Building a subscription business – part 2
by Morten Suhr Hansen
Part 2: Subscription model – Benefits for companies
As said in part 1 of this article, it is easy to see why the subscription model offers huge benefits to companies which implement it. It is simply good business.
On one hand, a subscription business will attract more customers if it provides the kinds of tangible benefit for subscribers that we saw above. On the other hand, there are inherent benefits associated with the subscription business model itself:
One of the chief benefits of operating a subscription business is the predictability of demand for your product, which makes production planning both easier and cheaper. If you run a stable
subscription business, you will be able to predict your sales up to a year ahead, based on subscriber numbers, and often you will know precisely how much you have sold before you start
If you run a newspaper business, you will know just how many subscribers you have when you start printing. That contrasts with single-copy sales, where you never know where customers
are going to show up to buy the paper. In consequence, not uncommonly you will have to print twice the number of copies that actually get sold by your retailers. This predictability of
production and the associated reduction of waste are huge cost savers, and they are one reason why consumers often get substantial discounts when subscribing to a product or service.
Increased purchasing frequency and customer lifetime
Generally speaking, subscribers will spend more money with your business than non-subscribers. One reason is that they will purchase more frequently, because they do not have to make
an active decision each time they need the product. Even a loyal transactional buyer will forget to buy now and then or will sometimes buy from your competitor instead of from you.
Another reason is increased subscriber lifetime. When a customer subscribes to a product he has “taken himself off the market” for a while, making it much less likely that he will cease
consuming or switch to one of your competitors.
Fostering loyalty and improving competitive position
An often-quoted survey shows that business executives around the world see increased customer loyalty and improved competitive position as among the key advantages of a
subscription business.* This is no surprise, given the massive focus on loyalty building we have witnessed over the past decade. Nothing is a greater sign of loyalty than when your customers sign up to your product on a continuing basis and having your customers as subscribers makes it much more difficult for your competitors to win them away.
Reduced sales costs
When running a subscription business, you only need to get the customer to sign up once in order to create a lasting relationship. If your subscription business is well run, this will significantly
lower your cost of sales, relative to running a transactional business where you have to make the sale every time. However, the degree to which sales costs will actually decrease depends on a number of different factors, such as your industry sector, and the churn** you experience. If your subscriber lifetimes are short, you may still need to spend heavily on acquiring new customers.
* This survey was conducted in July–August 2013 by the Economist Intelligence Unit for Zuora. It asked 293 business executives in Europe, North America, and Australia about their views on the subscription economy. The survey results can be found at www.managementthinking.eiu.com
** “Churn” is an important term in the subscription world, referring to the number of active subscribers who terminate their subscription in a given period.
Robust cash flow
One last key benefit of running a subscription business is the robust cash flow that a subscription business can generate. A subscriber to a product or service will often pay in advance. In the case of services like Netflix or Spotify subscribers pay a month in advance, but for other subscription businesses it is not uncommon for subscribers to pay up to a year in advance, giving the subscription business money in the bank even before it starts producing.
This is very different from most transactional businesses, which have to produce their goods before putting them on sale and collecting money from the customers, so it is just one more reason why companies prefer subscriptions.*
* A further advantage of the subscription model, not touched on above, which deserves some consideration is the environmental aspect. As already mentioned, most subscription businesses reduce production waste, because the entire production run is often sold before it is produced. Thus, apart from benefiting consumers and companies, the subscription business model also offers advantages for society in general.
To sum up, this chapter has shown us that most subscription business models are actually a win–win combination for both consumers and companies. So, it is no wonder that we have seen subscription businesses thrive in most business sectors over the last couple of years, and it is why we shall see even more subscription businesses succeed in the years to come.
• Reduced complexity
• Gateway to membership to a community
• Saving money
Figure 2.1 Consumer and business benefits of engaging with the subscription model
• Increased purchasing frequency and customer lifetime
• Fostering loyalty and improving competitive position
• Reduced sales cost
• Robust cash flow
About Morten Suhr Hansen and Subscrybe
Morten Suhr Hansen is an experienced subscription expert and has held senior positions in the subscription business for more than 20 years.
In 2011, Morten Suhr Hansen founded Subscrybe – a consulting and innovation company working exclusively for subscription businesses in areas such as subscription business development, subscription innovation, pricing and packaging, acquisition strategies, loyalty building and subscription systems and processes.
Subscrybe is headquartered in Copenhagen, Denmark, and the company caters to customers in several European countries.
Morten Suhr Hansen is the author of the book “How To Build A Subscription Business”. You can find the complete book here.