3 Reasons Why You Should Move Towards a Subscription-Based Business Model

Do you remember Blockbuster? If you wanted to rent a video in the 1990s, it was the premier place to go. As the world’s largest video-rental chain, Blockbuster experienced more than a decade of success while hitting its peak in 2004. In 2010, however, the company experienced a sharp decline.  Companies like Netflix, the now-ubiquitous streaming movie service, began to offer its customers the same great movies, but for one low monthly rate. This meant that instead of paying per movie, customers could watch as many movies as they wanted.  In addition, they never had to leave the house.

Instead of altering its business model to a subscription-based one, Blockbuster chose instead to increase customers’ with late fees to increase its revenue. This ultimately led to the company’s demise. Blockbuster, once a media giant,  has been replaced by customer-driven, subscription-based companies like Netflix and Redbox.

According to Tien Tzuo, Zuora CEO, “Subscription economy companies are allowing their customers the adaptability to either pay as they go, or pay per subscription monthly, or via a long-term contract. The point is to have flexibility.”  He also says that “Subscription-based companies are growing nine times faster than product companies.” Tzuo believes that “Digital transformation of business is causing The Subscription Economy to grow faster than expected.” To understand more about digital transformation, check our article Embracing the Age of Digital Transformation: Two Keys to Unlock the Door to Success.

So, what does subscription economy mean for you and your business? How can moving towards a subscription based business model help you? Tzuo points out that, “Subscription relationship management platforms will replace existing ERP and CRM systems.” In addition, technology research firm Gartner says that “By 2020, more than 80 percent of software vendors will change their business model from traditional license and maintenance to subscription.” Here are 4 good reasons why you and your business should move towards a subscription-based business model.

Give customers convenience

With a subscription-based business model, your customers will no longer have to worry about the frustrations that come with shopping, including commuting, store hours, the amount of time it takes to browse a website, extra costs, etc. With a subscription-based model, they can easily shop online and buy directly from a computer or mobile device; they can see deliveries come straight to their door regularly with packages customized to their desires and needs. This is a convenience for people who prefer to buy online.

Another convenience is that your customers will have the flexibility to change or cancel their subscription memberships at any time. According to Apruve, “such convenience turns purchasing from a company into a habit. If you leverage this relationship, you have the opportunity to build loyalty and advocacy that not only increase customer lifetime value but also broaden your client base.

Create long-term relationships

Managing a subscription-based company means that you will be able to build and maintain continuing relationships with your customers. Most companies have short-term relationships that end with just one swipe of a credit card. Subscription models allow service providers “to grow a relationship with the client and cater to their business or design needs as they change.

“It builds a substantial level of trust since the client knows that you have their best interests in mind and understand their business,” says Entrepreneur.com. This also means that your clients, knowing that they have a monthly fee for which they are responsible, are more likely to use that product or service as they have a vested interest in doing so.  

Generate a steady revenue

Another benefit of moving to a subscription-based business model is that you will be able to create a consistent cash flow.  This allows you to more accurately predict and manage your company’s finances. According to John Warrillow, creator of The Value Builder System, a company with a subscription-based business model could be valued up to eight times that of a comparable business with very little recurring revenue.”

Think about it–even if the customer never uses the product or service after signing up, they will still pay the monthly fee until they either cancel or renew the contract. So while something like Netflix or Hulu doesn’t generate much revenue at the outset–at $10 a month for Netflix–with close to 100 million subscribers, that means the company is clearing $1 billion just on subscription fees. Hulu, a newer company, charges $8.99 a month for a basic subscription. Latest statistics state that Hulu is closing in on 12 million subscribers. That is over $100 million per year in subscription fees alone.

If your company can support a subscription-based product or service, it is not only a viable way to make money, it guarantees a steady stream of customers. With the global attention deficit and everyone trying to chase the newest thing, having a solid customer base in invaluable.