What are the Mechanics of a Good Subscription Model?
by Karen Turtle, on 28 Feb 2019, 16:55:20
Subscriptions are infiltrating every aspect of our daily lives, and the introduction has been both gradual and subtle. I, for one, am signed up to three subscriptions, which turns out to approximate the norm within the urbanite 25-44 age bracket – certainly across countries such as the US and the UK.
After two years, I am still thrilled when my ink cartridges ‘magically’ pop through my letterbox as soon as my printer tells HP it’s running low. The monthly subscription to Netflix seems a bargain – four weeks’ worth of top rate movies and shows for less money than a single take-out meal. Then, half of Americans and 7.5 million Brits seem to agree – they have Netflix too.
Subscription boxes are also rapidly increasing in popularity and proliferating wildly. The revenue for meal kits alone is projected to increase from one billion US dollars in 2015 to US$10 billion next year. While the business-to-consumer market seems to have popularized subscriptions, leading B2B companies like Amazon Web Services, Salesforce and Adobe also lead at the helm and are among the first adopters of this model.
‘The subscription lifestyle’ is therefore no longer in its concept stage. In fact, it’s increasingly starting to look like the new reality, especially as more of us move our everyday activity online.
The increasing popularity of the subscription model is a compelling opportunity for businesses. Subscriptions offer the promise of a predictable, recurring revenue stream, which allows for more accurate forecasting and, with good forecasts ahead, many companies’ can boost their valuation.
But how easy is it to add a successful subscription model to your services? The acknowledged bedrock of a good subscription business is; quality of product and first-rate customer relationships. First-rate because you want to keep your customers for the long-run. But what about the logistics of this sort of business, and how can you competently preserve and nurture customer relationships and operate at scale?
Here is a look at the basic mechanics of a good subscription model.
Leave Your Shop Doors Open
A subscription business requires a digital makeover. Amazon is the perfect illustration of how this can work in practice. Customers visit Amazon’s website, select a product they’d like to receive on a recurring basis – a cleaning product, for example and the Amazon platform manages this purchase from viewing through to billing and renewal. Amazon’s overheads are significantly reduced because automation takes care of the full customer life-cycle, plus an online presence means that the company can reach any market from (A)fghanistan to (Z)imbabwee, 24/7, which translates to scale and higher profits.
Automation is very important for a recurring revenue type model because subscriptions get significantly more complicated as a business gets larger.
Traditional sales involve a basic two-way exchange –- I give you money and you give me a product or service in return. With subscriptions, transactions multiply exponentially however. Once the subscription has been bought, you’ve got renewals, opt outs, add-ons, upgrades, downgrades and so on.
As you grow, keeping tabs on all of these transactions becomes ever more laborious. Customer changes to subscriptions start to slip through the net, and errors in calculation are unavoidable. Fortunately, we live in the age of automation where enterprise grade infrastructures can be set up to effectively process these large flurries of activity and at friendly costs that most successful companies can recoup relatively easily.
Subscriptions Demand Flexible Pricing
Subscriptions are usually priced differently too, and this adds a whole new layer of complexity. With subscriptions, you’re trying to lure new customers and look after and retain your existing subscriber base.
This means that pricing has to be flexible. Most subscription companies offer a choice of payment plans. The most aggressively competitive companies maintain pricing in flux, reading shifts in customer behaviour and in supply and demand.
There are numerous ways of setting pricing. Subscriptions prices can be metered according to usage levels, tiered to accommodate different levels of functionality, discounted to encourage bulk purchases, or optimized to reward loyalty. Gyms and telecommunications companies often adjust subscription prices according to the time of day. Pricing can also be determined differently according to geographic region, it can be term-based to incentivize longer commitments, or it may be adjusted to accommodate partner promotions. There are free trials, early bird offers, freemium to paid plays, virtual coupons, overage charges, and it goes on.
Rather than jump in the deep end, it is best to start with two to three basic pricing tiers which can be adjusted over time as you learn more about your customers. If you have an ideal price for your product in mind, make sure to add another price above it to make it look more attractive. Always reward loyalty.
Streamline it: Billing, Payments, Accounting and Reporting
A typical subscription has a vast number of order transactions. Not only do customers need to be billed at sale, as per the traditional business model – the accounting team also has to deal with pro-rated accounts, usage-based billing and shifting billing dates. In a large-scale operation, tens of customers (or more) are often simultaneously logging in to manage and update their subscriptions. Without the right billing system, it can take weeks of headache to generate bills, and mistakes can be costly. Customers’ expectations are set by the biggest players, so they expect accuracy and easy and efficient payment.
This is why it’s very important to choose a good subscription management system. The ideal is to have a multi-user platform that offers backend team access and viewing of this hive of subscriber activity. The finance team should be able to quickly sync and pull reports that accurately reconcile billing, and which facilitate financial auditing. If the customers can get the same deal and can see their billing breakdowns from their personal dashboards, even better.
You Just Can’t Launch a Subscription Business Without Going Digital
As mentioned earlier, launching a subscription business at scale requires a digital transformation. The good news is that you don’t have to be put out of pocket to afford the infrastructure that forms the backbone of this model. Ideally you want one system where the full customer life-cycle can automatically be managed and where your teams can also regulate pricing, gather intelligence, create better selling opportunities and easily manage billing and reporting.
When the cogs and wheels of automation handle the core mechanics of your subscription model, it’s easier to free up time for more interesting and higher value activities; including finding more ways to thrill your existing customers, as well as build strategies to capture a wider audience.
Are you thinking of launching a subscription business? Why not reach out to our team for an informal chat on how Cloudmore can help. 👍