Subscription is the word in the tech industry, and especially in SaaS. It is no longer about buying a product. Now customers are buying your product every single month, and they expect value over that subscription.
So, what exactly is the new subscription economy and what does it mean for your marketing plans, your customer lifetime value, and the customer lifecycle? We’re going to get into all of the implications of the subscription economy of the 21st century and how this will likely impact your bottom line!
In this subscription economy guide
What is the subscription economy?
The subscription economy is a new kind of business model that is trending across the globe. It’s not going anywhere anytime soon. Its theme is recurring revenue and customer retention. Subscription models may also be referred to as subscription revenue models.
Let’s break this down a little bit more:
A subscription business model usually involves some form of monthly or yearly subscription, where customers either pay for access to something or pay for additional services on top of an existing product they already use. In addition, it means that the recurring revenue from the subscription adds up month by month, year by year until it hits millions of dollars over time!
In addition, it means way greater customer retention because your subscribers have paid for a long-term solution and aren’t willing to toss it away after one year. They expect real value in return for their subscription. You need to provide that value every single month!
Death of the one-time sale
Beware – the fact that businesses are turning more to recurring revenue instead of one-time sales is bad news if you only rely on one-time purchases. This means that your average customer lifetime has decreased, and it’s also much harder to upsell or cross-sell your products because people don’t want to have a large purchase every 6 months. They’re used to monthly subscriptions now!
Therefore the subscription economy refers to the new wave of doing business and earning revenue through subscription-based services.
What are the different Subscription Business Models?
There are quite a few different subscription models. Let’s go through the most common.
Advertising-based subscription model
This type of subscription is very popular in various tech industry sectors like gaming or music streaming, where users get access to certain content or services for free, but they are constantly interrupted by ads. The value of this model is the fact that it’s cheap and easy to build thanks to tools like Google Adwords or Facebook Ads.
Freemium subscription model
The most popular software subscription model in early-stage businesses. With the freemium model, customers usually get access to a basic version of your product (the “free” one) with limited features compared to the paid version (the full functionality is only available with the paid subscription).
Crowdfunding subscription model
Another model that’s a lot cheaper to implement than the freemium business model. With crowdfunding, people pay up-front for your product or service, even before it has been built. This way you have all the money you need upfront and don’t have to worry about making those monthly revenue numbers!
Cooperative subscription model
In many cases, customers will be happy with a lower price as long as they get access to other customers’ data as well. In other words, rather than looking out for themselves – getting features that benefit them – they’re willing to share their data with others in support of a common good, working together for something bigger.
Consumer/producer marketplace subscription model
These are subscription businesses where consumers pay a subscription fee in order to access content, educational material, or even other sellers. Think of an online eCommerce store charging a subscription fee in order to access the database of goods that are being sold on the site – this would be accessing content/educational material. You can then think of Kickstarter or Indiegogo as consumers/producers marketplaces where you pay for access to certain projects, while many other projects are available for free!
Pricing for subscriptions
The most common pricing model for subscription services is the Freemium business model. Many companies offer a limited version of their service at no cost to you – like Google’s business suite Gmail, which has invaluable features like unlimited storage but only allows the user to store up to 7 years worth of email; or Dropbox, where they give you 2GB free (but still charge $10/month if you want 100GB!).
Another big trend that many startups are following is giving away their product for free and then charging money on top of it. For example, Spotify gives users access to all its music catalogs but charges them $10/month for mobile services. Other examples include Stitch Fix, an online subscription service that gives users access to a “personal style assistant” with its $20/month subscription.
Many people find this model attractive because it often results in higher revenue than if they were to charge for the product or service upfront, but it also means you have to spend more money on marketing and getting your initial user base invested!
Companies primarily use subscription models when they’re expecting their customer lifetime value (CLV) – the average amount of money each customer spends before cancelling their subscription – to be high. This way they offset the costs associated with acquiring new customers through expensive marketing campaigns, by earning money from existing clients.
The drawbacks of using subscriptions models
Another drawback when using subscription-based business models is that when your churn rate (the number of people that cancel their subscription) is high, you don’t just lose those customers who canceled but also the ones that stayed. In other words, if your churn rate is 20% monthly and your average customer lifetime value is $75/month, then $60 of every $75 goes to waste when a person cancels!
The next drawback is an increase in support costs since it’s harder to change someone’s payment status on a subscription-based business model than it is on an account whereby people pay upfront. This means more customer support tickets and additional expenses for you.
Additionally, most new companies using subscription models usually don’t have any content or service providers on their platform So even if they do get traction, they’re not making any money! That’s why many startups that follow this model usually pivot to an advertising model or a freemium business model after a few months.
Finally, it can be challenging to get consumers to pay for subscription services – except on the web of course where everyone is used to paying for subscriptions!
Predictable reoccurring revenue in the subscription economy
Predictable recurring revenue will play a major role in the success of any subscription model or economy. This is because when you can predict your revenue, it means that you’ll be able to plan and execute better in order to achieve your goals. Also, when you know how much money you can expect to receive from a certain customer or project, it makes scaling easier by choosing the right pricing model and decreasing churn rates.
Subscription economy and subscription marketing
So, now you know all about the subscription economy and the various subscription business models. Let’s get into the fun stuff: subscription marketing!
A quick Q&A on the subscription economy and subscription marketing
Here are some answers to some commonly asked questions:
- What is subscription revenue: subscription revenue is the money your company makes by charging its customers a subscription fee on a recurring basis.
- What is the subscription revenue model: this is a business model where companies charge their users a monthly or yearly fee for access to their product or service.
- When did the subscription economy begin: Steve Jobs launched Apple’s app store in 2008, which was one of the first cases of software as a service (SaaS). This helped start what we now know as the subscription economy.
- How do I make my company sustainable with a subscription model: when you decide to use subscriptions, it means that you’ll have to spend more money on marketing campaigns since your main source of acquisition will be through word-of-mouth and referrals.
- What is a subscription? A subscription is when you pay for a product or service on a regular basis, usually monthly or yearly.
- How to start a subscription business? The first thing you need to do is identify the pain points of your target customers. You should then create a product or service that solves their problem and find ways to charge them for it on a recurring basis.
- How much will my business make with subscriptions: this depends on your customer lifetime value (CLV), churn rate, the average number of subscribers, subscription fee…etc. It’s better to focus on increasing CLV rather than revenue since this way you also increase profit margins!
- What are the benefits of using subscriptions? Subscriptions let companies earn money from existing clients – which offsets the costs associated with acquiring new customers through expensive marketing campaigns!
- What are some examples of subscription-based businesses? Blizzard’s World of Warcraft game, Netflix, Spotify, Adobe Creative Cloud…etc.
- What does subscription marketing mean: it means growing your business by running a successful marketing campaign for your product or service. This usually involves creating a sales funnel that converts leads into subscribers and then sells them on the value of the product/service, as well as upselling them throughout their customer lifetimes.
Final thoughts on subscription marketing and the subscription economy
The subscription economy isn’t just for software or digital products anymore, it’s becoming more popular in the retail and service industries – which means that you have plenty of opportunities to start your own subscription-based business.
Start small by offering a free trial of your product/service to get people hooked on it. Then upsell them throughout their lifetimes! Making money with subscriptions is easier than you think so go out there and create something great…and then charge people for it!
