Back in the “old days” (as recently as the mid-2000s) subscription business models were mostly synonymous with the media industry. Consumers eagerly paid monthly or yearly flat rates for magazines and newspapers delivered to their front doors or cable TV transmitted directly into their living rooms.
Today, even as media businesses primarily serve their audiences through digital channels, their subscription models continue to thrive (think: Spotify, Netflix, Disney+, etc.). But what’s relatively new is the prevalence of products and services that also have adopted subscription models. Dinner? There’s a subscription for that. Sunglasses? There’s a subscription for that, too! Baby clothes? Subscribed! There’s even a subscription for baseball bats. The model is so ubiquitous, a 2019 study found that American consumers spend an average of $237.33 each month on various subscriptions. That’s almost $3,000 in committed annual spend!
The boom in subscription business models is not just a happy coincidence. Both legacy and startup brands have gravitated toward subscription offerings in recent years because the model offers valuable recurring revenue streams and a persistent brand presence with their most valuable customers. These factors combine to build an element of certainty in what are clearly uncertain times in our economy.
How businesses benefit from subscription models
When we think of today’s subscription models, we tend to think in terms of streaming services, specialty boxes (like StitchFix, Blue Apron, or Birchbox), ecommerce like HIMS or Dollar Shave Club, and access to exclusive events, content, and deals like with Amazon Prime. But subscriptions are spreading rapidly across a number of industries. Companies in the Software as a Service (SaaS) space (Salesforce, Slack, DocuSign, etc.) have famously adopted the model in recent years. According to one report, subscriptions will make up 53% of all SaaS revenue by 2022, which promises to be a pretty big number for an industry that’s already worth almost $160 billion. The food and beverage industry is even tinkering with the model after Panera Bread enjoyed a strong wave of PR earlier this year following its rollout of an unlimited coffee subscription for $8.99/month.
A recurring revenue stream is the most obvious benefit of a subscription model. When a business knows how much cash flow it can count on from month to month, quarter to quarter, or year to year, it makes it easier to plan budgets and make decisions across the entire organization, from raising capital, to going public, to introducing new product lines. And that sort of peace of mind is healthy for any business that doesn’t know what economic headwinds might be waiting around the corner.
Subscription models also promote long-term relationships between brands and customers. Instead of a one-off purchase, subscriptions promote frequent touchpoints between buyer and seller. As customers become more familiar with a brand’s attributes, they’re more likely to promote them to their friends and family and provide constructive feedback through surveys or social channels.
A subscription also may be a tool that incentivizes consumers to engage more deeply with a brand’s loyalty program. Customers can activate Panera’s coffee subscription, for instance, only after they join the chain’s free MyPanera program. And once a business can enroll a member, deliver on a promise, and exceed expectations, it only deepens customer loyalties – and spending. Amazon Prime members, for example, spend $1400/year compared to just $600/year of non-Prime members.
Another benefit is that a subscription can be a gateway drug of sorts for your brand. One core subscription can open up a whole new set of product and upsell opportunities. For example, Dollar Shave Club (one of the first prominent CPG subscription operations) famously hooks customers with razors, but it has also expanded into adjacent bathroom products covering skin care, oral hygiene products, hair care, and more.
Finally, a monthly product delivery isn’t just a recurring sale; it’s a recurring marketing opportunity. Businesses can and should use these deliveries to inform their customers about new products, available accessories, special promotions, and more. Even fun inserts and tchotchkes can help boost affinity for your brand. Dollar Shave Club, for instance, provides an entertaining bathroom reader filled with fun and relevant content to keep subscribers engaged with the brand.
How subscription models improve CX
For customers, the main benefit of product and service subscriptions is that their favorite brands can (literally) meet them where they are. This was true before the pandemic, but even after the outbreak of COVID-19, subscription services made it easier for shoppers to get what they need safely and securely, while keeping their own cash flow relatively consistent. Instead of risking exposure through monthly trips to the store to stock up on pet food, for example, consumers could simply subscribe to regular deliveries from major retailers or a specialty provider like Chewy, often at discounted prices exclusive to subscribers.
Subscriptions also offer a passive experience that’s welcomed by consumers. If it’s a product that they know they’ll use over and over again, they can simply set up their account and wait for their regular deliveries. This “set it and forget it” system gives consumers more of something they truly value: time. It also eliminates one more task they need to worry about, which is no small feat in times when so much is already weighing on their minds, all while building brand loyalty by eliminating the need to search out competitive offers.
Subscription models are challenging – but also rewarding
Not every business should fully pivot toward subscriptions, and sometimes the market simply isn’t ready for certain industries to adopt the model. Some auto manufacturers, like Cadillac, have tested and scrapped subscription models for their fleets. And while vehicle subscriptions haven’t quite taken off, manufacturers have found subscriptions to be a useful tool as they roll out new tech features for cars that are already on the road.
Any business that wants to consider a subscription model needs to do its homework through rigid market research. Ideally, you’ll want to identify the right price thresholds that maximize revenue while offering undeniable value to customers, even in economic downturns when they might look to cut monthly expenses. Similarly, you’ll need sure up supply chains and inventory management to make sure you can consistently deliver the right products and services on time. And, of course, you must always be prepared for disruptive variables (such as increased shipping costs, product returns, manufacturing delays, and sudden cancellations outside of planned churn rate) that may be out of your control.
But with diligent planning and clever marketing, a subscription model is better than most other business models at keeping the cash flowing and your customers glowing.