Accounting & Finance
How Effective is the Subscription Business Model?
It has become common for many businesses to set up subscription-based payment systems to charge their customers for the products/service they offer. Huge companies like Netflix have managed to acquire a multitude of subscribers across the world, allowing them to keep money constantly flowing into the company. With the subscription business model becoming increasingly popular, it may be time to look at its actual effectiveness. Here are some considerations.
What is the Subscription Model?
Having been used for many years, the subscription business model is certainly nothing new in terms of how it works. Instead of a customer paying a one-off price for one product/service, they produce a set fee regularly (weekly, monthly, annually) and receive their product as and when it is released or have access to a service for a stated period.
Before the advent of the internet, the subscription business model was used extensively by magazines and newspapers, as they were printed regularly, and it made sense for customers to have their desired print delivered to their door for a monthly fee. Now, however, the subscription model is used by a wealth of both online and regular businesses, as it offers them numerous advantages over other payment models.
Technological advances have helped to facilitate the widespread adoption of the subscription business model, especially advances in payment options. With most businesses now offering highly secure ways to pay online with a credit/debit card and direct debit becoming increasingly popular, it is now much easier for customers to pay for their desired product or service.
On top of this, it is also easier for businesses to market their offerings and stay in touch with their customers through mediums like email, meaning that customers can always be kept in the loop about new business developments (such as new content or expanded services), and any customer queries can be quickly dealt with.
One of the main advantages of setting up a subscription payment system is that it brings money in from customers regularly. Most subscriptions are charged monthly, so it is possible to know precisely how much money will be paid into the business accounts and when.
This provides a decent level of security for the business charging the subscription, as it allows it to manage cash flows with greater ease, and know its monthly profits well in advance. Some companies ask for a month’s notice before cancellation, allowing them to plan for potential profit losses.
Lower Profit Potential?
Those businesses that use the subscription model may have plenty of security regarding payments but may not generate maximum profits. To attract customers, subscription fees need to be pretty low/competitive (at least in comparison to non-subscription-based alternatives), so some profitability usually needs to be sacrificed to achieve the security offered by subscription payments (especially in more competitive industries).
How much to charge for a subscription largely depends on what the business offers. Still, some businesses offer different subscriptions, with the most expensive option being the most extensive. This gives customers a decent choice and ensures those with lower budgets/requirements are not priced out.
Subscription-based business models are likely more suitable for specific business types than for all businesses. A courier business such as Whistl, for instance, is likely to be used by several different businesses regularly, and so the subscription model would work well (since it allows all the payments to be sped up and automated).
A business that sells a more specialized service, such as a law firm, would almost certainly lose profit with the subscription model, given that most people would only use it sporadically and thus cancel their subscription once they are finished with the service. As previously mentioned, online businesses like Netflix can particularly benefit from this business model, as they can easily add new content regularly, and use the regular, consistent and ever more enormous profits from their vast subscriber base to make high-quality content.
It is Growing
The number of businesses adopting the subscription model provides a significant incentive for technology developers to innovate in this field. So, the subscription model will likely continue to grow and evolve as more technology becomes available.
In fact, many investors are piling money into subscription-based startups, suggesting that businesses adopting this model may have a better chance of receiving funding. As technology continues to revolutionize payment methods and other areas of the subscription model, it may well become accessible to even more business types further down the line.
The subscription model is undoubtedly effective and is becoming ever more popular amongst various business types. While it may prove more effective for specific business types, new businesses will likely continue to popularise it by offering at least some form of subscription-based payment methods into their own model.