To us, the formula for a company’s sustainable future does not equate only its ability to incorporate technological revolutions into the existing business model, but to alter the business model itself when the time comes. Our recommendation: the subscription business model.
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Generally, there are 3 types of a subscription business model: Paid, non-paid, and circulation. However, this article will only focus on the paid option as it yields the highest profit.
The paid subscription business is defined as a business model where a customer must pay a subscription price periodically (monthly, yearly or seasonal) to gain access (partial or fully) to a product or service.
The price – often time referred to as ‘membership fee’ – is automatically deducted on a fixed, predetermined date from either the user online wallet or their authorized credit card. The price can also be varied, depends on:
- The number of users: personal, family or a company utilizing a service at one time.
- The frequency of usage: range from premium access (full price – full service) to limited access (free to minimum price – limited service).
Typically, users can choose to unsubscribe at any point in time without any barrier. However, there are businesses that include switching costs or penalty in the unsubscribe process to discourage customers from leaving their business in a certain time frame.
The paid subscription business model was first applied in magazines and newspapers back in the old days when readers from each suburb subscribed to their regional news outlets and received the printed version of daily news every morning. Now, it is utilized by several commercial businesses.
2.1 Companies that were born with the subscription business model
Several companies applied this business model from the get-go, with Netflix as the pioneer. Founded in 1997 in California, the company’s initial business model included DVD rental by mail. By 2007, Netflix expanded its business with the introduction of streaming media, while retaining the DVD and Blu-ray rental service. Their service plans are divided into three price tiers; the lowest offers standard definition streaming on a single device, the second allows high definition streaming on two devices simultaneously, and the “Platinum” tier allows simultaneous 4K streaming on up to four devices. That decision captured the first wave of technology revolution 4.0 and the company started expanded internationally. Now, it is considered to be an industry titan, being the number #1 destination for television entertainment with approximately 118 million subscribers globally.
Another field leader is Spotify – an upcoming titan in the areas of music streaming. The Swedish entertainment company provides DRM-protected contents from media organizations, record labels, and even freelance artists. Being a bit different from Netflix, Spotify operates under the freemium business model – meaning that the basic features are free (sponsored by ads placement, to be exact) with limitation while premium features such as high streaming quality or music download are provided via paid subscription. Being a 10-year-old direct competitor of Apple Music and Google’s Youtube, it now has a total of 159 million active users, successfully gone public through the direct listing and playing a vital part in almost every modern artists and labels’ marketing campaign.
Those are the two classic examples of paid subscription business model. Just within the last 5 years, we have many more being born – across all fields and industries: ‘Dollar Shave’ for shaving product, ‘Brilliant’ for education, ‘Trunk Club’ for fashion, ‘Better Health’ for psychology services … The possibilities are endless.
2.2 Companies that adapt to the subscription business model
Witnessing the triumph of the paid subscription business model, others corporation starting to jump boat.
For example, before 2012, Adobe focused squarely on selling boxed software and licenses for designers, photographers, videographers, web developers and audio professional. But 6 years ago, Adobe Systems announced the creation of Adobe Creative Cloud – which is what they believe to be “a radical new way of providing tools and services”. This package included the exclusive access to 15 software with monthly update and a shared platform to view and publish user’s creations, paid under the membership format of US$49.99 per month. The result: an unexpected success – according to Scott Morris, leader of Adobe Creative Cloud and Creative Suite. Within 1 year, they added more than 500,000 paying subscribers and 2,000,000 try-out subscribers. The update occurs more frequent thanks to high morale among their engineers. The rating is through the root.
A similar story goes on YouTube. Founded as a social network slash video sharing platforms for individual creators, it was later bought by Google in 2006 and became the second-most popular site in the world – according to Alexa Internet. Traditionally, viewers of YouTube – after signing up – could gain access to almost every content published on the website for free. Content creators, also known as YouTubers, earned their income solely through advertising revenue from Google Adsense. But since 2015, there is an exception: the birth of YouTube Premium (used to be known as YouTube Red). It’s YouTube-owned subscription service that provides ad-free access to exclusive original content made in collaboration with its YouTubers – which will be paid by projects. It is reported that by 2017, there are 1.5 paying subscribers over 88 countries – a relatively small number compared to the company’s unpaid user: 1.57 billion. People are not easily persuaded to pay for content that was previously free. However, not much can be said about YouTube Premium’s success (or failure) for now, considering its young ages.
3. The reasons behind the movement
The paid subscription business model is not called ‘the model of the future’ by James L. Heskett, a foundation professor of Business Logistic at Harvard University, for no good reasons.
- Recurring sale: It’s simple consumption psychology. Since your customers already paid for it, they will want to ‘exploit’ your services to their best potential – creating a habit of using your product on an everyday basis. This, added with relatively positive experiences, get your customer to attach to your product.
- Better Customer Relationship Management: With long-term usage comes long-term data. As a result, the marketing departments can generate personalized marketing or database marketing in a more detailed manner. This allows them to better satisfy the most valuable customer, improve customers brand loyalty and reduce the overall customer acquisition costs.
- Cross-selling abilities: The power of this business model can be easily combined with the ‘Big Brother’ movement – corporation produce a range of complementary products that best used with one another. This acts as a suggestive marketing and allows your brand to increase the likelihood of customers trying out other products.
- A predictable stream of revenue: Typically, the subscriber’s free will be charged on the same date monthly or annually. This gave the accounting department a set date on which the sale revenue can be claimed, which make their job considerably easier to plan for reimbursement, risk management, and investment plan.
- The incentive for continuous development: This is especially important for software development companies and their application’s sustainability. Historically, the “one-time-purchase” model does not give developers much incentive to maintain a constant updating schedule for a released application or software. They’ve received the money and their job is, for the large part, finished. This means that the released product will soon be outdated and the sale will start decreasing due. However, the paid subscription model for software changes this situation. The predictable flow of income from an existing product acts as an immediate incentive, pushing the developers to keep working hard on their products and create a strong, well-designed competitor.
4. The barriers and how to cross it
With that said, if it is profitable and easy, everyone would already have done it. Of course, there are several barriers for software development companies to apply the paid subscription business model.
But don’t worry, our team has provided you with several ideas for the solution.
- Low customer adoption rate: in certain markets and economy, customers are still custom to the idea of one-time-payment, thinking it’s more of a bargain. This poses a substantial challenge to the companies’ marketers.
Solution: While creating an educational campaign about the product long-term benefits (e.g.: convenience, save money in the long-run, provide an advantage for high-frequency users), remember to include different tiers of payment and allow at least 1-week try out for your customers.
- Vendor lock-in: Paid subscription models is likely to increase the possibility of vendor lock-in, which can have fatal implications for a customer if their business depends on the availability of a software. Without an online connection to a licensing server to verify their user status periodically, a software under a subscription-model would typically stop functioning, thereby making it impossible to continue using the software in remote/secure places.
Solution: Have long-term customers or large B2B partners acknowledging of the issue and provide them with a special code that they can use to gain access temporarily when there is no Internet access. This, although does demand additional effort in CRM, provide the users the comfort that your brand cares immensely about their overall experiences.
- Require an accurate, reliable and timely system to manage and track subscriptions: with all customers’ data are now backed on the cloud, it’s crucial for your business to ensure that they have a smooth and secure interaction with the platform you provided. This – especially with software development companies – may involve a lot of initial capital investment and IT-related human resources, which create another barrier for startups or SMEs to adapt to this business model.
Solution: If it’s out of your capability, go outsource. Let the professional take the burden off your shoulders. You can also learn how to do the things that you can’t yet by watching them navigating through the presented issues. And once your business has a strong product and is self-sustain, it’s up to you to choose the next step.
Moving on to the days and age of industry revolution 4.0, with mobile application and software development as their based product, companies and businesses have much competition to face and continuous development to adapt. Paid subscription, the solution that we advocate for, allows them to finance their way along the product’s learning curve with a loyal customer base while providing developers the incentive they need for constant development.
It is, in our eyes, the most promising business model to build a sustainable future.