Can we talk about the subscription business model for a bit?
With millions of people out of work, tons of business closed down, and no clarity on what the new normal will be, the recent Subscription Impact Report by Zuora highlighted the good news that, “In an analysis of hundreds of subscription-based companies, more than half have not seen an impact on their subscriber growth, while one quarter are actually seeing subscriber acquisition rates accelerate even faster than before.”
This raises a series of questions that you likely have been talking about, or should be, with your business friends and partners.
How does a subscription business model work?
A subscription business model is driven by recurring revenue. Customers are charged a consistent fee on a regular basis – monthly, quarterly, annually. In return for the regular payment, the customer gets delivered a good, a service, or gets access to a resource. When a payment isn’t made, the customer loses access, or stops receiving the product or service.
You can start to see why this model offers some distinct advantages.
What advantages does a subscription model offer?
When we think about a subscription model, the advantages are ones you’ve likely experienced personally:
- A cheaper upfront cost invites more customers to sign up. Because the payments are spread over time, the initial payment is lower than it would be if someone were paying in full. This means people need less money to sign up. And that creates a lower barrier to entry.
- Revenue is more predictable when it’s recurring. You don’t start each month, quarter or year at zero. Instead, your existing subscriptions allow you to predict your revenue by being the base of whatever time period you’re in. And each sale you make is additive, making the following period better.
- You have time to truly delight a customer. Every interaction is a touch point that you can use to build a relationship with your customer. With a subscription model, you get more touch points. And that means more chances to go from “satisfied” to “delighted.”
- You can drive greater revenue over time. If a customer is happy with their subscription and has become used to regular payments, you have an opportunity to sell them more (upselling, etc). The more you know a customer, the more you can offer additional items with a lower cost of sale.
These are the dynamics that have led to what Zuora noticed in their recent report.
How have companies using a subscription model navigated these times?
As I mentioned above, Zuora released a report on how COVID19 has impacted subscription businesses. And what they found was very interesting.
They looked at March 2020 subscriber acquisition rates and compared it to the previous year. Here’s what they said (you can download the report in PDF here):
Overall, the COVID-19 Subscription Impact Report found that 53.3% of companies have not seen a significant impact to their subscriber acquisition rates. 22.5% of companies are seeing their subscription growth rate accelerate, 12.8% of companies are seeing slowing growth, but are still growing, and the remaining 11.4% of companies are starting to see subscriber churn outpace their subscriber acquisition rates.
Here is a different breakdown from their report, when it comes to industry trends:
- Accelerating: OTT Video Streaming, Digital News & Media, E-Learning, Communications Software
- Limited Impact: B2B & B2C Software, Information Services
- Slowing: Consumer IoT, Business IoT Services, Software for Small Businesses, Memberships
- Contracting: Travel & Hospitality, Sports Related Services
eLearning, which I write about often, grew subscriptions by 2.9x – almost 300%!
This makes you ask one very important question, right?
Will every business embrace a subscription business model?
At this point there’s really only one question left, right? It’s the question of whether the subscription model is for everyone. Are we witnessing the End of Ownership, as Zuora calls it?
- When I look at my television and movie usage, I think of Netflix, Amazon Prime Video, AppleTV+ and DisneyPlus.
- When I think about food, I get weekly deliveries from HelloFresh!
- When I consider visiting a new city, I’m using AirBnB. (Not right now – stay inside!)
- When you think about owning a car, depending on the city you’re in, you might choose Uber instead. Or Lyft.
- If we’re talking software, you likely know the Adobe story of their shift to subscriptions.
- You might want a rent a high-end watch, via a subscription service like Aquired Time.
- Or consider changing your closet regularly with a subscription at Rent the Runway.
You can see where this is going: entertainment, food, accommodations, transportation, software, jewelry and fashion. I’m positive there are businesses that have yet to embrace a subscription business model. But at this point, shouldn’t everyone, shouldn’t you, be considering a subscription play?
How do you create a subscription model?
- First, find the folks who said no, or who left. There’s a good chance that the people who left you or cancelled their service with you, or who rejected you in the first place, may have done it because they couldn’t afford to pay you. If you’ve never looked at financing deals, or ways to stretch out payments, you might have missed an opportunity to welcome another segment of customers into the mix. Remember that people are evaluating your product or service in the context of everything else they have to pay for. If you’re not the first or second priority, they may love you and still have to say no. Payment plans can bring them back.
- Second, find your value function and lengthen it. I can’t tell you what you do that is amazing. Only you can (along with your customers). But I would guess that you have some things you offer that are pretty average, and other things that are spectacular. Find the things that highlight your unique value and then ask yourself, how can I add to it? How can I shift it from a transactional dynamic to a relational dynamic? This shift will help you find a path towards subscriptions.
- Third, find the ways technology can help you. In the end, you’re not going to want to manually charge the cards of your customers. That’s why there’s Stripe, PayPal and Authorize.net. So the trick is to find tools and technology that will do it for you. For pure subscriptions, I’m a huge fan of Recurly. But depending on what you’re building, you may want to check out the following solutions.
You can rapidly build subscription solutions with WordPress
If you’re looking to build a membership system that leverages a subscription business model, there are a ton of options that I referenced last week in my article on membership plugins. These include MemberPress, Paid Memberships Pro, Restrict Content Pro and more.
If you’re looking to build an online course that charges people monthly, you would do well to look at LearnDash, LifterLMS, or AccessAlly. Each of these can integrate with the payment gateways mentioned above and offer complete solutions for courses.
And by now you should know that I’ve personally worked on building out a platform for hosting these kinds of applications at Liquid Web / Nexcess so that you can run highly concurrent, highly trafficked WordPess sites on our Managed WordPress plans.
Of course, if you have questions, you can always grab some time to chat.