A subscription service isn’t a new concept. This model dates back at least as far as newspaper subscriptions that brought the weekly paper to your doorstep. Recently, a whole new fray of subscription revenue services has sprung up, giving customers the ability to plan, pay and schedule services and product delivery in advance and businesses access to a predictable, recurring revenue stream. But what makes subscription business models more than just another passing fad? What will distinguish the here-today-gone-tomorrow players from those that last?
Here are two strategies for building a subscription business model that lasts:
Build and expand your subscription offering on multidimensional value exchange.
For now, most subscription businesses are thriving on a simple value exchange—annuity revenue from customers in return for the convenience of not having to go to the store for diapers, replenish break room or pantry supplies or remember to replace the refrigerator filter. But those businesses that last will go beyond convenience factors and recurring revenue to create a multidimensional value exchange with subscription customers. This starts with:
- Using repeated customer to identify unmet needs or common pain points in the experience
- Evaluating assets—expertise, excess inventory or service capacity—for subscription potential
- Deciding what, if any, additional investments need to be made to operationalize that offering
- Projecting the market size and value based on LTV to determine if investments are worthwhile
For example, Rent the Runway, which lets customers rent designer duds, added a Pro service for an annual subscription fee, that lets customers save on rental insurance and shipping costs. They recently introduced a Style Pack that leverages existing assets, like excess inventory and service capacity, to offer customers a bundle for an additional annual fee, which combines clothing rental with a styling appointment and accessories. These additional services create a multidimensional value exchange of incremental revenue and asset utilization in return for convenience, cost savings and expert advice.
Evaluate your operations to determine if and how you could use existing assets to help customers avoid common pain points or enhance their experience with your brand. If you’d need to hire more staff, invest in advanced technology or develop a new process, first perform a cost-benefit based on market size—how many existing and potential customers are likely to buy the service—and lifetime value of subscribers versus non-subscribers. Subscribers may have a higher retention rates, lower retention costs and positive repeat interactions that turn them into advocates who attract other customers.
Help customers get the most out of subscriptions through communication, control and customization.
Customers may face fear of commitment to subscription services. No one wants to hand over their payment information, sign up for a recurring bill or prepay for products or services only to find they can’t get out if their needs change or they’re dissatisfied. For businesses, predictable, recurring revenue and demand may be the very reasons you launched a subscription model, making you reluctant to give customers an “easy out”. But, you can increase customers’ comfort and satisfaction with subscription services through careful communicating, measured control and customization.
Proactively communicate about how your subscription service works. Answer FAQs about sign-up, usage and cancellation. Show step-by-step processes and enable those processes in digital and traditional channels. List subscription costs and fees for add-on services and cancellation. Communicate via customers’ preferred channel throughout their subscription, not just for marketing messages, but also notification about upcoming services and reminders about charges to their account. Provide digital access to service status and account history for real-time engagement and to show value over time.
Control and Customization
Some aspects of a subscription service may be flexible, without costing the company extra time or requiring additional resources. The latter represents an opportunity to let customers control the details their subscription. Amazon Subscribe & Save, for example, gives customers control over the date and frequency of their shipments. Amazon also communicates before a package is shipped, giving customers the ability to review and modify their order before it ships. Customers also have some control over how much of a discount they receive, based on the value and volume of items in their cart.
Other elements of a subscription model may be harder to change. Allowing customers to significantly alter their order could affect operation and supply chain costs by increasing the time needed to pick and pack the order or raising shipping costs. It’s hard to pass these costs on to customers. And frequent changes could send your variable costs into a tailspin. Tiered subscription services can help you structure subscription fees to account for a range of variable costs and place customers in the right service tier based on their needs, minimizing changes and giving the feel of a bespoke service.
Subscription services have potential to improve business results and operational efficiencies by delivering predictable revenue and enabling you to forecast expenses. But, convenience alone is a fading competitive advantage as more services emerge. Over-saturation of the market will ultimately reduce switching costs, making it harder to compete for savvy customers and eroding financial and operational gains. Set your subscription service up for success by delivering value in numerous ways, communicating with customers and giving them control and the ability to customize the service to their needs.