A subscription business model or a subscription-based model is a business model for generating revenues in which a business organization sells a product or service by asking its customers to pay a recurring price at regular intervals. Hence, as long as a specific customer pays regularly, he or she has access to this particular product or service.
The model originated from publishers in England during the 17th century. These publishers adopted a scheme that required readers to pay subscription fees for them to continuously receive copies of newly released books or new editions of newspapers and magazines.
Nowadays, it has been utilized by businesses in different industries and sectors for marketing their products and services. Examples utility service providers such as network carriers and Internet service providers, music and video streaming services, other online-enabled services such as cloud-based software and applications, and business solutions providers, among others.
Pros: Advantages of a Subscription Business Model
Benefits to Businesses
Recurring sales due to repeat purchases is one of the advantages of a subscription business model. Instead of offering a product or service for a one-time payment, businesses are somewhat guaranteed to receive a predictable and steady stream of income at a predefined date, thus reducing uncertainties while enabling them to reduce customer acquisition cost and focus more on expanding their number of subscribers.
In certain scenarios, the collective revenue stream from subscriptions can be greater than the collective revenue from single purchases. For example, in publications, subscribed readers have no straightforward option but to receive a copy of the latest newspaper or magazine. In software or applications, subscribers are enticed to purchase an entire bundle of all other products or services such as a complete software suite.
The model can also help build brand loyalty. Regularly transacting with customers promotes consistency in communication, helps in building and maintaining further the relationship between these customers and the business, and increases attachment to the brand through continuous usage of a product or service. It also increases the average customer lifetime value, thus opening more opportunities for upselling or cross-selling other products and services.
Furthermore, because of the regular customer transactions, it is easier for businesses to gather data that can help in making informed business decisions, thus facilitating customer relationship management. Some examples of data that could be collected include demographic and psychographic profiles of the customer base, feedbacks and other suggestions, and consumer insights for improving existing or launching new products or services.
Benefits to Customers
Convenience is another advantage of a subscription business model. Customers can find it convenient because it reduces or eliminates the frequency of placing an order, especially if they believe that they will buy and use a particular product or service regularly. Regular order placement can be time-consuming because the customer would need to communicate and transact with a business on a regular basis.
Most businesses also devise a pricing scheme that can make a product more affordable through a subscription-based model. Instead of a one-time cash-out of a particular product, such as a single-license software, subscription fees break down the total price to smaller amounts that could be paid on predefined intervals, thus making the model akin to installment payments.
In addition, because the model compels businesses to maintain communications and relationships with their customers, the continued transaction provides a mechanism for easier after-sales servicing. The feedback fed to these businesses can also help them improve further products or services, as well as the other facets of their value chain, thereby benefitting end-users. Note that these organizations will incessantly improve and innovate to retain their subscribers.
There is also the benefit from opting out of a specific product or service. A one-time purchase leaves an unsatisfied buyer no choice but to either endure that product or service, or replace it with another one from another provider. In a subscription-based model, the unsatisfied subscriber can easily cancel his or her subscription and in effect/ Fundamentally, this model allows customers to run a trial before fully committing.
Cons: Disadvantages of a Subscription Business Model
Drawbacks to Businesses
One of the disadvantages of a subscription business model for businesses is the need to have specific technology-based capabilities for managing the subscribers and their purchases. Acquiring and utilizing these capabilities have cost implications. Hence, a small company might not have the capacity to deploy this model because of the lack of technical competency, human resources, and financial requirements.
Note that the technical capabilities fall within the realm of information systems and the more specific customer relations management technologies and solutions. More specific examples include database management, order management system, recurring billing system, payment solution via a payment processor, a solution for refunds or payment recovery, marketing automation, and data analytics capabilities, among others.
Hence, considering the aforementioned requirements, a business needs to have an in-house or outsourced information technology team. Of course, because the model also compels a business to interact with its customers regularly, it also needs to have a dedicated capacity for providing customer support. For businesses with a small customer base and limited geographic reach, the cost of deployment might outweigh the benefits of a subscription-based revenue model.
The consistent revenue stream is also unguaranteed. During the startup phase, income might be uncertain due to initial sign-up avoidance behavior from the customers. The workaround is through freebies or a limited trial. Furthermore, a high cancellation rate is unavoidable if the business fails to offer valuable products or services and relevant customer support, among others. It is critical to constantly provide new value to the customers to avoid cancellation.
Drawbacks to the Customers
For customers, cost is a disadvantage of a subscription business model. In several situations, such as in the case of software and applications, some individuals prefer a perpetual license for a one-time purchase instead of a temporary license that will only be in effect as long as their payments are on time and updated. The commitment for paying subscription fees might be relatively more expensive in the long run than a one-time purchase.
There is also an issue concerning vendor lock-in that makes a customer dependent on the products or services of a business. For example, complementary products or services within the ecosystem of a business can make customers too dependent on a single vendor. Temporary licenses can also have business-critical implications to business end-users, especially if their operations depend on the products or services of a particular vendor.
Privacy is another concern. The model requires customers to divulge personal and professional information, including sensitive data such as contact numbers and financial details. Breaches to the database of a business could put these customers at risk of identity theft, financial losses, and other negative exposures. Some individuals are not comfortable with handling their personal data and information for personal and professional reasons.
Another disadvantage of a subscription-based revenue model is unnecessary purchases. Because the model locks a customer to a preordered products or services, he or she will continuously receive such as long as his or her subscription remains in effect. For physical items such as books and magazines, this can lead to waste, especially if the customer does not need or want all of the items he or she has received.
Summary of the Pros and Cons of a Subscription-Based Model
The model certainly has two-fold benefits: one for the businesses and the other for the customers. For the businesses, these include greater predictability of both income streams and product or service availability, lower acquisition and retention cost, and the possibility for better customer relationships. The model can be part of the promotional marketing activities or a specific sales promotion strategy of a business, as well as a source of its competitive advantage.
For customers, the benefits include convenience, relatively cost savings, and a more open line of communication with the product or service provider. Of course, there are drawbacks as well. The model requires a business to allocate resources in implementing and maintaining a system needed to acquire and manage subscribers. Also, this system has technological requirements. Customers might also need to evaluate their purchasing decisions to ensure that they are making informed and valuable purchasing decisions. Fundamentally, both businesses and customers must ensure that the benefits outweigh the costs.
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