As online shopping continues to dominate the retail industry, we’ve seen a huge rise in businesses operating a subscription model. According to Statista, an astounding 10 million households in the UK have an Amazon Prime account, with Amazon accounting for more than a 30% market share.
Subscription services are now available for almost anything you might want, from razors to software to your weekly veg shop. Signing up for a subscription not only offers greater convenience for consumers and allows them to avoid running out of essential products, but also often gives them access to exclusive discounts on items they were going to buy anyway.
The subscription model is great for consumers, but is it right for your business? In this article, we’re going to explore the subscription model from a business perspective, discussing the good and the bad to help you understand whether it’s a good fit for your brand.
We’ll cover the following topics:
- What is a subscription model?
- Advantages of a subscription model for your business
- Disadvantages of a subscription model for your business
- Considerations when implementing a subscription business model
- Subscription model vs. transaction model
- How to tell if the subscription model is right for your business
What is a subscription model?
First, let’s identify what we actually mean by a subscription model. A subscription is a payment that is made regularly for goods or services that a consumer needs frequently, or on an ongoing basis. The most common payment intervals are monthly, quarterly and annual.
A subscription business model is one that allows customers to purchase products or services on a regular basis through automatic payments. It’s most commonly used for consumables, health and beauty products, software, and digital media services such as streaming platforms.
The subscription model has been around for hundreds of years, with newspapers and magazines selling on this basis as early as the 1700s. However, the internet age has seen a dramatic explosion in the number of companies adopting this approach. This is because it offers a variety of benefits for businesses and consumers alike.
Advantages of a subscription model for your business
The subscription model has become so popular in a wide variety of industries because it offers a lot of great benefits for businesses.
Delivers regular cash flow
By offering fixed, regular payments to your customers, the subscription model ensures regular income for your business. This more predictable cash flow helps your business to maintain financial stability, while also making it easier to budget and forecast for the future.
Increases revenue
Subscription services are often offered at a discounted price, encouraging more first-time purchases. By automatically recurring payments, the subscription model removes the need for manual purchasing, increasing the lifetime value of each customer.
Speeds up payments
A subscription service makes receiving payments fast and easy. By using an automated service like Access PaySuite, you can enable your customers to set up recurring payments so there’s no need to send invoices and chase late payments.
Reduces administrative burden
The automated processes used to manage subscription payments dramatically reduce the amount of admin required. This means your accounts team can spend less time sending invoices, chasing late payments, entering the payments into your accounting system, and reconciling your bank.
Supports inventory planning
Regular subscriptions allow your business to know exactly what you need to supply and when. This makes it easier to ensure that you have the necessary stock on hand, and minimises the hassle of accounting for busier and quieter seasons throughout the year.
Sets your business apart
If none of your competitors are using a subscription model, you could take advantage of this and become an industry disrupter. Offering convenience and financial benefits to your customers helps to set you apart from the competition, bringing more business your way.
Considerations when implementing a subscription business model
Whether you’re setting up a new brand or making changes to the way your business operates, there are several important considerations to bear in mind when implementing a subscription model.
Market saturation
The subscription business model has become extremely popular, so you need to make sure your brand stands out from your competitors. As well as clearly outlining the benefits of a subscription for your customers, you might want to offer incentives to encourage them to sign up. This could include subscriber-only discounts, getting one month free if they subscribe for a full year, or offering sign-up bonuses like freebies and vouchers.
Impact on operations
You’ll have to consider what a subscription model would mean for your internal systems and overall business operations. The most efficient way to run a subscription model is to use specialist automated payment software, which you will need to purchase and implement before you can get started. You might experience an initial learning curve while your employees get to grips with the new processes, but the time-saving benefits of the software will become apparent before long. You also need to be aware of compliance regulations regarding recurring payments, and use a system such as Direct Debit that offers a guarantee to protect your customers from payments taken in error.
Subscription pricing
Pricing your subscription can be tricky, as you need to ensure that you’re able to entice customers without negatively affecting your profits. You’ll need to consider any set-up and administrative costs that you need to either absorb or pass on to your customers, and factor this into the final price. Remember to also research what your competitors are charging to make sure you don’t price yourself out of the market. It’s also important to consider monetisation strategies such as tiered pricing, add-ons, or discounts for long-term commitments, which can help you to boost your profits.
Cancellation rates
It’s important to measure what your monthly churn rate is, and how this differs from customers who choose to pay upfront annually for a service. You might see a rise in early cancellation, but you should find that this is balanced out by the value delivered by long-term subscribers. Keep an eye out for cancellation patterns that could suggest deeper issues with your subscription model that need to be addressed. For example, you might notice a drop-off after a price increase, or early cancellations indicating that customers are taking advantage of a sign-up deal.
Customer engagement
Consumers have a short attention span, and the hands-off approach of a subscription model can leave them feeling a lack of engagement with your brand. Make sure to regularly keep in touch with your subscribers (while adhering to GDPR, of course) to tell them about limited offers, share exciting new products and services, and provide personalised content that resonates with their preferences. This helps to keep their interest and prevents them from leaving for a competitor.
Subscription model vs. transaction model
So how does a subscription-based model compare to the standard transaction model?
Revenue stability
By using regular, automated payments, a subscription model helps businesses to ensure a more consistent and predictable revenue stream. This supports easier budgeting and forecasting, and makes it easier to ensure that the necessary items are in stock. Some subscription businesses include a notice period for cancellations, giving them an additional buffer in the event of a cancellation.
For businesses using a pay-as-you go or one-off purchase model, revenue can fluctuate throughout the year, making it harder to plan budgets and stock requirements. While brands that have been operating for a number of years may be able to identify and anticipate slower seasons, it can take a while to reach this point, and it requires careful planning to manage revenue throughout the year.
Customer engagement
A subscription model is designed to encourage long-term repeat custom and increase the lifetime value of each consumer. However, as the customer doesn’t have to engage with your business to make a purchase, this can lead to an emotional disconnect. By removing the need to make a direct purchase, you also remove a layer of interaction, which can weaken their relationship with your brand.
In comparison, making one-off purchases requires the customer to come back to your website each time they need to restock, increasing the likelihood of making additional purchases as they browse. This helps customers to feel actively engaged with your brand, and helps your products and services to feel fresh.
Market suitability
Not all businesses are suited to a subscription model. For example, high-cost products such as laptops and cars aren’t the sort of thing that a person will need to purchase on a regular basis. On the other end of the scale, very low-cost items also aren’t suitable, as it’s much harder to make a profit on them after factoring in administrative and delivery costs.
However, some industries are much better suited to a subscription payment model than the standard transactional approach. Mobile phone plans, software and digital media services are well suited to this approach, as it removes the need for customers to remember to update their subscriptions, ensuring a consistent service with no additional effort on their part.
How to tell if the subscription model is right for your business
By considering the points we’ve discussed in this article, you should be able to get a good idea of whether a subscription model is suitable for your business. Although it’s a popular way of operating, that doesn’t automatically mean that it will work for you, or that your customers will respond to it.
Careful research and planning is essential to ensure that subscriptions will provide a good return on investment before you implement any changes to how your business operates. Explore what other brands in your industry are doing, how much they’re charging, and whether your customers would benefit from subscribing to your products or services.
As online shopping continues to move from strength to strength, subscription services are likely to become even more prevalent, so now might be the time to adopt this business model if you want to avoid being left behind. However, that’s not to say that you need to completely abandon the transactional model; depending on your business, the two may be able to work together in harmony to offer even more flexibility for customers while boosting your earning potential.
If you’re looking to explore subscriptions as a revenue stream, Access PaySuite has a wide variety of payment solutions to support your move to this model, including Direct Debits and online payments. With a wide range of integrations ready to connect your payment portal to a host of popular systems and services, we can help you to make the most of your subscription model.