The Value of the Subscription Business Model and Why Start One?
Subscription business models have transformed the current marketplace. Netflix has replaced your run to the local Blockbuster store. Spotify has replaced the $1.29 purchase of one song on your music-playing device. And finally, Amazon Prime has pretty much replaced every necessity in your life. What do all three of those companies have in common? They are all billion-dollar companies with a subscription business model.
What is a Subscription Business Model?
A subscription business model allows a business to get recurring revenue on a monthly or annual basis by offering a good or service. From 2012 to 2018, subscription businesses grew more than 300%, which is about five times faster than the revenues of S&P 500 companies. Furthermore, according to Shopify, “the subscription e-commerce market is projected to reach $473 billion by 2025.”
The most popular example is the streaming service, Netflix, where one can watch their favorite movies or shows starting at $9 per month. When the COVID-19 pandemic struck, people had to adapt to a new lifestyle. As cities nationwide were experiencing lockdowns and curfews, people were confined to the comfort of their own homes. No one had to leave their house to complete daily activities such as grocery shopping and exercising as it was done via subscription-based companies.
One of these successful subscription models was HelloFresh, a customizable meal-kit company based in Berlin, Germany. From choosing meals that are quick and easy to meals that are family-friendly, HelloFresh delivers to your door an easy-to-follow recipe with pre-portioned ingredients. HelloFresh reported sales of about $1.13 billion dollars for the third quarter of 2020, which is up 120% from 2019. An example of a subscription-fitness company is Peloton. It has seen its usage increase substantially during COVID. Besides Peloton’s trademark spin bike, Peloton charges $12.99 per month for its digital membership, giving access to workout classes of all types. Thankfully, COVID numbers are starting to dip as vaccination rollouts continue to increase. However, subscriptions to services and goods continue to increase and do not plan to stop anytime soon.
Benefits to Starting a Subscription Business Model:
Guaranteed Source of Revenue: This is important because it can be used to predict future sales, inventory checks, as well as money to reinvest back into the company. In unforeseen times like COVID-19, having a subscription business ensures incoming cash flow.
Decreasing Customer Acquisition Costs: Once a customer has purchased a subscription plan, there is no need to spend additional marketing towards these customers as they are committed to your brand. In addition, if your company releases a new product or service, your pre-existing customer already knows the quality of the products or services you offer.
Customer Loyalty & Relations: One luxury that many small businesses have is customer loyalty. Successful subscription businesses create a loyal relationship with the customer and if they keep purchasing, you as a company can cater to their experience to make it that much more special. If your business or service offers customization, people love to personalize. Even if there is no customization, there is still that element of surprise where customers can discover new products.
Quick Tips on How to Start:
Choose and Evaluate the Right Subscription Business Model: Are you providing a curated box, a replenishing product, or is it for extra perks?
Experiment: Test your pricing and products and adapt to your market. The last thing you want is consumers who churn quickly.
Customer Retention: Companies often focus too much on trying to acquire new customers and lose focus from their loyal consumers. Most of the time, those loyal customers will be more valuable.
Diversify Marketing Tactics: Social media is the new wave. Offer your product or service to an influencer to help gain traction. Send out emails or even mail out flyers. It is important to keep your customer engaged.
Key Takeaways on Subscription Businesses:
The subscription business model is growing and becoming increasingly beneficial for small businesses.
Subscription business models provide a constant stream of revenue for businesses, allowing for an increase in passive income.
Subscription business models allow customers to customize to their own preference
Customer retention and loyalty is the key to success with any subscription business model.
As a social impact initiative, Rem and Company also offers free consulting services and resources to small businesses and nonprofits impacted by COVID-19. Our pro-bono consulting teams provide small businesses with the opportunity to identify and prioritize issues facing their business, propose innovative strategies, and facilitate execution. If you are a small business or nonprofit in need of assistance, learn more about how we can help.