Subscription Services – What’s the Big Deal?
You can now buy a subscription for everything from dog treats to razor blades. Music subscription services are booming as our appetite to buy tracks is replaced by our willingness to rent them. Starbucks now even offers coffee on subscription.
Why are so many companies leveraging this type of business model? The obvious reason is that recurring revenue boosts your company’s value. However, the hidden benefits of offering a subscription service could be even more impactful.
Free Market Research
Finding out what your customers want is expensive. By the time you pay attendees and rent a room with a one-way mirror, a focus group can cost you upwards of $6,000. That doesn’t even include lunch! A statistically significant piece of quantitative research, done by a reputable polling company, might approach six figures.
With a subscription company, you get instant market research for free. Netflix knows which shows to produce based on the viewing behaviour of its subscribers. No need to ask viewers what they like, Netflix can see what they watch and rate.
For you, this type of offering can allow you to test new ideas. It also gives you a direct relationship with your customers so you can see what they like first hand.
Subscription companies are often criticized for being cash hungry. Many charge by the month and then have to wait months—sometimes years—to recover the costs of winning a subscriber.
That assumes, however, that you’re charging for your subscription by the month. If you’re selling subscriptions to businesses, you may be able to charge a year’s subscription up front. That’s what the analyst firm Gartner does, and it means they get an entire year’s worth of cash from their subscriber on day one. Costco charges its annual membership up front, which means it has billions of dollars of subscription revenue to float its retail operations.
Customers can be promiscuous. You may have a perfectly satisfied customer but if they see an offer from one of your competitors, they might jump ship to save a few bucks. Subscription customers are typically less tempted by competitors since they’ve already made an investment with you.
One of the reasons Amazon Prime is so profitable is that Prime subscribers are stickier than non-Prime subscribers. Prime subscribers want to get their money’s worth, so they buy a wider swath of products.
The obvious reason to launch a subscription offering of your own is that the predictable recurring revenue will boost the value of your company. While that is certainly true, the hidden benefits — gaining customer loyalty, insight into customer buying habits, and improved cash flow — could be even more important.