Once upon a time, subscriptions used to be limited to newspapers and magazines. Now you can't get through a day without seeing or hearing about a different type of recurring delivery. In this day and age, virtually anything you can think of that one can possibly purchase or use can be automatically renewed. We have everything we need at our literal and proverbial doorstep.
Though subscriptions are nothing new, they have boomed in recent years, starting with wine-of-the-month clubs in the consumer space, and SaaS (software as a service) led by Salesforce in the B2B space.
Cut to more recent examples of recurring sales strategy: Birchbox, the leading provider of curated cosmetics boxes, is a pioneer for recurring revenue in retail sales and has been valued at $484 million; and where it once stood alone, it is now competing with dozens of businesses with similar offerings (the likes of Ipsy and FabFitFun).
Even United Airlines has now incorporated a subscription billing service for frequent fliers, with a fixed monthly fee for privileges, such as checked baggage and extra legroom. And never one to shy away from a trend, Apple even started permitting subscription sales across all categories in the app store.
Types of Subscription Models
Here is a list of eight types of subscription models in the market; as you can see, it goes far beyond the box of consumables delivered to your door:
- Knowledge membership: website allows unlimited access to information—works best in a niche market where experts are hard to find
- Buffet content: streaming services such as Netflix and Hulu—works best when new and diverse content is added regularly
- Peace of mind: takes insurance to a new level through monitoring and alerts—think AmberAlert, Radian6, credit/identity theft monitoring
- Front of the line: works well with products or services that are complex and require specialists to fix (such as IT services)—particularly useful for customers who are not price sensitive and like to feel special
- Consumables: automatic renewal delivery of items that typically run low—such as office supplies, coffee, household goods, diapers, razors
- Surprise box: curated/customized packages of items—encompasses everything from pet supplies to cosmetics, art, clothing, and lifestyle items
- Network: sharing services such as Zipcar, Lyft, and BeatsMusic—ideal for a product or service that gets better as more people join
- Private club: product or service that is limited in supply—status offerings, such as American Express Centurion
Why have these subscription models become so popular? If you look at the immediate benefits from both sides, it makes sense:
- Customers buy on convenience. Whether they want to make their job or their life easier, automatic renewals are as easy as it gets.
- From a business standpoint, it guarantees repeat business, which is the lifeblood of any well-run organization. Also, subscription services put more focus on the long-term relationship with the customer, rather than on transactions (or, in some cases, rather than the product or service itself!)
Continuing to provide goods or services automatically ensures not only recurring revenue for the supplier but also a feeling of commitment on the part of the buyer. When buyers are committed, it's easy for them to become loyal.
It's basic psychology that we humans do not like to feel foolish. So, even if we aren't completely blown away by a service or product, if we continue to purchase we will convince ourselves we are satisfied because the alternative would be illogical, and deep down we don't like to look illogical.
However, providers have to walk a fine line with subscription offers to ensure that the customer feels the commitment but does not feel trapped. When customers begin to feel trapped, they become dissatisfied with the product or service; and when they are unhappy but still purchasing, the provider can become misled by that seeming customer loyalty.
Five Best-Practices for a Successful Subscription Offering
- Just as with any new business venture, for your subscription model to succeed you should have an established brand with a loyal following already in place, and the means to maintain constant output.
- Your offering must be a service, product, or solution that cannot be bought elsewhere or is limited in availability, fills an unmet need, or solves a problem.
- The type of subscription model that best suits a company will depend on not only your offering (product, service, access to information, etc.) but also customers' motivation (convenience, cost savings, special perks, exclusivity, surprise and delight, etc.). Not every business can create a subscription model out of thin air. So here's where segmentation can add immeasurable value to businesses looking to join the subscription bandwagon.
The first step is segmentation research, to find out who your target audience is and whether it would value a subscription service for any reason; you can then tailor your offering to appeal to your specific target. After your segmentation research, you may find that subscriptions may not be valued among your target buyers.
- Communicating the value of the service is paramount in keeping subscribers. If customers feel it is commoditized (i.e., they can get that offering anywhere else), they will just move on to a competitor.
The foundation of a successful subscription service is the relationship with the customer. Customers cannot be locked in from the beginning, which will make them hesitant to join in the first place; and, if they do join, they are heading into the relationship with doubts, which will only create a feeling of being trapped and, eventually, deeply felt distrust of your brand.
- Communicating value is also important to keep in mind when making changes to subscriptions. As we saw in Netflix's pricing debacle of 2011 (the company slashed an all-inclusive offer into two limited offerings, and drastically increased the prices), it should have communicated with its customers and sold them on the value of the new service offering instead of just springing the price change on them.