Article Summary of How Subscription Billing Models Can Grow the Value of Your Business:
- What a subscription billing model is and how it can grow the value to your business
- The Benefits of adding a subscription billing model to existing services
- Examples of companies using this model to their advantage
How Subscription Billing Models Can Grow the Value of Your Business
Every few years a book comes along that stops me in my tracks. Tien Tzuo, author of Why the Subscription Model Will Be Your Company’s Future — and What to Do About It, is a great read by a brilliant author. Why?
The book goes into detail about the SAAS (Software As A Subscription) model. I’m sure you’ve heard of Netflix, Spotify, or Amazon Prime. These are examples of wildly profitable companies with subscription models.
Here’s another one: Surf Air. Right now, for a flat monthly fee — and only in California — you can have unlimited flights on a commuter airline. Unlimited, that’s right.
Tien is on to something that many firms are just coming to realize: Subscription-based models are a fast-track to increased growth.
The Harvard Business Review has reported some staggering stats:
“Business-to-consumer subscription businesses have attracted more than 11 million U.S. subscribers in 2017, and the industry as a whole has been growing at 200% annually since 2011.”
Big players such as P&G and Walmart have entered the subscription billing model space driven by the recent growth, a McKinsey & Company report stated. Something big is happening that is transforming modern business.
What is a Subscription Billing Model?
Most everyone has encountered a business run by a subscription billing model at some point. The classic example is a newspaper or magazine. You pay weekly, monthly, or yearly, and the periodical is delivered (and more recently made available online).
What you may not know is that there are four main types of subscription models.
#1: Subscription for a certain amount of a good or service. Example: Blue Apron meals or Trunk Club clothing.
#2: Subscription for the unlimited use of a service. Example: Netflix or Adobe Creative Cloud.
#3: Pay-as-you-go subscription where a product is continuously purchased. Example: Birchbox or OrderGroove.
#4: Subscription for ask to a service with additional fees for extras. Example: Cable TV or telephone services.
The Benefits of a Subscription Billing Model
Subscription models have many advantages over traditional product and service billing structures. A subscription model, if implemented correctly, has the potential to grow the value of your business significantly.
Consider the following ten advantages:
- A constant, predictable revenue stream
- Less risk and less uncertainty regarding customer acquisition
- Creates emotional attachment and builds brand loyalty
- Increased possibility of vendor lock-in
- Higher average customer lifetime value (ACLV)
- Brings in large amounts of useful customer data
- Personalized marketing through the use of customer data
- Increased resale and potential for an upsell
- Customer inertia makes canceling harder
- Lower costs to consumers for products and services usually considered expensive
What about the customer, what do they get from the subscription model?
- Convenience. No need to remember to re-purchase.
- Sense of value. Unlimited use is appealing, even if most customers don’t utilize it.
- Save money. Often a subscription model makes products and services much cheaper in the long-run.
- Payment distribution. No need for large up-front payments.
3 Subscription Companies Building Massive Value With Subscriptions
I like to keep an eye on trends, and those companies making the most out of new ideas or strategies. With that, I have three subscription model firms that have or are currently disrupting established industries.
Dollar Shave Club
Michael Dubin and Mark Levine, the founders of Dollar Shave Club, really hit on a huge market need: the desire for low-cost razors on time. Razors traditionally were purchased transactionally at stores and supermarkets. Costs for individual blades grew, squeezing consumers and leaving room for disruption. Dollar Shave Club has earned massive returns, strong growth, and most importantly, a loyal following of consumers fed up with the high cost of razor blades.
This is another example of a trend with tremendous potential. With the skyrocketing costs of healthcare, TelMed has embarked on a path to offer high-quality medical care over the phone or online for a low cost. Instead of the industry average of $69.95 per appointment, TelMed offers a flat monthly fee of $20 for unlimited telemedicine services. This is a great example of a business solution to a huge social problem — broken healthcare.
Keep It Cut
I came across this company when a friend from Phoenix stopped by. The company offers unlimited monthly men’s haircuts for the ultra-low rate of $29. Plans scale up from here. This is a win-win for consumers, those who want a monthly cut and a bi-weekly trim, and the business that generates a lot of loyalty and a predictable revenue stream.
Subscription Models — The Wave of the Future?
Looking at the evidence, it seems clear that subscription billings are only going to increase with time. I believe this is a compelling way to grow a business, and encourage business owners I meet to seriously consider transforming their business.
So now you may be asking yourself: “Great Michael, I like your idea, but how do I get started?”
One word: Zuora.
If you were on the fence and my post put you over, take a look at Zuora. They are a publicly-traded company that helps companies launch and manage a subscription-based model. You can also learn more about how to build a successful subscription model here.
Growth can take many forms and a subscription model may be the way forward for you. If you still have questions, you can always reach out to me here.