsoft | Netflix | Salesforce.com | Spotify | Stitch Fix | Swapfiets | The New York Times
Valuable to Customer
Benefits
- Predictable costs
- Don’t need to bother with procurement to start using
Challenges
- Pantry load (subscription company does not forecast need well, and consumer given too much)
- Credit card overflow: in times of austerity review of what is truly a worthy monthly cost is given great scrutiny
Key Performance Indicators
- Cost of access compared to cost of ownership
Benefits
- Low friction shorter sales cycles move to departmental buyers
- Recurring revenue and smooth demand
- Click to ship vs. costly installs
- List ItemNo need for multiple versions of the software
Challenges
- Continuous investment in adding value
- Costly to raise expectations, surprise and delight (e.g. Netflix’s enormous content development spend)
Key Performance Indicators
- Net Promoter Score
- Retention
- MRR growth
- Ratio of CAC (cost of customer acquisition) to LTV (lifetime value)
When it Works Well
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.
Key Subscription Mechanisms to Test
KPIs depend on your unique business attributes and business model combinations. Subscription model heuristics are shared widely, and even baked into software subscription billing platforms like Zuora. As a result, make sure these KPIs work for your unique business. Special note for Subscription: not all businesses are ripe for this model. Test the value proposition of your offer heavily before committing.
- How do you go about purchasing and using this solution today (Probe for the primary issues, determine if there is a hidden cost of ownership, understand other pain points involved in purchase and use).
- Test for jobs to be done, level of pain on the pain scale. How much of a priority is (defined problem or pain)?
- Is there a replicable job to be done or is each customer defining a pain point that will require a custom solution?
- Is this a balance sheet capital expense, or is it expensed on your income statement? If yes would you benefit from shifting to a lower expense category?
Testing the Model
- Are there any reasons why you would want to fully own this service, vs. getting periodic access through subscription if the price was right?
- Arrange features, services, and benefits into key elements of your offer, and have the potential customer arrange the elements of the larger solution in order of priority. Then take away the lesser priority elements until you determine what would make an MVP (minimum viable product).
- Determine the minimal offering that would be compelling enough to have the customer pay for the offering.
More on Subscriptions
Why Every Business Will Be a Subscription Business by Jenny Luna, Stanford Business School Insights, 2018.
What is a Subscription Business Model, by Profitwell, 2020.
7 Surprising Industries Turning To Subscription Business Models, CB Insights, 2019.
The (Not Failing) New York Times, Mine Safety Disclosures, 2020.
The Automatic Customer, by John Warrilow, 2015 (book)
Subscription Services: The Perfect Business Model? by Bo Burlingham, Inc Magazine, 2015.
Why You Should use a Subscription Model, by Chuck Longanecker, Entrepreneur Magazine, 2015.
Use Customer Cash to Finance Your Next Startup, by John Mullins, HBR, 2013. (limited access)
What Subscription Business Models Mean for Sales Teams, by Andris Zoltners et al, HBR, 2017 (limited access).
Subscription Myth Busters: What it Takes to Shift to a Recurring-Revenue Model for Hardware and Software, by Kevin Chao et al, McKinsey, 2017
Netflix and the Conservation of Attractive Profits, by Ben Thompson, Stratechery, 2015.
Is Adobe’s Bold Move Setting it Up to Be Disrupted? by Steve Denning at Forbes, 2015.
Adobe Completes Swift Business-Model Transformation, by David McCann, MyCFO.com, 2015.
The relationship between consumer characteristics and willingness to pay for general online content: Implications for content providers considering subscription-based business models, by Girish Punj, Marketing Letters, 2015. (paywall).
