Traditional pay-per-product companies are moving toward a subscription-based model that offers customers access to products or services on an ongoing basis for a monthly fixed fee. From meal delivery kits, to brand new socks delivered week-by-week, to software upgrades, and wines-of-the-month, customers appreciate the variety, the fun, the ease, and the convenience of subscription-based purchasing and its auto-renew function.
Not only are subscriptions drawing new customers, they’re proving highly lucrative for merchants across industries. As reported in the Washington Post, observers predict that the subscription economy, currently worth an estimated $650, will double to $1.5 trillion by 2025. Here’s how the subscription economy is building and why it’s here to stay.
Customers are Embracing Subscriptions
Subscriptions used to be exclusive to magazines, newspapers, and cable TV. The idea of paying on an ongoing basis started catching on about ten years ago, as software and streaming platforms like Adobe, Netflix, and Spotify, started selling ongoing access to tools and programming to paying subscribers.
But when pandemic restrictions kept customers at home and shops and restaurants shuttered, businesses were compelled to think of new ways to earn revenue. E-commerce exploded alongside new and faster delivery options and subscription entertainment took off. With customers eager making the switch to online shopping and signing up for at-home experiences of all kinds, restaurants and the services sector soon followed suit.
Many experimented with meal and cocktail kits, boxes of specialty, gourmet or prepare-it-yourself items for home delivery, live online workouts, and more. Customers signed up in droves to support their favourite local merchants and to experience the services and products they love while working from home. The new model didn’t just help merchants weather the crisis. New product bundles and add-ons, like playlists and product histories, helped rejuvenate their offerings, deepen the customer relationship. The best part? Businesses earned even more revenue than they anticipated.
Customers Will Pay Upfront for Flexibility
While shops across North America have largely returned to regular opening hours, the subscription economy shows few signs of abating. As customers embrace streaming platforms and other digital services – all of which are available 24/7 – that demand is extending to other kinds of products. People want to be able to choose where, how, and how much they consume and how much they pay for it. These new flexibility requirements are driving a dramatic uptick in subscription models in every kind of business. In fact, Deloitte reports 8 out of 10 companies are either sustaining or growing their subscriber base. Even travel companies, hotels, and home repair companies are getting in on the trend, with access to exclusive offers, a range of properties, and dedicated customer service lines.
Subscriptions Flip the Sales Pyramid
Alongside new flexibility, customers appreciate the new model’s emphasis on people, not products. Businesses used to concentrate on developing perfect products and finding customers for that one big sale. Companies built revenue from the bottom up, with more substantial sales at the start of the customer relationship.
The subscription model turns that model on its head and puts emphasis not on the product itself in its finalized form, but on continuous product improvement, on the product experience, on relationship building with customers and on being responsive to changing customer needs. Beyond doing the groundwork to keep customers happy, growth in the subscription economy means gaining new subscribers and evolving higher priced subscriptions out of the base model.
Better Consumer Insights
In terms of growth, the subscription model helps self-sustain by giving companies better data on what customers like and how they’re using their product. Every month that goes by is a new, valuable touch point with a customer. That added knowledge helps businesses serve customers even better. The traditional transactional economy, modeled on a one-for-one exchange of goods, is shifting to a relationship-driven economy that prioritizes customer interactions with brands over time.
The subscription model gives vendors a new kind of assurance, too. Being able to count on a stable amount of recurring revenue each month helps with budgeting, scheduling and costs. While some customers might overuse services when they’re paying once a month for all access, they get a strong reputational lift from loyal customers that tends to balance things out.
Focus on Long-Term Flexibility
On the consumer side, there are obvious limits to growth. When the credit card bill comes at the end of the month, some customers realize they’ve oversubscribed and start to pare back. Regulators, too, are looking more closely at the subscription model to prevent consumer abuse and make sure customers aren’t being unfairly trapped inside overly rigid contracts.
With so many subscription packages to choose from, customers now expect flexibility in the subscription itself. A strict arrangement might offer exclusivity, but could also hurt brand image when customers are seeking freedom and choice. Many companies are starting to offer the following features to give subscribers more room to move:
- short- and long-term membership pauses
- new services and upsells
- pricing and packaging changes, including down sells
- easy subscription cancellations
While down sells and cancellations might seem like negative offerings, businesses are finding that these flexible service features support faster growth and lower customer churn. If a customer signs on after a 7-day free trial, the goal is not to lock them in, but to start nurturing a customer relationship for a lifetime.
As with any business transition or expansion, companies need to determine how best to work their current offerings within the new model and get clarity on how they’ll need to change to respond to customer requirements and market shifts. It’s more than a creating a new delivery kit or bundling services for different access tiers. A shift to a subscription business model might require company-wide changes – to business functions, operating models, and technology platforms. Companies should take stock of how their sector is evolving, look at where competition is emerging and scan the horizon for evidence of disruption.
Subscription business models are helping business thrive again during and after the crisis and engaging customers in creative new ways. Best of all, they’re creating lasting stability across sectors – not only by generating recurring revenue, but by nurturing transparent, responsive, personal, and enduring customer relationships.