Conventional wisdom tells us that streaming movies killed the video store. However, before this technology became available to nearly every home, the Netflix subscription service of mailing DVDs began capturing market share.
Subscription business models continue to disrupt industries from software to shaving supplies. Can your small businesses thrive by moving to this model?
The subscription business model can take several forms. Companies can deliver a product or service on a scheduled timeline such as a magazine or newspaper. Subscriptions can also offer continuous access like Netflix streaming service or your mobile phone plan.
Recently many technology-based services may offer a free level of service but charge an ongoing fee to access premium features. Software companies are moving to a model where you pay a monthly fee per user, allowing clients to scale their product as they grow or contract. Even clothing companies are getting into the mix, with firms like Jackthreads sending subscribers a monthly box with custom-picked clothing matching their customers’ tastes.
The major advantage of a subscription model versus a one-time sale is that it creates a continuous stream of revenue from a single customer. Rather than having to convince a customer every time they need a product or are due for a service, subscriptions maintain the relationship on an ongoing basis.
For small businesses, subscriptions create continuous and predictable cash flow and inventory demand. In short, if you know how much product you need and when you will sell it, you can create a sustainable profit for the long term.
Not every business is positioned to move to a subscription model. Consider these three factors when evaluating if a subscription model works for you:
Ongoing or predictable demand: One-time sales of large capital good are likely not good candidates for a subscription model, but maintenance agreements are. Cars need regular service, new lawns need care and networks need updating. If your customers return to you on a regular basis (or you want them to more often), the subscription model may be a good fit. Additionally, if the upfront cost of your service prices you out of certain markets, a subscription-type model may unlock new customers.
Untapped customer segments: With more enterprises moving to a subscription model, some customers may reach their limit on what they will spend for ongoing services. Evaluate your customer base not only against your direct competitors, but also for substitutable goods and services. A Netflix night in competes with a night on the town. If your competitors are not offering a viable subscription option, you may have an opportunity.
The price must be right: A small monthly charge for software may work as a value proposition for a customer, but if the recurring cost is too high customers are likely to reject the model. Recently when I purchased a new phone, the service plan to protect the device was over $12 per month after taxes. This means I would have paid more than 50 percent of the phone’s value to protect the device over its useful lifespan. In many ways, getting the price point right for subscriptions is even more important than pricing an item for a one-time sale.
Subscription model enterprises must focus on near-flawless execution and impeccable client services. The benefit of building a sustained relationship with a customer can quickly turn sour if you fail to meet expectations. Unlike losing a one-time sale to a competitor, an unhappy subscriber is far less likely to ever return to your business.
Subscription businesses continue to blossom in popularity with thoughts of steady cash flow and predictable profits. Entrepreneurs across many industries would be wise to see if the model fits for them.
Ryan Davis is dean of Business and Applied Technology at Everett Community College. He can be reached at rydavis@everettcc.edu.
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