New Industries Turning to Subscription Business Model.
New Industries Turning to Subscription Business Model
2022 Hot Trend You Should know
The subscription business model improves buyer retention and encourages customer success. Thus, the subscription business model is beneficial to many organizations.
This blog discusses a subscription business model, its functions, and some advantages and disadvantages. We will also see why businesses want to turn on the subscription model, the newest trends, and industries offering subscription-based services and products.
What is Subscription Business Model?
A subscription business model is a recurring revenue model in which customers pay a weekly, monthly, or yearly fee in exchange for a product or service the business is offering. This model allows for the leverage of customer relationships and creates a steady income stream. Such a model is beneficial for both sides - businesses and customers. Companies can retain customers for future sales rather than needing to re-engage them on a more frequent basis. With a subscription business model, a company can secure monthly recurring revenue (MRR), which will keep the business afloat throughout the most destructive times. Nevertheless, this model is beneficial to customers, as they have the convenience of automatically repurchasing a product or service.
The subscription business model can be a practical and lucrative approach to running a business operation for the right product, brand, and industry.
How Does a Subscription Business Model Works?
In such a model, customers are charged repeatedly for the product or service the business is offering. However, customers can choose how long and often they want to receive an offer. In addition, most companies offering a subscription-based model also provide an option to renew or cancel the offer at any time. Let's see one example - a local newspaper. While anyone can buy newspapers individually, most who read them have a subscription. This way, the newspaper is delivered to the individual's front door for a fixed rate, so the person does not need to go to the store and purchase one.
Benefits of a Subscription Business Model
01 - Subscription models are convenient for customers
We are busy all the time. But with such a model, an active individual with little or no effort can get a product or service delivered when needed. Moreover, the subscription business model creates a more seamless customer experience, as it saves individuals from spending countless hours on product research and shopping in many stores.
02 - Businesses can accurately predict revenue
Subscription models make it easier to predict how much revenue the company will receive each month. Since the customers are repeatedly paying, businesses know when they will make a payment and how much it will be. In addition, when a business is factoring a budget into a business strategy, this model will help to represent the company's resources.
03 - Subscriptions can attract more customers
Sometimes the price tag on a product will encourage buying. Charging weekly, monthly, or annually allows businesses to set the price at a more affordable point and lets customers budget their monthly expenses. Customers also tend to stick with a subscription service once they have signed up. As angel investor Eric Stromberg notes:
"Subscription is a powerful business model because it creates an environment where the default customer behavior is retention, as opposed to one where the default behavior is churn."
04 - Subscriptions decrease customer acquisition cost
Businesses can spend countless dollars trying to engage with potential customers who don't know the company and neither trust the business. However, the subscription business model allows doing business with individuals who already do. This model enables to focus on customer referrals and cuts down marketing expenses.
05 - Businesses build a strong relationship with their customers
Another benefit of working with the same customers is that the business can develop stronger relationships with them over time. When the service team is always there to provide excellent customer support, customers learn to trust employees and become accustomed to working with the business. This plays a crucial role when customers decide whether or not they will renew their Subscription.
Challenges of Subscription Models
While subscription businesses enjoy unprecedented popularity, the model is far from bulletproof. Recognized companies such as MoviePass and Blue Apron have reminded us that plenty can go wrong with such a model if a product, pricing, positioning, and incentives are not aligned.
01 - Managing Churn
One of the critical benefits of adopting a subscription model is repetitive customer purchasing. However, such success is not always guaranteed, as the subscription meal kit service Blue Apron illustrates.
"Customers are quick to cancel services that don't deliver a superior experience, such as poor product quality, dissatisfaction with the assortment, or a lack of perceived value." - McKinsey.
Blue Apron was an early success story in the subscription economy, but it began to stutter after its 2017 IPO due to customer attrition publicly. As a result, Blue Apron found itself on a Harvard Business Review article called a "customer acquisition treadmill," churning many customers and spending huge money to replace them. Churn rates vary from different segments within the subscription economy. Depending on the industry, churn rates range from 4.79% to 10.54%, according to data from Recurly. But with an easily cancellable subscription plan, it's risk businesses are willing to take.
02 - Battling Competition
Another challenge facing businesses when using the subscription model is the sheer volume of subscription options. A 2019 Fetch survey showed that 75% of respondents reported that the variety of options had made it much harder to choose and stay with the desired Subscription. At the same time, 40% stated they planned to reduce the number of subscription services they subscribed to.In the earliest days of the subscription model, Netflix was a primarily unchallenged giant in the space of videos, with Hula in a comfortably distant second place.But influential media brands and networks, including Disney, Apple, CBS, Facebook, and even Amazon Prime - have thrown their hats into the streaming ring, quickly growing the space more crowded. This leads to frustration for customers who feel overwhelmed by many choices. As well as, there is intense competition among platforms competing to stream the most demanded content. Some industry observers speculate that there might not be enough customers and that those customers will begin to drop one subscription service in favor of another.
Surprising Industries Using a Subscription Business Model
A growing number of businesses are adopting the subscription business model - in many cases, in industries that you might not expect.
01 - Airlines
Travel companies turning to a subscription business model can offer a couple of different value propositions. For instance, subscription models can make travel cheaper for frequent travelers, but the more attractive benefit may be saving time.For example, an airline company can offer to save time in the airport by purchasing a premium subscription for frequent business travelers. Surf Air positions itself as California's "private air travel membership," offering unlimited flights on private planes for $1,950/month for its members. The company also claims to be a more efficient service than commercial flying.
FlyLine is another airline company taking out the annoyance of air travel with a subscription service. The company focuses on saving subscribers money on tickets for $49.99 per year Basic subscription or $79.99 per year Premium subscription. FlyLine promises "extraordinary flight deals you can't find anywhere else." FlyLine reports that its subscribers will save an average of 10-15% on domestic multi-carrier bookings and anywhere from 20-60% internationally.Surf Air and Flyline simplifies customer choice and saves loyal customers from hunting for deals on multiple websites or airlines.
02 - In-home fitness
Subscriptions aren't precisely new to fitness - for decades, gyms have run on monthly and annual membership plans. But in the digital era, businesses are offering subscription fitness programs that let subscribers sweat out in their own homes. As a result, such in-home fitness subscription models are becoming more and more popular. Such workout programs offer customers a solution to work out when and how they want - going beyond an at-home treadmill or exercise video with offerings like interactive digital classes or one-on-one remote coaching.Subscription models also enable brands to reach consumers in smaller cities and less-populated regions, where high-end gyms might not be accessible.
Peloton is the most recognized player in the emerging subscription-fitness space. The brand combines one-off product sales of its bikes and treadmills with a $39/month subscription for ongoing access to a library of workout-related content.By 2019, Peloton had sold 577,000 of its "Connected Fitness Products," — but it sold 1.4M subscription services to its members.
03 - Health & Wellness
Nowadays, healthcare providers have explored how a subscription service will offer a solution to lower point-of-service costs and reduce individual health providers' load. MDVIP is an excellent example of a subscription-based approach for healthcare providers. Rather than covering visits through a combination of insurance and out-of-pocket expenses, MDVIP members pay a flat yearly fee ranging from $1,650 to $2,200. This fee covers preventive care and diagnostic tests and a variety of value-added services such as meal plans, fitness plans, and 24/7 physician availability.
Under a subscription model, a physician can earn the same amount as they would by working under a traditional model. However, the physician sees only about one-sixth of the number of patients. For doctors, this means reducing caseloads without losing money. For patients, this means more personalized care and reduced up-front costs because they pay gradually throughout the year rather than all at once at the point of service.
In 2019, tech company Fitbit launched its first paid subscription service, Fitbit Premium. The program provides:
- "Advanced insights" that go beyond those offered to all device owners.
- Coaching is tailored to address common health concerns, such as diabetes and weight management.
- Health and wellness reports that subscribers can share with their doctor.
Subscription healthcare services highlight how such a model can provide value to stakeholders on both sides of an equation. For example, in the case of subscription healthcare like MDVIP, patients get more personalized, attentive care, and providers get less hectic caseloads.
What's Behind the Rise of The Subscription Model?
In decades past, if someone had a subscription, it was likely for a magazine or a local gym. Nowadays, we have a subscription for everything - from music, TV shows, clothing, and even murder mysteries!
How did we go from having a few subscriptions to having more than we can count?
01 - Four Factors Driving Subscription
Price is one of the biggest reasons for the rise of the subscription model.
Let's take Costco as an example. The company built its business by limiting customer access. At first, business owners paid to access Costco's stores. After that, Costco invited individual members who were happy to pay an annual fee for access to much cheaper goods than they could purchase from the company's competitors. As a result, Costco customers pay a yearly fee for unique goods sold at low prices. This speaks to another factor - convenience. Why should anyone need to run to the local store every two weeks for charcoal or cat food when you can subscribe to those items on Amazon? And the third reason why the subscription model is trending - is personalization. For instance, Loot Crate has succeeded because they offer tailored tastes to each customer. Such a subscription model sends necessary and cool stuff and lets us feel seen and remembered. Finally, there is curation, which is slightly different from personalization. It's the magic behind a good Spotify playlist and services like Birchbox. Curation is the feeling that an expert pulls together pieces to make an exceptional product.
02 - Large brands Are Taking Notice
Many big enterprises are jumping on the subscription model. For example, Target launched Cat & Jack - a kid's private label clothing subscription. In addition, Sephora is battling Birchbox with its Beauty Box.
The two companies we wouldn't think need revenue from Subscriptions - Restoration Hardware and Lululemon - both offer a subscription model to their customers. For example, you can get a Restoration Hardware grey card for $100 a year, which gives you 25% off any purchase, and you can access a private interior designer. On the other hand, Lululemon recently launched a subscription model that offers customers a pair of pants or shorts, workout classes, and free shipping for $128 a year.
03 - What Can We Learn from The Rise of Subscriptions?
To recap everything about the subscription business model and make it successful, there are a couple of things to remember.
First, make sure that the offer is personalized. Personalization is the driving force behind the success of companies like Blue Apron and Stitch Fix.
Second, the offer must feel curated. The customer wants to feel that the professional has brought things together and that the customer is getting the best offer possible. This will add a layer of justification and satisfaction for the subscriber.
Finally, a business can leverage existing brand assets to launch a subscription model. Amazon, Sephora, Target are all great examples of existing companies that have added a Subscription-based model to their infrastructure. Like all opportunities in business, if the big dogs don't want to offer customers a subscription, someone else will.
CrowdedHero's Favorite Subscription Business Model
We are excited for those who have got this far reading this blog. We would love to share one of our favorite companies working with a subscription business model.
Introducing - GEGE
GEGE is for those who want to make their life much easier with a baby.
The business offers premium-quality diapers with easy and flexible service. It's a subscription-based business model, offering to deliver diapers right to parents' doorstep. GEGE has successfully designed its subscription business model to lower parents' struggles. It's not that easy for busy parents to run to the store for diapers every day, so the business is taking care of such a struggle. With a monthly subscription for 31.00€, parents can forget about diaper shopping. Not only has the company addressed parents' struggles and found a perfect solution, but they are a fast-growing eCommerce business with many opportunities. In addition, GEGE is open-minded to exit within the next six years.
The CrowdedHero team is excited about this business because soon, you will be able to invest in GEGE in return for dividends and a realistic exit in the next 6 years.
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