The direction the modern consumer marketplace has taken is pretty clear.
People want quality products that are tailored to their preferences without having to bend over backward to get them.
The answer to this specific desire, many industries have discovered, is the subscription business model.
Once the purview of magazines and other print publications, the model now works for customers who seek anything from razors and makeup to food, music, and educational classes.
Benefits of the Subscription Business Model
The subscription approach owes its success to the balance of value it offers to both company and customer, entrepreneur Chuck Longanecker explains. This balance of benefits is what makes the model so strong and sustainable.
“For customers, the value lies in the convenience,” Longanecker says. “For businesses, the value of a subscription is the ability to predict revenue through recurring sales.” More specific, subscription business models yield the following benefits.
1. Easy Scalability
The most obvious are the scalability, and this is true both on the customer and business side of things.
- Customer. The subscription model suits customers because they can scale according to their own needs. For example, let’s say an individual has a subscription for which the company sends 20 pre-packaged meals every week. If the individual is going to be out of town on business for five days in a particular week, he or she can scale back the subscription to meet those specific needs.
- Business. From a business point of view, the subscription model enables the organization to scale easily according to demand. If it jumps suddenly from 500 units in one week to 1,000 the next, the company knows it can simply double inventory to meet the demand. The model is neat and easy from this perspective.
Scalability is obviously something that’s hugely beneficial for a growing business, and this makes the subscription business model very enticing.
The beauty of the subscription model is that you have a basis for expecting some consistency. Using the number of subscriptions you have in place and the average growth rate for each over the most recent months, you can come up with a fairly accurate prediction of what your revenues will be in the coming month, the month after that, and so on.
Not only does predictability make things easier from a bookkeeping point of view, but it also enhances your flexibility. For example, if you know you’re going to generate $20,000 in profits during a particular month, you can readily allocate a percentage of that money toward a new project or initiative. In other words, this fuels quick growth.
3. Stronger Customer Relationships
In 1996, General Motors launched OnStar, the first in-car service assistant of its kind. The original idea was to establish an additional monthly revenue stream, but GM officials soon discovered the real value lay in customer loyalty.
“OnStar continues to be a key reason why folks return to the GM brand,” says a general sales manager at one GM dealership. “And for customers who have been driving a competitive make or are first-time buyers, demonstrating the OnStar system for safety/security, door unlock/remote start and more continues to be a key selling point.”
In other words, the current purpose of OnStar centers more on ensuring customers keep returning to GM for new car purchases. This personalized service complements the core product offering by creating a high touch point between the brand and the consumer.
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Four Industries That Thrive With the Subscription Model
Not every industry will necessarily be suited to the subscription model, but there are more opportunities than you might think. Check out these four examples of fields that are currently thriving with this strategic approach:
1. Online Learning
“The way education is distributed is changing. The teaching model for most of the world for the last 100 years has been one teacher, 25 kids, and a textbook,” says entrepreneur Yoav Farbey. “This is all starting to change and the winds of disruption will open up the education and training markets to new ways of teaching and personal development.”
At the moment, several companies are leading the charge by offering online learning opportunities in the form of subscriptions. Educator is one example.
This powerful online platform connects students to a variety of middle school, high school, and college-level courses taught by qualified teachers and professors and all for one low monthly price. It’s an excellent supplemental educational tool for students who seek outside help.
Other popular online learning companies that operate with subscription models include Treehouse and Udemy for business. People are able to learn new skills and explore unfamiliar subjects without ever leaving the comfort of their home or office. Furthermore, the prices allow for unlimited consumption. It’s like buffet-style learning.
2. Streaming Music
The streaming music industry was one of the first to embrace the subscription business model. The growth of subscription streaming is the direct result of an increase in the availability of Internet-powered devices. There’s no longer a need to purchase individual songs when you can stream unlimited music, from a variety of channels and sources, at any time.
“The music subscription market doesn't yet have a runaway leader but is still top-heavy,” says Billboard’s Glenn Peoples. “Billboard estimates Spotify has roughly 50 percent of all subscriptions globally, even after Apple’s strong entrance.”
3. Beauty and Health Products
If there’s one industry that loves the subscription box model, it’s the beauty and cosmetics industry. Birchbox was one of the first leaders in the field, having launched in 2010 and delivered boxes of curated samples directly to women’s doorsteps for just $10.
Since then, the industry has matured, but customers are still crazy about getting boxes in the mail. “The idea was to leverage the subscription model to be part of the product discovery process,” says Katia Beauchamp, one of Birchbox’s co-founders. “We wanted to transform E-commerce from a flat, two-dimensional world by giving it texture and reality.”
Since Birchbox shook up the industry, plenty of other brands have followed suit. From “time of the month” boxes sent by companies like The Period Store to make up from ipsy, there’s a subscription service for literally every beauty and health product imaginable.
4. Food and Beverage
The food and beverage industry have made huge inroads using the subscription model. It wouldn’t be fair to name only a few examples since dozens pop up every year. From coffee and beer to fresh fruits and organic spices, there’s a subscription for everything.
The subscription business model empowers companies to thrive by taking advantage of convenience. People want to try new foods, but they don’t know what to purchase at the supermarket. Having a company curate food choices based on their broad knowledge base is, for many customers, worth the cost.
The Future of the Subscription Business Model
The subscription business model doesn’t appear to have reached its limit. Since both customers and businesses benefit from this setup, growth is likely to continue.
However, experts expect to see some shifts in the coming years. As use of the model climbs to new levels, expect to see the total number of businesses dwindle because only a few market leaders will be capable of providing consistent value from month to month and year to year.