By Jillian Gordon(opens in new tab), contributor at The Underground Group
The subscription business model(opens in new tab) is worth considering, no matter your brand category.
However, simply adding a subscription offering doesn’t guarantee you’ll beat competitors.
Calculate the costs of adding a fixed-cost product to your suite, then conduct customer research in order to price it right.
Last spring, rideshare service Lyft(opens in new tab) began testing a monthly subscription plan(opens in new tab). Last month, it debuted the official product: An offer of 30 rides(opens in new tab) (worth up to $15 per ride) per month for an upfront cost of $299.
Bundling rides for a recurring flat fee might sound risky from a revenue standpoint, but Lyft is right on trend. From monthly beauty-product boxes(opens in new tab) to curated clothing collections(opens in new tab), more and more companies are using the subscription-based business model(opens in new tab) to exceed customer expectations while leveraging technology and securing a steady revenue stream. So it’s no surprise that more convenience-based businesses like Lyft want in on the action.
Lyft debuted a monthly subscription plan last month. (opens in new tab)
For many businesses, the idea of offering a monthly or yearly subscription service rather than a pay-by-the-drink model can seem like an attractive option. Indeed, it is working in many business sectors of the modern economy. But does simply having a subscription model alone give businesses an edge on competitors?
Not necessarily, says Devy Schonfeld, a business professor at Pasadena City College.
Subscription models alone aren’t enough.
Schonfeld suggests that some companies try subscription models to keep pace with competitors who are doing the same. In the case of Lyft, its primary competitor, Uber, tested a similar bulk-package model, Uber Plus, in 2014. A few weeks ago, just days after Lyft’s announcement, they unveiled an official subscription plan(opens in new tab) which lets users avoid surge pricing for a monthly fee.
Subscription models by themselves aren’t a magic solution, Schonfeld told Grow Wire via email. Instead, she said, companies need to differentiate their offerings using flexible pricing options, “extraordinary customer service and added personalization/customization of services.”
In other words, a subscription model has the potential to yield big gains, but there needs to be more unique selling points for businesses to beat out the competition.
How subscription models can help you win
If done right, Schonfeld says, a subscription model can bring in more revenue and a larger base of loyal customers.
Overall, a subscription-based business could generate the following:
- A recurring revenue stream that’s better known in advance, which will help with forecasting and limit the pressure to drop prices in order to increase sales.
- Stronger relationships with customers through engagement and personalization. For example, Vinyl Me, Please(opens in new tab), a record-of-the-month club, offers exclusive LPs to its members monthly, creating an exclusive community amongst its consumer base.
Subscription service Vinyl Me, Please sends records to its members every month.(opens in new tab)
- Increased product usage and engagement, which may increase pricing power and customer retention. Teabox(opens in new tab), for instance, offers subscribers “surprise” teas from India and Nepal, which inspires new product discovery with each shipment.
- The ability to upsell. Gentleman’s Box(opens in new tab), for example, offers two different subscription plans for regular deliveries of curated men’s accessories. The “Classic Subscription” is offered at $25/month, but “The Premium Box” is $100/quarter and includes luxury wardrobe pieces at up to a $400 value.
- Simpler pricing. For example, beauty brand Birchbox(opens in new tab) offers subscriptions for $10/month, $50/6 months (with promo code), or $110/year. Sticking to an uncomplicated pricing model makes financial calculations less stressful for the business and customer.
- Loyalty. If a customer is already committed to a subscription, they are less likely to shop around.
How to set up your subscription model
“Knowing your audience is key,” says Schonfeld. She offers the following tips for success:
- Study successful subscription-based business models closely (think Amazon, Netflix and Costco).
- Calculate the incremental costs and financial risks associated with providing the service at a fixed price.
- Collect customer data through cost-sensitivity analysis, customer surveys and product trials so you have a clear snapshot of your customer. Then make adjustments to your product accordingly, and personalize your customer experience.
Netflix is a prime example of a subscription model--and its shows' stars keep members engaged.
- Deliver on your promises, and exceed customer expectations.
- Create a flexible subscription model to suit customer needs.
- Collect cash frequently through a monthly or quarterly model rather than an annual renewal for more accurate tracking and forecasting.
- Start with simple pricing.
Incorporating a subscription model into your business can provide a seemingly uncomplicated revenue stream, but do your homework before jumping in. Consider the financial implications of offering fixed pricing and whether a subscription plan makes sense for your offering and your demographic.
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