Creating recurring value through a subscription model

Posted in Business and entrepreneurship.

The subscription business model has changed the relationship between businesses and customers. The shift from sporadic one-time sales to a periodically recurrent sale has proven to be quite lucrative for businesses. Such a model requires its own methodologies though. It is not a one-size-fits-all model. In particular, the subscription model has been shown to work well in the software, service, and e-commerce industries. As technology evolves, it is important to keep track of trends and happenings so that one is able to adapt their business to the times. So, why has the subscription model gained traction?

How the subscription model benefits businesses

Businesses are always balancing revenue and expenditure. In a transactional model, expected revenue can be predicted, but not to the extent that a subscription model can. The subscription model provides a level of predictability that facilitates better financial planning. The key here is steady, recurring, revenue streams.

Subscription models typically allow for better customer retention. Once money is being put into something, customers are more likely to stick with it to make the most of that money. A subscription business model essentially facilitates increased customer retention. Providing continuous value ensures that customers provide the same. Customer Lifetime Value (CLTV) is a metric by which a customer is measured in terms of their value to a business. How much does a single customer bring to the business per acquisition? A transactional model seeks to maximise acquisition rate to achieve higher CLTV whereas a subscription model seeks to maximise customer retention to achieve higher CLTV.

What makes the model work

In a vacuum, yes, these benefits seem good, but each model has its own methodologies. In order to maximise customer retention, a business’s relationship with a customer is of utmost importance. Continual improvements to the product or service is necessary to warrant the subscription.

Furthermore, subscriptions are typically handled within a closed system where each product or service complements the others. This is a method of engaging customers. The aim is to get customers onboard as seamlessly as possible. This means that a positive initial experience and proactive customer support is needed. Software may require intuitive interfaces and easy-to-read documentation.

And while customers are providing ongoing payments, a business is likewise required to provide ongoing improvements and support. Incentives such as loyalty programs or exclusive content is key alongside prompt responses to feedback. Businesses need to ensure that pain points are readily addressed as losing a customer in a subscription model is theoretically worse than in a transactional model. The focus is different, but this is not a hard set rule. Subscription-based businesses should be agile in order to readily see to it that customers are satisfied with their subscriptions.

Most of all, a subscription model only works if the product or service is able to provide ongoing value. When a subscription quickly becomes obsolete or overshadowed by another, that’s when the model fails at being a proper subscription model. When the product’s or service’s value is locked at the initial payment, it ceases to be a good subscription.