Subscription Models Moving into the Mainstream

Subscriptions are quickly becoming a preferred business model, especially for digital companies. No longer just the realm of newspapers and magazines, subscriptions, also called recurring payments, offer reliable streams of revenue a wide variety of companies can tap into.

In addition to a steady income, subscriptions tend to provide higher customer lifetime values and reinforce a customer’s commitment to a service by encouraging them to use what they are already paying for. It can also help prioritize customer service requests by distinguishing payers and non-payers as well as protect revenues from fluctuations in consumer habits.

Advantages for Digital Companies

From removing the risk of a product being pirated to eliminating compatibility issues between versions thereby reducing support needs, subscription models can offer even more advantages for software companies. For customers, software as a service (SaaS) offerings substantially reduce upfront costs and the need to install large platforms that usually require frequent updates.

Adobe is one recent example of a software company that has adopted a subscription model. While some users were disappointed with the move, Adobe’s advantage as an industry leader and its recognition of the revenue opportunities lost by customers’ reluctance to frequently upgrade made the switch inevitable. With each version not being substantially different from the last and with a huge upfront price tag, customers were often wary of abandoning their indefinite license and upgrading.

With Adobe’s new service, however, all upgrades are only available if customers subscribe for $75US a month or $50US a month if you sign up for the year. While Adobe’s profits have dipped in the short term, they are betting that they can be more profitable over the long-term by attracting more recurring users with significantly lower upfront prices.

7 Challenges to Overcome

While the revenue advantages of a subscription business model can be appealing, it only works if companies can overcome the hurdles along the way. Some of these challenges include:

1. Presale Marketing — The biggest challenge is usually the added difficulty to onboarding users. Customers are often reluctant to commit to long-term or indefinite payments for a service, especially if they are unsure if they will use a service regularly. They have to be persuaded that the recurring value they get from the service is more than the recurring payment. Therefore, customers must feel like a product is a ‘must have’ and that they will use it on an ongoing basis.

2. Pricing — Many firms fail to take into account how their customers interact with their product when setting a subscription price. If 75% of the value derived is within the first few months of using a service, the proportion of cancelations is likely to be high as time goes on unless the price drops as time goes on. This could include low monthly payments accompanied by an initial fee.
Similarly, fees that are set too low may actually lower lifetime customer values to levels below where they would have been otherwise. This results in a substantial loss of revenue from people that would have been willing to pay much more for a product.

3. Customer Retention — Whereas traditional business models focus on the one-time sale of a product, a subscription-based company must obsess over keeping customers happy and engaged with a product. Failure to do so results in cancelations and lost revenue.

Consumers are also unlikely to sign up for more than one subscription of a similar service which makes the model risky for those companies that are in a competitive market. Adobe’s switch is likely to work because it is an industry leader with a highly differentiated product. Their stock price remains significantly up in the last 18 months despite lower profits because investors remain confident in the long-term revenue potential of substantially expanding the number of users.

4. Post-Marketing — Subscription-based companies must put significant energy towards keeping customers connected to the product well after the initial buying decision has been made. Many create blogs or newsletters to demonstrate the ongoing value that can be derived from a product.

5. Ongoing Product Updates — In keeping with the theme of customer retention, a subscription gives the opportunity and challenge of ongoing product improvements. Companies have to be able to listen and compile feedback from customers about why they stick with a particular product or what aspects may cause them to cancel.

6. Metrics — In addition to the initial sale, renewals, cancellations, customer service requests and a number of other data points means that companies have even more metrics to track and analyze.

7. Finding the Right Platform — Companies must find an ecommerce platform that adequately supports digital transactions. This not only includes payment processing but also account management, automated subscription emails for users, as well as tracking and reporting of metrics.

Is a Subscription Model Right for my Product?

Recurring revenue is obviously a goal shared by all companies and subscriptions offer a viable way to achieve it, especially for those offering digital products. However, if a company has the product and the team to overcome the challenges of the subscription model, the revenue opportunities are vast.

Originally published at www.kiwaluk.com on December 3, 2013.