What is the similarity between Netflix, HelloFresh and HubSpot? That they are hugely successful. Certainly. But there is something more fundamental at play. All these companies are based on the subscription business model. Instead of one-off revenues, they receive ‘recurring’ revenues. Are there also opportunities for your organisation to start with a subscription model? And how do you go about it?
The phenomenon of subscription is not new. Newspaper subscriptions originated hundreds of years ago. The advent of telecommunications led to telephone subscriptions around 1880. Fast forward to the end of the 20th century and we see a whole range of subscription forms based on the internet and digital and mobile technologies. By now, the mobile phone subscription is almost a standard in our lives and streaming subscriptions like Netflix and Spotify are embedded in our existence.
Tangible products as-a-service
For the past two decades, more and more ‘tangible’ products have also been offered as subscriptions. Physical products take the form of a service. This applies to both durable consumer goods (such as washing machines, bicycles or cars) and consumables (such as nappies, razor blades or food).
Two well-known examples of successful companies that sell tangible products ‘as-a-service’:
- Swapfiets does not only provide a bicycle but the possibility to cycle for a fixed monthly fee on an ‘always working bicycle’. The idea here is that consumers do not so much need to own an (expensive) bicycle, but are mainly looking for hassle-free mobility.
- HelloFresh takes care of the consumer who wants a healthy, tasty meal, but has no time or desire to find recipes and do the shopping. The meal boxes are offered in subscription form, which can be varied in a flexible way.
Attractiveness for customers
The subscription model is attractive for several reasons. In 2018 ING (pdf) studied what drives European consumers to take out a subscription. For durable consumer goods, it turned out that financial motives played the most important role: avoiding high purchase costs and less risk of repair costs. For consumables, price played a less important role and convenience was mentioned in particular. Never ‘without’ anything and products automatically delivered to your home.
People don’t want a drill. They want a hole in the wall.
It is important to realise that consumers do not always strive for ownership, but rather for the solution of their problem. Harvard professor Theodore Levitt once said it aptly: “People don’t want a drill. They want a hole in the wall.” By the way, you might wonder whether ‘a hole in the wall’ is really what people want: after all, the end goal is more likely to be ‘a nice painting on the wall’. But Levitt’s thought is clear.
The Holy Grail: recurring revenue
The past few decades have seen the emergence of quite a few companies based on the subscription business model. From Dollar Shave Club (razors) to BarkBox (toys and treats for dogs). From Surf Air (unlimited flying) tot HubSpot (marketing automation).
It is not difficult to imagine the appeal of the subscription business model for these companies. To begin with, it is a huge advantage that revenue streams are recurring rather than one-off. Recurring, predictable income (recurring revenue) can offer a company a high degree of financial stability. It is not for nothing that recurring revenue is the holy grail for many organisations and investors.
In addition to turnover, operational profit can also increase through the use of subscriptions. The (high) costs of repeatedly acquiring new customers are significantly reduced. After all, if all goes well, customers stay with you, so you need to invest less in the acquisition of new customers each time.
Another big advantage that subscription providers have is that, in most cases, they have access to a large amount of customer and usage data. That data can help companies to strengthen their customer relations or to improve their services. Free’ and continuous market research.
Introducing a subscription business model
The subscription business model can be promising for many types of organisations, in various sectors (such as the cultural sector). However, you need to investigate and capitalise on this opportunity step by step. I give 5 tips that can help.
1. Everything starts with the customer
Before developing a subscription proposition, it is essential to have a clear picture of your potential customer and his needs. After all, the subscription must offer a solution for the customer’s problem.
A tool that you can use well for this is the value proposition canvas from the book by Alex Osterwalder and Yves Pigneur from 2014. The value proposition canvas assumes that every value proposition must be based on deep insight into:
- Customer jobs: the tasks consumers are trying to perform.
- Gains: what positive outcomes consumers expect in the process.
- Pains: which negative outcomes and risks consumers are trying to avoid.
The important thing is to understand how a subscription service could meet these customer needs. Does the subscription offer advantages over one-off purchases? What pain points are resolved for the customer and is he prepared to pay for this?
2. Minimum viable subscription
Based on customer insights, you may be able to design a subscription that you can test in the market. It is not necessary, or even desirable, to work out all the details of the subscription. It is better to first make a relatively simple basic design of the subscription and test that proposition in the market.
In the start-up world, the concept of a minimum viable product (MVP) is often mentioned. It is a concept that has been popularised by authors such as Eric Ries and Steve Blank. An MVP is a kind of stripped-down version of the final product, the purpose of which is to test the viability of the proposition.
An example. When HelloFresh was set up 10 years ago, their meal box subscription was far from mature. The founders packed the first boxes themselves and brought them by underground to their customers in their hometown Berlin. The insights they gained with their minimum viable product – or rather minimum viable subscription – laid the foundation for their eventual proposition and thus for the successful multinational that they have now become.
3. Retention from day 1
It is a well-known fact that it is much more lucrative to retain existing customers than to acquire new ones. Customer retention is therefore an absolute priority for any subscription business.
The misconception that still often arises is that the organisation should only worry about customer retention at the end of the contract period. I know this from my own experience as CRM manager at several mobile telecom companies. In the average telecom organisation, more attention was usually paid to winning back subscribers than to making existing subscribers happy so that they would stay of their own accord.
Subscriber retention is not something for the last phase of the customer life cycle, but an essential focus from day one. It would be going too far to go into detail here on how to keep customers on board. I will just mention three critical points:
- Satisfaction: regularly survey your subscribers’ satisfaction with the overall service.
- Usage: get customers excited about using your product and any features that come with it as soon as possible.
- Data: develop a well thought-out ‘retention dashboard’ that brings together the most important data. And even more important: take action on this…
4. Make it easy to cancel
Yes, you read it correctly. Cancelling should become a party for the customer. This may sound strange, after we have just dwelled on the importance of customer retention.
A 2017 American survey showed that no less than 42% of respondents said they found it (very) complicated to cancel their subscription. This is obviously not pleasant for the customer, but is it also bad for the company offering the subscriptions?
The answer to that question depends on the objective you have as an organisation. If it is about maximising short-term profit, where customer experience and satisfaction are less relevant, then you might consider building in a cancellation threshold. But in principle, the idea of a subscription, whereby you by definition enter into a long-term relationship with a customer, is diametrically opposed to the idea of short-term profit and tricking customers. So make cancellation easy and thus a positive part of the customer journey. The more chance you have of welcoming a customer back in the future.
Fortunately, there are many companies nowadays that organise their cancellation process well. A good example is Netflix. When you log into the account environment, you immediately see a clear button in the top left corner that says ‘cancel membership’. In fact, the cancel button is the only button on the page! Netflix has chosen for customer friendliness and transparency, something that will benefit their long-term relationship with their customers and former customers.
5. Something fishy about this model…
Switching from one-off transactions to a subscription revenue model can be very positive financially. As I wrote above, in the longer term, subscriptions can increase the profitability of the business and reduce the financial risks.
However, there is a catch, especially from a financial point of view, when you switch from one-off transactions to a subscription structure. An example to illustrate this.
Suppose you have a product that you normally sell once for $500. You sell 100 products in a month, so the revenue you get in a given month is $50,000. If you now decide to switch to a subscription model, the monthly revenue suddenly looks very different. For example, if you charge $50 per month in subscription fees, your new monthly turnover will be $5,000. That is $45,000 less than the old situation. You won’t make the finance department happy with that…
The Fish Model shows what is going on here. If you switch to a subscription model, the (monthly) income drops temporarily, while the expenses rise due to investments in the new revenue model. Panic! However, this situation is temporary. In time, the subscription model will enable the company to realise faster revenue growth, combined with a lower cost level.
The subscription business model is no guarantee for these kinds of solid results. But if you do it right, subscriptions offer a flywheel for commercial success, less financial risk and happy customers.
This blog was also published (in Dutch) on Frankwatching.
Subscriptions are a common thread in Bas Verhoeven's career. As a marketing manager, he introduced numerous subscriptions to the market for multinationals such as Wolters-Kluwer and Vodafone. As a consultant and interim marketing manager, he also helped many SME organisations to increase their recurring turnover.