Why Automatic Customers and Subscriptions Are The Lifeline of Business
Look around you and you”ll see that we live in a new economy. A subscriptions economy.
Subscriptions are taking over the world!
The fastest growing companies in the world today, from media (Netflix, Spotify) to e-commerce (Amazon) to SaS (Salesforce, Dropbox) are using subscription models. Recurring revenue models are the new norm.
Well known companies like Amazon, Fortune Magazine, and Apple got the jump and started building their subscribers database years ago and leveraged their reach to build an unfair advantage.
In just 6 months Apple Music reached 10 million subscribers while Spotify took 10 years to reach 20 million.
YouTube started adopting the subscriptions business model by offering ad-free subscriptions where users could play music for a flat monthly fee.
Starbucks started a subscription service called Starbucks Reserve Roastery Subscription program, which gives online customers access to its line of super-premium small-lot coffees.
80% of companies are seeing a change in how their customers want to access and pay for goods and services and 50% of these same companies are changing their pricing models as a result. – The Economist
Should you move your business to a subscription model? It’s never too late to start cashing in on recurring revenue.
Here are 7 reasons why you should consider subscriptions over the traditional business model. (From John Warrillow’s- The Automatic Customer: Creating a Subscription Business In Any Industry)
1. Stability and Predictability
Traditional customers are defined by single purchases at various parts of their life cycle. Subscribers, however, provide built-in regularity- smoothing out demand by renewing their contract at the same time each month for a duration of the subscriber’s agreement.
This dramatically reduces uncertainty and business risk in terms of revenue by guaranteeing advanced payments.
The ability to forecast your future revenue, within a few percentage points, is a huge advantage over traditional business. It allows you to plan your business effectively and optimize your labor and supplies which then leads to lowering your costs and investing more into your growth.
For example: Let’s look at a traditional flower shop vs a subscription based one.
Like most traditional business, the traditional flower shop has to start every month with no revenue. It can make some plans and predictions based on past sales, but it doesn’t have a contractually obligated revenue stream.
When you compare that to an online flower delivery service like HBloom, HBloom is an e-commerce company that provides subscription-based luxury floral arrangements at affordable prices to direct consumers and corporations. In 2014, HBloom reported annual revenues of $7.2 million. 80% of its revenue comes from subscriptions. This means the company can expect $5.8 million each year in recurring revenues. This figure is stable and predictable.
2. Higher Customer Lifetime Value
When you transition to a subscription model for your business, you are much more likely to increase Customer Lifetime Value (the total net profit that a company makes from a given customer).
With a subscriptions business model, you build a long-term relationship with your customer.
Ex: Netflix vs traditional movie rental store
Traditional movie rental stores sell or rent a one-shot DVD to a customer and they may never see them again. With Netflix, however, you can sign up for a monthly subscription of $8.99 and have access to thousands of movies on demand. On average, a customer stays with Netflix for about 20 months (it’s monthly Churn Rate). The Churn Rate is the percentage of customers who stop subscribing to a service. It’s between 4-5%. This gives Netflix a Customer Lifetime Value of $179.80 ($8.99 x 20).
3. Higher Business Valuation
Having a subscription based business model drives up the value of your company. Recurring revenues in the form of subscribers adds stability, security, and predictability to your business, which is something normal customers can’t provide.
Your largest assets as a business owner is your business and how it’s valued by potential investors or buyers. To investors, the primary appeal of subscriptions based models is the value of predictable recurring revenue. Businesses with recurring revenue models are typically valued up to 8x higher when compared to a similar business using a traditional business model.
“When you have a recurring revenue business model, you rarely miss your monthly or quarterly numbers by more than 10-20%. Your forecasting process is much more accurate. At the beginning of the quarter, you start with a base to grow from rather than begin at zero. In a SaS or subscription software business, you can predict your churn rate and new business closing to determine your growth rate. The management team and the investors are thus rarely surprised by major fluctuations in your results”. – Venture Capitalist Jeff Bussgang-
4. Free Market Research
Traditional businesses pay thousands of dollars to conduct market research (telephone surveys, focus groups, etc), but companies with recurring revenue models get the research for absolutely free. Subscription business models gets you closer to your customers- giving you the ability to track your customers preferences in real time and simply ask them what’s on their mind.
This is the reason Walmart launched Goodies Co. a monthly service that will send you a package of sweets and snacks for $7. Subscribers who are active enough in rating, reviewing, and touting the products can get Goodies boxes for free. Why give away free items? Walmart doesn’t care about the $7. What they want is the market research to help inform them of their customer’s buying decisions in the store.
Companies like Netflix and Microsoft are leveraging the subscription business model to discover what their customers want next.
5. Lower Marketing Costs
Having a subscription model for your business helps you to dramatically cut marketing costs. Instead of spending money on multiple channels, you acquire the subscribers only one. You no longer are required to do the work to get them back like with traditional business. It helps you to lock in buyers who want your products again and again.
From a marketing perspective, the subscription model allows you to learn about your customers better and understand their needs or desires. This helps you to optimize your sales channels, create personalized marketing for each audience, and eventually reduce customer acquisition costs.
6. Subscribers Spend More
A subscription model allows you to talk to your customers on a regular basis and upsell them on products and services beyond their basic subscription.
Ex: When Amazon launched Amazon Prime, it provided unlimited free two-day delivery, on demand video streaming, and free access to the Kindle library, all for an annual fee of $99.
Later, Jeff Bezos, CEO of Amazon, reported that ongoing analysis of customer behavior before and after joining Prime shows that they increase their purchase with the company after joining, which means these customer relationships are deeper and their customer LTV is greater.
Prime customers spend more than double what non-Prime members do. They shop more frequently, and also buy more expensive items on average.
This is important because the longer a customer remains with Amazon Prime, the more they spend. 49% of first-year Prime members and 68% of fourth-year members spend at least $800 on Amazon each year.
7. Subscriptions Make Customers Sticky
When it comes to subscription-based businesses, subscribers knowingly enter into an agreement where the convenience of uninterrupted automatic service is exchanged for their future loyalty. Rather than buying once and then deciding again in the future who to buy from, subscribers usually stick around for years.
For traditional businesses, earning a customer’s loyalty can be hard. When done well, they can keep customers coming back for repeated purchases, potentially turning them into a loyal brand advocate. If done wrong, it becomes a huge waste of time and resources.
Should your business switch to a subscription based model? The answer is complicated. Consumer behavior, especially among the new generation, is changing. The need to own things- from music, to cars, to houses- is dying out. You should consider a subscription model regardless the size of your business or the industry you compete in.
Tansitioning isn’t easy, and each company needs to evaluate the needs of its customer base, and how subscriptions can potentially open the door to new users and a predictable recurring revenue.
You can experiment with various markets and product lines within your business. Many established companies are developing a hybrid approach to recurring revenue. You have the ability to test new models out on specific audiences.