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Testing a Subscription Model

In a subscription business model, customers sign up for periodic access to a product or service.

Why a Subscription Business Model is valuable to your business:

Benefits
  • Recurring revenue and smooth demand
  • More revenue from existing customers than new
Challenges
  • Continuous investment in adding value
  • Costly to raise expectations, surprise and delight (e.g. Netflix’s enormous content development spend)
KPIs
  • Retention is a primary metric for a subscription model
  • Net new customer growth
  • the ratio of CAC (cost of customer acquisition) to LTV (lifetime value)

Why a Subscription Business Model is valuable to your customers:

Benefits
  • Access more valuable than ownership
  • Simplicity, less stuff
Challenges
  • Overcome benefits of ownership
  • Pantry load for goods: too much product arriving leads to cancel
  • Fear of lock-in
KPIs
  • Value of access perceived higher than value of ownership
  • “It’s only 9.99 per month”
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Companies using subscription business models:
Adobe
Amazon Prime
Birchbox
Blue Apron
Comcast
Dollar Shave Club
Dropbox
Microsoft
Netflix
Salesforce.com
Spotify
Stitch Fix

KPIs of a Subscription Model evolve as the business grows, driven by retention and customer love.

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What's the best example of a subscription model? The highest valued public company with a subscription company is Netflix.

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Key interview questions to validate a B:B subscription model:

Before you consider the subscription model:

  • How do you go about purchasing and using this solution today? (Probe for the primary issues, determine if their 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 on the income statement?

    When testing the solution:

    • 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.

            • Example test cards (Osterwalder's Value Proposition Design)

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