KEY DRIVERS OF SUBSCRIPTION-BASED ECONOMY

KEY DRIVERS OF SUBSCRIPTION-BASED ECONOMY

October 3, 2018

What is a subscription-based economy?

Subscription-based economy is the outcome of a new business model where a customer pays a subscription price to have access to a product or service. The subscription either has a time-based or a quantity-based validity. The model was initiated by magazines and newspapers, but is now widely used by many business entities. It’s a new model based on an old concept. We all remember having daily organic dairy milk delivery every morning, while paying the bill at the end of the month. That was an old school subscription model which has been rejuvenated in the era of technology and innovations.

Subscription-based business models are popular mostly because this business model offers relatively stable and predictable cash flow. The lifetime value of customers is higher as customers usually do not cancel their subscriptions if they are satisfied with the service and if they perceived the value of the service to be high enough. The stability of the business form also makes the investors consider subscription-based companies high in valuation. In short, the reason why this model is so lucrative is because:

  1. Recurring, Stable and predictable stream of cash flow
  2. Lifetime brand value to the customers
  3. Bigger customer base and more valuable, long-term relationships with customers.

In a growing economy of Bangladesh, subscription-based model is a fairly new concept and the market yet needs to kickstart, therefore not much can be said from the perception of our country. There was practically no study conducted on this model in our country. However, there are many studies done on the US market. McKinsey’s research team interviewed 5,093 US-based respondents, 4,057 of which were online shoppers who had spent at least $25 online in the past month. A report constructed by McKinsey & company named, ‘Thinking inside the subscription box: new research on e-commerce consumers’ published on February 2018 sheds light on the following statistics that can be useful to initiate a subscription-based model in Bangladesh.

  • E-commerce subscribers are most likely to be 25 to 44 years old and live in urban environments.
  • 15% of online shoppers have signed up for one or more subscriptions to receive products on a recurring basis, frequently through monthly boxes.
  • 15% of online shoppers have subscribed to an e-commerce service over the past year, with 46% of respondents subscribed to an online streaming-media service including NetFlix.
  • Women account for 60% of subscriptions, and men are more likely to have three or more active subscriptions. Men are more likely than women to have three or more active subscriptions (42% versus 28%) suggesting that men value automated purchasing to save time by reducing store trips.
  • 55% of all subscriptions are curation-based, making this category the most dominant in the 2018 subscription economy.
  • 28% of access and curation subscribers say having an excellent personalized experience is the most important reason to continue their subscriptions. For replenishment subscribers, convenience (24%) was the most important consideration, though the value for the money (23%) and personalized experiences (22%) were also important. Subscription churn rates are high, and consumers quickly cancel services that don’t deliver superior end-to-end experiences.
  • Only 55% of online shoppers who consider a subscription service subscribe. Despite the hype surrounding subscription business models and the cloud apps and platforms supporting them, making a subscription-based business work is more difficult than it looks. Replenishment-based subscription services have a higher conversion rate (65%) than curation (52%) or access services (51%). McKinsey found that 40% of e-commerce subscribers have canceled their subscriptions, further underscoring the importance of delivering an excellent customer experience on an ongoing basis. The company with the highest long-term subscription rate is Amazon Subscribe & Save.
    Source: Mckinsey & company: Thinking inside the subscription box: new research on e-commerce consumers.

TYPES OF SUBSCRIPTION MODELS

From expert belief subscription-based model can be of following 9 types:

SUCCESSFUL BRANDS WITH A SUBSCRIPTION MODEL

When was the last time you paid to have a mobile application on your phone? Because existing businesses are evolving from paid application to in-app purchase model. In case of Apple, it is stated by an expert that “Every day that passes, Apple cares less about how many iPhones they ship, and more about how many Apple IDs they can gather, and how much revenue they can generate per ID.”

This is because the more Apple IDs are generated, the more chances of In-App purchase through multiple devices, thus more revenue.

Apple

Apple’s iPhone subscription program is one of the most successful subscription models out there. The subscription model allows Apple users to upgrade to another iPhone. This subscription model is popular amongst consumers because upgrading your phone model is definitely much easier than purchasing a new device every year.

Amazon Prime

Amazon Prime is Amazons subscription program through which the e-commerce site benefits from consumers’ willingness to receive free two-day shipping.

Amazon Subscribe & Save

Amazon Subscribe & Save is another subscription-based amazon program through which consumers can schedule a delivery.

Adobe Creative Cloud

Through this subscription program, all Adobe apps can only be accessed via monthly subscription. Adobe successfully converted their consumers through a policy that Adobe application can no longer be supported without this subscription program.

SUBSCRIPTION OR MEMBERSHIP

Subscription and membership can sound like the same service but there is a fine line between these two. Subscription is a Monthly, Quarterly or Yearly financial arrangement or a promise of fixed amount of service over a time period. Membership is more of an attitude, emotion and connection.

MAJOR DRIVERS FOR BUILDING SUCCESSFUL SUBSCRIPTION-BASED MODEL

  • Customers should always be the center of the business model: Therefore, the customer support department should be constructed in a manner that the employees are more focused towards helping the members out to create a valuable customer experience. Meanwhile create scope for subscribers to contribute more frequently. It is very easy to enter market therefore companies should make sure to gift their existing customer base all the best opportunity to create loyalty, before any competition can enter and takeover.
  • Create a price point that supports your business: In order to grow a subscription-based business, there are three fundamentals increasing customer pool creating additional value for existing customers, and reducing customer churn. And in establishing all three of these fundamentals, pricing plays a valuable strategic role. So, businesses rolling under this model should have the ability to offer transparent pricing structures in an organized manner. That is what will give the business a competitive advantage in the market. Subscription pricing strategies can be tiered according to functionality, discounted to incentivize bulk purchases, metered according to usage levels. Like Telcos, the price can be altered based on the time of the day when the service would be expected. The incentive can also be adjusted based on geographic locations and long-term commitment. Other popular price offerings can be free trials, virtual coupons, early bird discounts, Premium Pay etc. Making multiple strategic offerings can be confusing for the consumers. Therefore, the idea should be starting simply with two or three basic price points, and adjusting them over time with experience. Sometimes, if the businesses are already sure of an ideal price point, then they promote another price above it to make it look more attractive too.
  • Offer seamless multi-channel support to acquire more customers: From a customer point of view, signing up for a subscription should be a seamless experience, and the same subscription should have an offering to be acquired from multiple channels be it online, mobile, or via an assisted sale. For an already existing business looking to expand in a subscription-based model, many existing old school systems aren’t even designed to support multi-channel offerings. These complexities can often slow down your customer acquisition strategy and result in cumbersome single-channel commerce solutions. The whole idea of a Subscription businesses is fast, simple, and automated delivery of service that leads to customer acquisition through multiple channel workflow. So, in order to explore the horizon of this model businesses must have multi-channel support in order to fine-tune the user flow by ensuring ease of use and simplicity.
  • Break the complexity of invoice billing: For traditional business models, we have seen that any service offerings are simply purchased and invoiced. But subscription-based billing isn’t that simple. Businesses have to bill new customers at sale, deal with prorated accounts, different billing dates, usage bills, etc. So, if the billing module isn’t in the right place it can take weeks to generate one bill for one subscription. And in the world of zero tolerance any error can lead to loss of customer pool. Therefore, in order to scale up billing can be a huge challenge. The billing module must be simple and accurate and have the capacity to manage the many data points needed to calculate bills clearly and accurately. For a subscription-based model, understand that billing would be your companies first real step in establishing a transparent, long-lasting customer relationship.
  • Measure to get visibility into the right consumer metrics: Subscription-based business model keeps evolving as new businesses come up with new strategies and the others adapt. SaaS, a subscription-based coding module has changed their business a hundred times. While evolving the business, analyzing the key metrics through earned revenue recognition can provide unparalleled insight into customer value and the financial health of your subscription finance business. Traditional financial system might not be able to see these metrics, so companies might have the risk of flying blind. So, a dashboard must be set forth in order to analyze and to track these important subscription finance KPIs from the inception and monitor them frequently.
  • Make sure to nurture your customer relationships: Subscription-based business falls under the parameter of service industry. Therefore, quality of your relationship with your customer will be the core of your business model. Without them, you cannot sustain as there will be no sustainable recurring revenue growth. Growth of the company’s customer base will be one of the most important factors residing within the entire framework. Acquiring new subscribers is definitely crucial, but one needs to also keep in mind that in the subscription-based economy, the majority of the transactions occur via change of existing subscriptions: renewals, suspensions, add-ons, upgrades, terminations, etc. The business model isn’t that resource-intensive, therefore to build on existing customer relationships is a better course of action than acquiring new ones. Most large companies in this business generate just 15 to 25% percent of their revenues from brand new customers. As a result, they also need to ensure that their customers have access to intuitive and comprehensive tools to manage their accounts over the entire subscription life cycle. These businesses should offer 24/7 support service, as well as a customer success outreach program. Make sure if you are investing in this business model, you are also planning to closely monitor customer usage and adoption to mitigate churn risk. A stable, happy customer base is essential to compound growth.
  • Scale with mission-critical infrastructure: At the end, the infrastructure of the business is what will ensure that the business survives in a competitive market. In the world of online retail Alibaba rejuvenated the concept of e-commerce selling by operating the business without owning any warehouse. So, for long time survival the subscription-based model needs to have a mission critical infrastructure, where the business has clear goals of what they want to achieve and how they want to achieve it.

For any business model, the key drivers are just a checklist that should be followed, but the main success of any business model lies on the framework of execution. The level of detail and the unique attributes of the business that makes it stand out. Key drivers are the formulas to be followed by the book but rather reminders to ensure the minor details of the business model are fine-tuned.

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