For any business, one-off sales aren’t going to provide the cash flow that your business needs in the long term.
This is why many have resorted to using a subscription business model over the last few years. Although it was a well-established way of operating, subscription-based businesses have seen a resurgence in popularity of late, as a result of innovative tech startups. In facts, sales in subscription products have increased by 100% over the past five years.
If you are considering using this business model but wish to find out more before committing, please continue reading this article.
First Thing’s First, What Exactly is the Subscription Business Model?
Before we get into the pros and cons of operating a subscription business model, we should define what it is, and what alternatives are out there.
So for the sake of clarity, a subscription-based business is a model where customers sign up to receive your product or service in exchange for a series of payments.
This could be annual, monthly or even weekly, depending on the option they have selected.
This is in stark contrast to a one-off payment, where customers are expected to debit you (or use their line of credit) for the entire cost of your product or service in one single go.
Why Might A Subscription Business Model Be a Good Idea?
Depending on the product you are selling, an up-front cost may be too much of a barrier to entry for potential customers. A perfect example of this would be a gym membership or your mobile phone contract.
The vast majority of customers out there are not exactly going to be enthusiastic about paying $1,000 upfront for the service. If that same $1,000 is suddenly split over the course of a 24-month contract, it’s no longer an issue for them.
Perhaps one of the reasons why the new tech companies have had so much success with a subscription model is that the general public is used to them.
Virtually everyone pays for at least their heating, energy, phone, and TV bills using this type of contract. Even still, startups such as Dollar Shave Club and Farmdrop have done a great job of disrupting their markets using subscription models.
The good news doesn’t end here though. There are several other reasons why businesses are turning to subscription models for their companies.
Recurring Revenue Streams
One of the key reasons why subscription-based businesses are so popular can be summed up with two words: consistency and predictability.
Let’s go into this. When you have a list of subscribers to your services and products, you know exactly how much revenue you will be pulling in for a defined period of time.
This is a huge advantage when it comes to planning for the future. Cashflow, which can make or break any business, is also very consistent with a subscription model.
By comparison, an online store which relies on one-off sales can never predict precisely how much money it will generate each financial quarter. All sorts of factors may affect sales, and this can have a knock-on effect on cashflow to the business.
You shouldn’t underestimate the benefit to your customers as well. Not only are you gaining regular business from them, but they are being provided with a service that they need on a regular basis.
You can find out more about how your monthly billings can enjoy the subscription model at this link.
Unbeatable Customer Retention
If a customer walks into a shop, they may buy a copy of your monthly magazine. The next time they come into the shop, it may not be there.
If they are a paid-up subscriber to that very same magazine, you can count on them to pick up a copy every single week.
This small example highlights another key advantage of the subscriber business model. A company offering one-off sales will never be able to match (or beat) the customer retention numbers of a subscription service.
Although there may be months where sales of a company relying on one-off sales eclipses a subscription service, a year-on-year comparison of sales will prove the superiority of using a subscription model.
Stock and Inventory Management Benefits
In the same way that running a subscription model helps with your revenue streams, it can also help companies to manage their stock levels.
Because you will be aware of the number of customers you have in any given period, you can plan in advance to ensure that you never run out of stock.
Let us say that you are producing and selling razors via a subscription service. You will know in advance that you need 2,000 razors per month from your suppliers, to meet the demands of all of your customers.
This means that precious warehouse space is saved because you don’t have to hold unnecessarily high levels of stock.
Convenience for Customers
One of the key advantages that consumers enjoy when choosing a subscription-based business is simplicity. After setting up their account and adding payment information, they do not have to do anything else.
When you consider that the average consumer now has 4 subscriptions, it has become clear that people see these services as a convenient way of managing payments.
Who would willingly choose to manually pay their phone bill each month, given the option? It is doubtful that many would do this out of choice.
In the eyes of consumers, subscriptions are a hassle-free way of managing their payments. They cut the risk of any penalties for late transactions and other issues that can occur.
An Effective Business Model
Although the subscription business model is by no means new, it has received a lot of interest and attention in the past few years. And with good reason.
Not only can enjoy the security of knowing how many customers you have for your products, but consumers of your products are better off as well.
For these reasons, you should take a close look at subscription models if you are about to open your business.
Please check back on this blog, as there is plenty of new business content each week.
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