The average consumer has almost four subscriptions. What makes them so enticing? For Netflix users, it’s the promise of endless high-quality entertainment delivered efficiently and at a predictable price. Subscription models facilitate a relationship that fosters trust and loyalty. “Technology is extending the infrastructure that enables these trusted relationships. Subscription billing platforms, digital support and the ability to serve content and provide services have exploded”, says Kellman Baxter, the author of the book “The Forever Transaction: How to Build a Subscription Model So Compelling, Your Customers Will Never Want to Leave.”
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What are the benefits of adopting a subscription business model?
Predictable cash flow
Subscription models create predictable revenue for businesses, enabling them to manage their money better and plan confidently. With a more predictable cash flow, companies can get ahead of their competitors by reliably allocating a portion of their budget to making their products even better.
Relationship-building
Instead of wasting money on post-purchase remarketing, subscription models allow organisations to remain perpetually engaged with their consumers. Marketing budgets can be redirected to product development and customer service, facilitating a cycle of continued satisfaction.
Better valuation
If you want to sell part or all of your company, consider implementing a subscription-based business model. Subscription businesses have a higher valuation. According to Kellman Baxter, businesses with successful subscription models can be valued at a difference of millions.
Direct-to-consumer access
Subscriptions allow companies to move away from third-party sellers, distributors or retailers. By selling directly to the consumer, businesses benefit from a stronger customer relationship and access to behavioural data. Product teams can use this data to improve their services and reduce the risk of losing revenue by doing more to keep customers likely to cancel.
Increased revenue over time
People are willing to pay more over time for flexibility. As society moves away from ideals of ownership toward a ‘shared access’ economy, more people value using products without the burden of ownership. Enterprise software companies are a great example of this. Many software companies have introduced software-as-a-service (SaaS), which provides consumers with enticing benefits such as access to the product, smaller individual payments and the flexibility to leave when they want - even if it means they pay more over time.
Alamy transformed its digital commerce business by moving away from its traditional one-image sales model with the help of composable technologies.
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Subscriptions aren’t just for consumers, they’re for B2B companies too
Whether a subscription model is right for your business depends on the type of products you are selling. Any organisation that can align the goal of the customer with the goal of the consumer can create a successful subscription model - and it’s not just limited to B2C.
A great example of this is VR FleetCare, a 150-year-old Finnish rail maintenance provider that expanded internationally with a refreshed product strategy for their SmartCare service. SmartCare is a subscription-based service that processes data from smart sensors on rail machinery to offer predictive insights that help its customers optimise maintenance and reduce rail disruptions.
Another example is Caterpillar Inc - a manufacturer of machines and engines for construction, mining and energy transportation - which created a subscription-based model for their smart machinery products. Caterpillar’s product team also benefit by accessing rich data that help improve their products. By aligning the goal of the customer - to improve efficiency and bottom line - with their own goals - to improve product effectiveness and grow revenue, Caterpillar Inc. successfully launched one of the largest subscription services in their industry.
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Do subscription models make businesses more resilient?
It depends on your industry and what your business is. During times of change, people are more likely to adapt their behaviour, which means it’s a good time to experiment. Once successfully implemented, companies should prioritise retention over acquisition. Improving retention allows companies to spend less on acquisition and builds resilience. If you focus on retaining customers and improving product quality, your customers will help you grow your subscriber base.
Fruitbox, Finland’s biggest and oldest B2B subscription service, has been growing at a steady pace of 20% per year. Instead of getting complacent, they invested in making it easier for customers to manage their subscriptions, place repeat orders and redeem loyalty points online. The results? Improved customer satisfaction and a 12% increase in sales.
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How to succeed with a subscription model
Make it easy to cancel
Many companies go wrong by making it hard to cancel. The easier it is to cancel, the more customer loyalty and return subscribers you’ll see. By doing so, Netflix knows the value they gain will pay off in the long run, increasing the likelihood of returning customers and boosting word-of-mouth. In 2023, Netflix announced they will cancel any subscription left unused for a year, setting a new standard that asks customers to for as long as they get value.
Be aware of subscription cynicism
Consumers who are tired of bad subscription services are pushing back. They are distrusting because they’ve had negative experiences in the past. Consumers know what a subscription should do versus what it actually does. They want to try a product without entering card information and easily cancel subscriptions when they choose to. To be successful, businesses must be aware of cynicism and look for ways to create trust.
Consider the long-term value
Consider the lifetime if a consumer were to stay with a particular product or offer. What problem is it solving forever? If you are a company offering meal deliveries, do you promise novelty with every meal, or will people get tired of the same menu? Consider the value of your subscription idea over time and formulate a ‘forever promise’ that’ll make consumers stay.
Counter subscription guilt
Is there too much value? If your subscription offers too much and people can’t use all of it, they might cancel because they feel guilty about not using all the value they’re paying for. For example, if they’re subscribing to a publication, how will you offer value to customers who read more versus those who read occasionally? Companies should consider building flexible options to offer different values at different prices.
Elisa, one of the biggest telecom companies in Finland, overcame this challenge with a guided selling wizard. Their B2B internet subscription portfolio didn't match their customers' needs. The solution? IONA created an online self-service channel that could consider a variety of customer needs and recommend products and services that would offer just the right amount of value.
How should larger companies approach subscriptions?
First, create a forever promise. Swiss shoe brand On kicked off its Cloudneo subscription service with the promise of an endless supply of shoes that subscribers will never feel guilty about. “The shoe you will never own” is available for a monthly fee, and worn-out shoes can be returned and replaced for free - locking in raw materials for new shoes while reducing waste through a circular economy.
Start small by picking a small section of your target audience to which you can make a ‘forever promise’ and optimise the experience. Moving away from product-centric to focus on the customer journey.
Once you have predictable engagement, acquisition and retention with your pilot program, consider rolling out the subscription model within a larger part of the company.
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Conclusion
Almost every business could be subscription-based. Subscription models create resilience for B2B and B2C businesses by fostering trust, loyalty and a predictable source of income. To be successful, businesses must first know the answer to, “What is in the best interest of our customer in the long term?” and “What are the biggest problems they want you to solve?”, before building a forever promise around it. Start by wrapping services around your product with a small pilot program before rolling it out to a larger audience. Once you’ve established your service, prioritise retention over acquisition.
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