Ten years ago, the concept of a subscription was confined to newspapers and magazines. The idea of subscription boxes and ‘Netflix and chill’ were almost completely unheard of.
Fast forward to 2019, and anything you think of can—and probably has—been turned into a subscription. This includes vehicles, consulting services, beer, razor blades, food, dating apps, clothing, and software. The subscription possibilities truly are endless.
In fact, one study shows that 15% of online shoppers have subscribed to an e-commerce service over the past year, while 46% of consumers subscribe to a digital streaming service like Netflix or Spotify.
The popularity of the recurring billing business model can be attributed the immense value it provides to both the company and the consumer.
For customers, the value of subscriptions lies in the convenience and low pricing options compared to repeated stand-alone purchases.
When it comes to businesses, tapping into the growing subscription economy makes sense from a financial standpoint. One study found that in the U.S., 40% of revenue comes from repeat customers.
As subscriptions continue to disrupt the traditional business model, more businesses are being swayed by the benefits of recurring billing activity, such as predictable revenue, long-term customer relationships, and increased opportunities to upsell.
Can your business leverage the subscription model?
With nearly every industry looking to reap the benefits of subscription commerce, any business can theoretically make the recurring billing model work for them. However, this doesn’t always ensure a proper fit.
Here are a few things to consider:
- Need. In order to succeed with subscription commerce, your product or service must warrant a subscription.
- Value. It’s critical that customers see the value of purchasing a subscription versus a standalone purchase. Customers will only want to sign up for your services if they feel it will save them time and money.
- Competition. With so many businesses leveraging the subscription business model, there is a lot of competition for newer entrants. Ask yourself; does your product or service provide a solution to a need? Do your research and make sure that your subscription offering fills a void by providing customers with something they can’t find elsewhere.
- Target customers. It’s critical that you have a clear sense of who your customers will be, what kind of problems they need solving, and how your business is an appropriate solution.
If your business doesn't check off any of these items, then you might want to reconsider the subscription model.
A good example of a subscription service that did not work is the Netflix offshoot, Qwikster.
Back in 2011, Netflix announced that it would no longer include DVD rentals as a part of its subscription plan. Instead, the streaming service would create a brand-new DVD subscription service separate from Netflix called Qwikster. Up until this point, both DVD rentals and online video streaming were included in Netflix subscription plans for $9.99 month. By dividing the two different services into separate subscriptions, customers who desired both options had to pay more money.
Needless to say, the attempt failed, and upset a huge chunk of Netflix’s customer base. Netflix lost 800,000 users and Qwikster was scrapped only one month after its inception.
If customers don’t find any value in purchasing a subscription, the recurring revenue model might not be a good fit for your business.
Industries that may not work with the subscription model
Despite the shift in popularity to the subscription-based model, some industries would not make for a good fit. Take the wedding industry, for example.
Regardless of the fact that between 42% and 45% of all marriages in the United States end in divorce, consumers typically see wedding bands and engagement rings as a onetime purchase that will last forever. Even if a consumer gets married several times, they are unlikely to purchase a subscription for wedding bands or engagement rings. The same would go for other wedding-related items like dresses, décor, and marriage officiants.
Similarly, products like car tires, printers, appliances, or home furnishings might not work well as subscriptions because they are not something a consumer would likely buy on a short-term recurring basis.
That being said, with some creativity the right entrepreneur could potentially disrupt the industries mentioned above to find success by innovating with the subscription model.
One example can be found in the case of the vehicle manufacturer, Volvo. When the Swedish automaker launched the XC40 model last year, they announced a subscription option as an alternative to spending $35,200 to own the car outright. Rather than leasing the vehicle, customers could pay $600 a month for a subscription that includes maintenance, roadside assistance, and even insurance.
Industries that lend themselves well to the subscription model
On the other hand, dispensable items like beauty products and food, or recurring services like consulting and dog walking would work well as subscription offerings.
Let’s take a look at some of the business models that have found success with subscriptions.
1. SaaS (Software as a Service)
Back when software was exclusively sold in brick and mortar stores, purchasing software solutions was a time-consuming process. New versions or releases meant customers were forced to make the trek out to the store, purchase the new software, drive home, install it, and repeat the process when software upgrades were made.
These days, most software companies sell their products as cloud-based subscription services. In fact, SaaS was one of the first industries to adopt the subscription model. In the early days of cloud-based software, Salesforce founder Marc Benioff perfected the “No Software” marketing pitch. Benioff built his campaigns on the suffering caused to sales teams by rigid, in-house maintained software. It worked. Cloud-based software like Salesforce is now commonplace in many businesses.
The subscription model works incredibly well for SaaS businesses mainly because of the convenience and value for customers.
Rather than paying a large amount of money for a software that will be outdated as new updates are released, cloud-based solutions allow customers to download regular updates and pay smaller recurring fees.
2. Product based subscriptions
Companies that offer products on a subscription basis have found massive success in the subscription industry. In fact, the top ten most successful subscription businesses of 2018 were product-based and accounted for 61% of the subscription industry’s web visits.
There are three broad types of product-based subscriptions which are popular with consumers:
- Replenishment.With replenishment subscriptions, customers can buy commodities like razor blades, food, diapers, skin-care products, etc.
- Curation. Curated subscriptions provide customers with personalized experiences by sending them a variety of different products each month. Think subscription boxes like ipsy or BarkBox. This type of subscription is the most popular at the moment, making up 55% of all subscriptions.
- Access. With access subscriptions, customers pay a monthly fee that allows them to gain access to lower prices or members-only perks. An example of this kind of subscription company would be Fabletics. The athletic apparel company offers their customers discounts, rewards for dollars spent, and exclusive access to certain products by signing up for a VIP membership.
3. Subscription services
While the most successful recurring billing businesses offer products on a subscription basis, businesses which offer services have also been able to capitalize on the growing industry.
From fitness training to legal advice, any type of service that is being used on a recurring basis can be offered as a subscription.
Take BetterHelp, for example: an online portal that offers counseling and therapy services. BetterHelp connects subscribers with certified mental health professionals and facilitates remote therapy sessions. Convenience and low pricing have been the business’s highest selling points, as regular in-person visits to a therapist are often costly and inconvenient.
Music streaming services like Apple Music, Tidal, and Spotify have also prove to be winning business models, accounting for 65% of all music revenues in the U.S.
Internet of things (IoT) technology refers to a network of devices containing electronics, software, actuators, and connectivity that allow the devices to communicate and exchange data. Examples include activity trackers like Fitbit, smart speakers such as the Amazon Echo, GPS tracking devices, and even "smart" appliances.
IoT has been a game changer for businesses across several industries. It’s estimated that by 2020, 95% of all new products will use IoT technology. The IoT also offers huge growth potential by way of usage-based and recurring billing.
IoT technology has particularly benefited SaaS, automotive manufacturing, telematics, telecommunications, vehicle transportation, and even agriculture businesses by creating more data streams and analytics capabilities.
Since IoT devices create a 24/7 connection with your customers, this connectivity can be leveraged to successfully adopt a subscription business model. An IoT subscription model will empower your business to cultivate positive ongoing relationships with your customer. With the devices continuously gathering customer data, you will learn more about your customer base and can tailor products and features to their specific needs. For example, hybrid billing which combines variations of usage based billing, fixed recurring billing, and one-time billing, can provide a pathway to increased revenues and profitability.
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Additional considerations for adopting recurring billing
Let’s say you are ready to adopt a recurring billing model for your business. Before diving headfirst into the subscription commerce pool, there are many additional points to consider.
1. Recurring billing creates challenges without the right billing system
Despite the obvious benefits, operating a subscription business opens the door for a unique set of challenges that don’t apply to traditional business models, especially when it comes to recurring billing processes.
Churn is one of the largest concerns for any recurring revenue business. In the subscription model, client retention is critical. Without a steady stream of recurring customers, your business will be unable to stay afloat.
Due to the complexities of recurring billing, using a manual billing system can lead to errors, and make it difficult to maintain communication for adapting to your customers’ changing needs and preferences. This can have a major impact on customer experiences, leading to a high rate of churn.
Another major concern for many subscription businesses is the ability to differentiate between earned versus deferred revenues. Revenue recognition can be difficult to track, and there is a compliance factor involved wherein Generally Accepted Accounting Principles (GAAP) must be followed.
2. Customers might not immediately jump on board
Despite the added convenience and value of a subscription offering, even your most loyal customers might not immediately be swayed by the advantages.
Many customers will debate whether it’s worth the recurring cost and commitment, or if they really need a subscription as opposed to just making regular purchases.
When settling on a subscription pricing strategy, it’s critical that you make sure the value outweighs the cost to the customer.
Your marketing efforts should clearly convey the value that a subscription will provide. The subscription should be positioned as a superior, more convenient option.
3. Building your own subscription billing system is easier said than done, and will cost your business time and money.
When manual billing systems approach their usability limits, many startups will try to create their own. Not only is this incredibly time consuming, but costly as well.
When building an in-house billing system, you also have to consider the fact that markets and technology are constantly changing. In time, taxes, pricing, and subscription plans are bound to change, and your customer’s needs and preferences will shift as well.
As your business scales, implementing complex changes and building new features becomes near impossible without significant development effort.
Choosing a platform specifically designed to manage recurring billing and subscription management is a more practical solution.
An automated recurring billing platform like Fusebill streamlines and automates your billing and invoicing process. It can also help mitigate some of the recurring billing issues mentioned above, such as churn and revenue recognition.
A subscription management platform can identify churn risks by monitoring potential problems. It will also help you recover revenue by retrying failed credit card payments and sending out automated communication to customers to remind them of unpaid invoices and failed payments.
4. Client relationships must be nurtured to ensure retention
In the traditional business model focusing on one-time sales, the customer relationship typically ends once the sale is made. This means that there is little incentive to maintain good relations with the customer after a transaction.
However, if you are interested in adopting the recurring billing model, you must take a different approach when it comes to customer relationships and experiences. In the subscription model, there is an ongoing relationship between the business and customer, so it’s critical to build a positive relationship with clients and ensure they have great experiences throughout the entire customer lifecycle. This can be achieved through continuous product enhancements, timely communication, and good customer service.
A modern recurring billing platform ensures there is a constant stream of communication so your customers are always kept in the loop. It enables automated emails to notify customers when payments are received, invoices are unpaid, or a payment has failed. You can even customize and personalize these messages so your customers feel they are valued.
Automation also helps you form better relationships with customers by allowing them the freedom to change their preferences, look at invoices and even make payments.
The subscription model is worth considering for any business, no matter the industry. When done right, subscriptions can help you create a steady volume of increasing recurring revenues along with long-term customers.
However, many existing companies struggle to make the transition because they don’t realize that simply creating a subscription option doesn’t guarantee success. It’s important to recognize that despite a lengthy list of advantages and increasing popularity, recurring revenue creates many challenges that can be difficult to mitigate if you aren’t prepared.
With the right billing system in place, your business will be able to navigate the world of subscription commerce with ease. From managing subscriptions and customer information to automated communication, an existing subscription management platform like Fusebill gives you all the tools you need to start implementing a subscription commerce model and scale your business.