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Unless you’ve been living under a rock you will already have subscriptions hitting your bank account at regular intervals so perhaps you have been wondering what are the benefits of a subscription model?

According to Statista, an astounding 10m households in the UK have a Prime account with Amazon having more than a 30% market share.

And if you don’t need to look very hard to find subscription services for almost anything you may want, from razors to software to your weekly veg shop.

So is a subscription model right for your business or is it all hype?

In this post we wanted to look at the model from the businesses perspective, the good and the bad to help you understand whether it is a good fit for your business.

We are looking at

  • What do we mean by the subscription model?
  • Disadvantages of subscription business model 
  • Advantages of subscription business model 
  • How to tell if the subscription model is right for you

What is a subscription model?

First, let’s identify what we actually mean by the subscription model.

The subscription method of buying has actually been around for many years, with newspapers and magazines selling on this basis as early as the 1700s.

But the internet age has seen a dramatic explosion in the number of companies adopting this approach and it almost seems to be the default way of working for many startups.

A subscription means a regular, standard payment whether that be a monthly, quarterly or annual payment. And this can be for goods or services.

For example, it is common for software companies to sell on a subscription basis, often dependent upon the number of users a customer has. So they will usually quote prices in “per user, per month” terms.

But goods are also suitable for a subscription service.

There are plenty of suppliers out there that offer regular deliveries of physical goods to customers. Naked wines, Harry’s razors and Hotel Chocolat all work this way.

In short, anything that you use regularly or that you need access to can be sold on a subscription basis.

Advantages of subscription business model

With a business model that has become so ubiquitous, you would be right to think that there would be a lot of upsides.

  1. It’s transformational

Moving to the subscription model is transformational for your business. Often we can feel that we are a little stuck in our particular rut and need something to shake us out of it.

  1. It can be disruptive

If nobody is using subscriptions in your industry then you could benefit from a first-mover advantage and be a true disrupter.

  1. It helps customers to spread the cost

If someone is subscribing for a service that costs a lot to set up then they may value the fact that they can pay as they go and spread the cost.

  1. Customers understand it

As we have already noted, almost everyone had a subscription of some sort or another and so this means that customers already get how these work.

  1. It can be very cost-effective to administer

Instead of sending monthly invoices, waiting for the money, putting the payments into your accounting system and then reconciling your bank, a subscription service is simplicity itself and with an automated service like PaySuite to help, administering it would take a fraction of the time.

  1. It does wonders for a regular cashflow

The great thing about subscription models is that you have the same money coming in each month, every month. This makes cash flow and business planning much easier.

  1. It helps you to plan your stockholding

If you know what you have got to supply and you know when you have to supply it then it is easy to plan your stockholding or move to a Just In Time stocking method.

  1. A subscriptions model helps with retention

One of the good things is that a subscription customer is much more likely to stick around. The power of inertia really is strong.

  1. It gives you great reasons to stay in touch

If you like to communicate with your customer and you want to sell more then a monthly subscription helps to give you reasons to contact them. Naturally, you’ll need to comply with GDPR but as long as you do, then you can introduce new offers as often as you like within reason.

Disadvantages of subscription business model 

There are downsides to the subscription model, just as there is with anything. WHile there are various ways to overcome them, you are well-advised to be aware of these before you make any radical changes to the way your company operates. 

  1. It’s a crowded market

The first disadvantage is really highlighted at the start of this article. The fact is that setting up a subscription service really does feel a bit like you are following and not leading these days.

It may be that you actually create more of a stir in your industry by not delivering a subscription model!

  1. It may take some operational changes

A subscription model is completely different to the way many companies have worked, often for a number of years. This means that their systems will all be geared to traditional pricing models

  1. You have to think carefully about your pricing

Pricing is a tricky subject and if you get it wrong on subscription pricing you could find yourself stuck with a customer who is paying well under the odds or having to upset them by increasing the costs soon after they join.

  1. You may not recover set up costs

If your business charges your current customers for set-up costs then you will have to absorb them and parcel them out over the early months of the subscription, if the customer cancels early then you may never recover those costs.

  1. You’ll need to change your marketing approach

You will almost certainly need to change your marketing approach to sell a subscription model. It will be a wrench but in a strange sort of way, this can also be a good thing as you end up reevaluating what you do and making it better.

  1. Your cancellation rate may rise

If you have customers who pay yearly upfront for a service then there is an inbuilt reluctance to move away however, if they only pay monthly then they may choose to leave before they have even given your service a chance. You will see a rise in early cancellation but you will find that this is balanced by the customer who stay for more than 6 months sticking around for much longer than normal.

  1. People may get bored

We have a short attention span these days and if you aren’t constantly refreshing the subscription offer then you may find that people get bored and leave for something new and sparkly.

  1. It can be heavy on cash flow in the early months

If you are moving to a subscription model then you will have all the costs associated with set up, marketing, changing your operational systems and completely transforming the way you do business. But you’ll only have a few monthly subscriptions coming in during the early months.

How to tell if the subscription model is right for you

So as you can see there are a lot of reasons why you might want to choose the subscription business model, but there are also challenges that you may have to overcome - so how do you choose?

The first thing is to seriously ask yourself if you are prepared to invest time, money and effort in the project. If you aren’t, then you shouldn’t set a subscription up but should concentrate on working in your usual style.

The second question is whether you would be able to recoup the set-up costs of a service. Many companies incur very heavy onboarding costs that wouldn’t make a monthly contract worthwhile.

You also need to consider the cash flow aspects of the move. If you have been used to receiving large payments at the start of a job, will it prove problematic if you receive smaller amounts more regularly?

Most importantly you need to know whether your customers value a subscription service. Would they take to it? Would they be happy paying monthly? Would it improve their lives?

Only if it makes sense for your customer can the subscription model work for your business.