Subscription business models earn money from recurring fees for using a product or service that your company provides. Today, CEOs, CFOs, CMOs, business owners and managers share a basic concern: How do you increase revenue to grow your business? There are many options for business growth that include adding more products, encouraging customers to spend more money and expanding operations digitally or with added brick-and-mortar offices. Related goals include increasing brand recognition, customer retention and profitability.
Statistics show that by 2022, subscriptions will account for 53 percent of all software revenue. [1] Most subscription services are software-related, but you can offer perks like free deliveries, recipes of the month or standard discounts on products with a subscription membership.
Offering your customers subscription services is one of the easiest ways to grow your business at a sustainable pace. The option is often considerably less expensive than other proven methods of expansion, and when done correctly, subscription services offer steady profit potential over a long-term period of time.
Adopting the Subscription Model for Your Business
Almost every method of business expansion and growth requires planning, product development and goal-setting, and the same is true of adding the business subscription model. The ultimate goal is to run your business more profitably, and the business model focuses on pricing, customer-targeting and ensuring customer satisfaction. Staying ahead of the competition involves pricing strategically, identifying trends and predicting market trends.
Updating business plans is a constant for businesses over long-term periods. You need to revisit your plan and look for additional strengths, weaknesses, opportunities and threats as well as verifying the ones you’ve considered previously.
Two Strategies for Offering Subscription Service
Two strategies for subscription services include the standard subscription billing model and the discount-based model. Both offer strengths and weaknesses. The former locks-in loyal customers who stay because of the perceived cost-value ratio of the subscription and the good customer service that your company offers. The other model uses discounts to attract customers who price-shop for their services.
The Benefits of the Subscription Billing Model
Also known as the recurring billing model, subscription billing is increasing rapidly as businesses discover that they can generate long-term income streams instead of selling once and allowing the customer to use the material forever or until outdated. The signature benefits of subscription billing include:
- Increased Number of CustomersEven though customers pay for service over a long-term period,many decision-makers prefer to do so because of the lower cost. Paying $25 per month is easier than paying a flat fee of $500.
- Predictable RevenueSubscription service smooths out the ups and downs of selling new customers. A large part of your income each month is predictable.
- Earn Additional IncomeYou can earn more each month by upselling and cross-selling.
- Ability to Offer Free Limited TrialsIt’s nearly impossible to offer free trials for a flat-fee product.The best you can do is to offer money-back guarantees.
- Brand LoyaltyOnce the customer accepts the subscription billing model, it’s easier to maintain the service by rote. Recognizing increased brand loyalty by beefing up customer service serves two roles: maintaining loyalty and given increased upselling opportunities.
- Price DesensitizationPaying the same amount each month desensitize customers to the price and increases the lifetime value of your customers.
The Benefits of the Discount-based Subscription Billing Model
There are benefits for offering discounts to establish new products with the public, build your brand and expand the customer base. Discounts attract shoppers who buy based on price. Unfortunately, you don’t build customer loyalty or increase profits by offering steep discounts. Customers come to expect big discounts,and they won’t be happy unless you offer them continuous deals.
Offering discounts on monthly subscription plans when customers pay for a year in advance is one way to capitalize on the subscription business model while attracting customers who shop by price.
Why Choose the Subscription Model?
Each day, you connect to the internet by phone or computer. Maybe you read an online version of the local paper,or maybe you still subscribe to hard copies. Maybe you turn on the television for the latest news updates. Both internet and cable services are prime examples of subscription service.
You might head to the gym where your subscription membership applies. Maybe you take an Uber to work, another subscription service. In the age of coronavirus,you probably order food delivery,which is yet another subscription service. Subscriptions are everywhere you look, which is why you should add the subscription model to supercharge your sales. The benefits of the adopting the subscription model for your business include:
- Ignite Stable Business GrowthIt’s always nice to attract new customers,but a shortcut is to extend the products you offer existing customers. You stand a better chance of marketing to existing customers because they already demonstrated their willingness to buy your products. You can quickly generate new income streams by offering your existing customers subscription services.
- Increase the Number of Monthly Paying CustomersCustomers are at the heart of subscription-based services, and providing exceptional customer service is the key to attracting and retaining loyal customers. Try to design your website and service to create great user experiences. About 49 percent of customers make a positive buying decision based on receiving great personal service. [2]
- Increase Your Conversion RateYou can use on-page SEO to offer discounts for adding a new subscription service as easily as you ,can discount products. Discounts usually incentivize people to buy now instead of “thinking about it.” Offering a free trial is a wonderful way to hook people on your service. Many customers forget to cancel the service after the free trial. The more useful and responsive your service becomes, the greater the number of people who will continue to accept automated billing.
- Improves a Customer’s Potential Lifetime ValueLifetime value is the estimate of what a customer is worth to your business operation. Subscription service offers a primary route to establish long-term service. Providing positive customer experiences helps to promote customer satisfaction. Satisfied customers will continue paying subscription fees even after their usage of the service drops. You can tilt things in your favor by establishing 24/7 support, personalized browsing and shopping experiences and targeted marketing messages and incentives to increase customer interactions with your brand.
- Improve Customer LoyaltyYour customers have already invested in your service by subscribing, and you need to capitalize on their loyalty to reinforce it and generate higher sales. When you add a service extension or new line of service, consult your existing customers for their opinions. Offer them an incentive to become an early subscriber, and seek reviews and testimonials to lock down a customer’s positive experiences. Statistics show that people willingly pay 13 percent to 18 percent more for products or services if they enjoy great service. [3] Providing better customer service and increasing loyalty allow you to charge higher prices.
- Improve Cash FlowOffering discounts for paying in advance is a great way to improve cash flow, which often makes or breaks a business. Seasonal slowdowns, market forces or unexpected emergency expenses can dry up the flow of cash so severely that companies might not be able to meet payroll or rent. Subscription services naturally stabilize income and p\rovide guarantees of sufficient cash flow, and receiving advance payments are a great way to increase cash flow during slow seasons.
- Ensure StabilityThe economy never rests -- which is both good and bad. Business downturns inevitably occur as do upticks. Hosting sales can prove unpredictable,and reducing your profit is not a sustainable business option. You have a stable blueprint of income,which is based on the different subscription tiers and billing cycles you offer. That makes forecasting revenue and buying inventory a lot easier.
- Meet Targeted GoalsSubscriptions provide data on supply-and-demand trends that can provide the necessary intelligence to make better sales forecasts. Keeping your sales goals challenging but achievable is the best goal-setting strategy. You can also use subscriptions as the basis for meeting profitability goals and lowering the cost of customer acquisitions.
- Increase Product TurnoverLoyal subscribers with high lifetime value help to ensure better product turnover, which enhances product movement.
- Get Greater Economies-of-Scale BenefitsYour company can benefit from economies of scale, which increase profitability. Subscriptions ensure that you never start from zero.Each month, there will be necessary production operations, subscription collections and inventory to move just to satisfy the subscription service demand. Adding more sales to the base increases the economies of scale accordingly. Planning your production more accurately and economically provides additional cost savings.
- Implement Subscription Service EasilyKeeping your service as simple as possible is the best way to start. That allows you to expand service later to increase your income stream. You can use Shopify to create a subscription program on a trial basis, and you can add features in this highly scalable environment as needed. Shopify provides an subscription opt-in button for your website,so you don't need to build a new website just to test the subscription model.
Why Some Companies Choose Not to Offer Subscription Service
Subscription services might be gaining increased popularity across myriad industries as more and more companies move to develop recurring billing services, but not everyone is ready to jump on the bandwagon. Some organizations simply prefer the straightforward nature of outright sales. Many companies don’t want to tangle their customers in complex subscription plans that often require digital spying to discover instances violate the terms of the subscription.
Subscription fatigue is a real thing, and companies need to take steps to compensate when their customers begin to tire of paying for multiple -- and often overlapping -- subscription services. Customers can view episodes of “The Golden Girls” and “Friends” only about 100 times before becoming bored with cable scheduling.
The Discounting Conundrum
Seth Godin, marketing guru and author of 19 books on in-depth marketing subjects, champions paying upfront for services that provide lifetime value. Grodin doesn't favor discounts because it leads to bottoming out, and he doesn’t support discounts on subscription services.
Discounts, however, have their place when used in conjunction with the subscription business model. You can offer a discount for paying a year’s fees in advance or give away a month after paying for a fixed number of subscription payments.
Companies can target subscription fatigue by keeping their service as fresh as possible and by offering unique, one-time-only experiences, personalized products and discounts on service.
Subscription Fatigue Generates Dissatisfied Customers
There are many causes of subscription fatigue that make customers unhappy. Free trials have become so common that consumers nearly need a subscription service to manage their free trials so that they don’t forget to cancel the service before the next billing cycle.
Customers often lose track of how to cancel their services to prevent unwanted cancellations of service. The drain on finances begins to generate hostility toward the company -- although automated billing after the trial is a standard practice that’s used almost universally.
Companies need to shore up their customer base by nurturing customers along with incentives, clear paths to canceling service and reminders to cancel before the deadline. Although it seems counterproductive, transparency in billing and ease of cancellation will go a long way toward attracting customers for repeat trials of other subscription services.
Dealing with Tight Profit Margins
Although subscription services are mostly not subject to high production costs, your overall economies of scale might be essential to earn a steady profit. It might be difficult to offer financial discounts on your service because doing so reduces your profit and can make your company appear desperate.
This can be a valid concern. Offering coupons, discounts on service,free gifts and other incentives can steadily erode profits and build customer expectations of additional discounts. You can manage this tendency by keeping discounts small, pairing incentives with increased spending and offering non-financial incentives. These might include greater flexibility in the terms of the subscription, first look at new technology, small but thoughtful gifts and rewards and recognition.
Strategies to Encourage Subscriptions the Right Way
Offering transparent pricing, unique benefits and superior customer service goes a long way in recruiting people to opt-in to your subscription offer. However, consumers receive myriad offers each day, and it’s essential to attract the prospect’s attention. That’s one of the major reasons for marketing to existing customers -- it’s easier to get their attention.
You can get attention by offering service comparisons, free trials of service and free downloads. Preparing specific types of content can also attract customers to your subscription service. The content might consist of articles, videos, slideshows and free access to podcasts. Some of the top subscription strategies include:
- Discounts for the First MonthDiscounting the first month of service offers a win-win for your company and consumers in the battle for subscription dollars. Giving interested parties a free or discounted first month sparks interest because people realize that they’ll get the full benefits of membership instead of a diluted version that constantly requests upgrading service to use any real-world features.It's easy to ask for financial information when customers actually sign up for your subscription service. Offering a discounted first month reinforces the fact that customers are signing up for the service. You can couch automated re-billing in beneficial terms that the prospect becomes a full member with all the relevant benefits.Offering a large benefit of up to a 95 percent discount pays off because your retention rate will be higher. This kind of offer is one of the most effective ways to acquire new customers while using only the costs of providing service to acquire customers. You should heavily promote the ongoing value of membership, and make all necessary disclosures prominent and transparent.This subscription strategy assumes that you offer a strong product that provides real -world benefits. The strategy won’t succeed without a good product. Offering free trials is a waste of promotional money if customers aren’t going to be happy with the product or find it almost impossible to use correctly without training.
- Strategic Button PlacementPlacing the Subscription Button under the “Direct Sale” button makes it obvious that you want subscription sales. The technique reinforces the impression that you receive all the benefits of product ownership -- for one month. When customers click on the link, the direct sale should be highlighted and entered in the checkout data.That’s a psychological trick that encourages prospects to opt-in for subscription service, which isn’t as final as buying the product outright. Coupled with a discount on the first month of service, subscribing to a service that the prospect actually wants becomes much more likely.The customer is not misled but chooses to opt-in to gain the benefits of the service or membership.
- Bolded Subscription ButtonBolding your Shopify subscription button ranks as the simplest and most effective way to attract attention.
- Automated Opt-InOffering an automated method of opting-in to subscription service is an effective method despite the fact that the approach isn’t subtle. For example, Fabletics uses the technique on its Shopify site to attract working women to its line of workout sportswear. The company is transparent and upfront in its promotion of VIP service that provides new workout ensembles each month at a heavily discounted price -- about 50 percent of normal retail. [4]Customers can choose to accept or skip any outfit, but they are charged $49.95 each month. In return, they receive a credit good for any outfit at any time. The company provides clear instructions on how to cancel the subscription at any time.Onnit is another Shopify site that generates millions of dollars in annual sales of sports nutrition and health supplement products. The company offers a subscription service that automatically reduces the cost of any product by 15 percent off manufacturer’s recommended retail price. [5]The company has perfected the way it promotes the service by showing the lower cost of a product first before showing the higher standard price. Choosing a different color for the “call to action” button makes it easier to opt-in and receive the lower price.
- Extra PerksEveryone enjoys receiving a discount, and even if you don’t want to offer discounts,you can still offer gifts, free shipping or other incentives. You can build line extensions by offering related products in the same category. Examples include offering Diet Coke to people buying regular Coke. It’s a great way to build sales.
- Customer PortalsCustomer portals make a wonderful incentive for subscription services. Using a dedicated customer portal, your clients can log into their accounts, make changes to their subscription and receive special offers.
- Outbound Marketing CallsSimple phone calls are an excellent way to promote the benefits of your subscription service. You can use direct marketing calls for customers who opt-in to receive them but haven't subscribed. Phone calls are also useful for retaining members who want to cancel their subscriptions. The option might be old-school, but outbound marketing calls work.
- The Rule of 100The rule of 100 states that products priced $100 or less should be discounted by percentages, which seem larger. Products that sell for over $100 should be discounted by dollars. The psychological effect of this discounting strategy has been well documented by consumer psychology trials. [6]For example, if you want to offer a $25 shirt for $20, the discount will appear greater if you couch it in terms of a 25 percent discount. If selling a $2,000 computer at a 25 percent discount, the incentive will be perceived as greater if you advertise it as $500 off regular price.
Using Subscriptions Intelligently
Subscription services offer many benefits for expanding your business, and you can offer a subscription service at minimal administrative costs. A simple VIP membership might only offer discounts on selected merchandise. However, you can receive a monthly payment for the opportunity to receive discounts on further purchases.
Imagine a steady stream of income from 2,000 or more subscribers each month. Even if the customers don’t buy anything, your automated billing provides extra cash that comes in handy during seasonal slowdowns and market crashes.
The key to success in customer subscriptions is offering exceptional customer service and perceived value of the subscription. You should continually nurture your customers and develop benefits that will convince them to retain the service. Empowering and engaging customers with your brand is an effective method of retaining subscription memberships. You can turn each member into a brand ambassador.
The benefits to your business include increased sales, greater profit margins, stable cash flow and long-term customer loyalty.
References:
[1] https://blog.fusebill.com/interesting-recent-statistics-on-the-subscription-business-model
[3] https://www.superoffice.com/blog/customer-experience-statistics/
[5] https://www.onnit.com/terms-and-conditions/subscription/
[6] https://www.businessinsider.com/the-psychology-of-retailers-and-deals-2013-3