The power of subscription

Subscription business models are getting increasingly more popular.

The reason is that a subscription business model is amazing for a company as it increases revenue, makes the growth smoother, allows for a better understanding of customers and for the usage of more expensive marketing channels, while it can also be appreciated by consumers too. Here’s why:

1. The burden of decision making for consumers

Today’s society requires us to make small unimportant decisions all the time. Which razor should I buy? Which road should I use to get from point A to point B when there is a 1-minute difference?

When faced with a decision to make and not a clear preferred choice, it requires some effort to choose one option. We have important decisions to make when it comes to our life and adding a lot of decision making for things that don’t really matter is a burden. Having a default choice takes this burden away, explaining why subscription can be appreciated by consumers. This is also why so many leaders rave about the importance of having routines. Barack Obama, when asked why he only wears grey or blue suits, said: “I’m trying to pare down decisions. I don’t want to make decisions about what I’m eating or wearing, because I have too many other decisions to make.”

I have been receiving razors from Dollar Shave Club for the past year. It’s not really that I love their blades, I just like that it’s one less thing to think about and to make decisions on.

2. The default effect

Among the set of options that someone choose from, the default option is the option the chooser will obtain if he or she does nothing. Experiments and observational studies show that making an option a default increases the likelihood that it is chosen; this is called the default effect. Different causes for this effect have been discussed. Setting or changing defaults therefore has been proposed as an effective way of influencing behaviour—for example, with respect to deciding whether to become an organ donor, giving consent to receive e-mail marketing, or choosing the level of one’s retirement contributions.

There is a famous example regarding organ donation. Consider Germany and Austria, which are quite similar culturally speaking. Germany has an opt-in system and a 12% donor rate (the percent of people registered to donate), while Austria has an opt-out system and a 99% donor rate.

3. Leveraging the default effect to increase revenue

Considering the default effect, you can see how subscription can increase dramatically your revenue. Assuming someone tries your product out and likes it. They’re not amazed, but they like it. They answer 8/10 to your NPS survey. If they have started a subscription, they will probably stick to it, while if they haven’t, they probably won’t order next week or month.

4. Smooth growth

One thing that is even better than revenue growth is a smooth revenue growth. Whether you are trying to scale your team, your office, your supply or your operations, having a smooth growth will remove the hassle of uncertainty and allow you to invest in scale rather than constantly having to adjust and having sudden growth you cannot manage and then sudden dips that burn a lot of cash.

Firefighting, either to deliver to customers with higher growth than expected, or to manage how to use overstocks and extra resources when you miss sales, wastes a lot of your money and the team’s time and energy. When you have a smooth growth, you can address one by one the issues that come with this growth and allow you to have focus.

5. Cancellation reason

Another very strong case for subscriptions is the cancellation reason. When someone cancels, have them select a reason for unsubscribing. This piece of data is gold, you can then identify your #1 reason for churn and tackle it. It costs way less to try and tackle your churn rather than acquire new customers.

You can even add triggers according to the cancellation reason to stop them from unsubscribing. For example, if the person is going away, offer them to pause for a few weeks instead. You prefer them to pause rather than try and reactivate them later.

6. Marketing opportunities

The power of subscription also resides in the competitive advantage you get thanks to a high lifetime value. As your customers stay longer, and assuming equivalent margins and average order values, you will have a higher lifetime value, which means you can allow higher costs of acquisition of new customers and own acquisition channels that are too expensive for your competitors.

It also means you can discount more heavily on the first box, encouraging that first purchase.

An extreme scenario is daily deals websites, like Groupon. With a normal one-off sale, giving a high discount plus a commission for an order with no expectations to get another order later is just not sustainable, I mean unless you have like a 60% margin. The value lies in the acquisition of the customer, but you need to make sure they keep ordering. Interestingly, low-quality channels like daily deals often result in decent re-orders with subscriptions, making it an efficient and profitable marketing channel.

You can also unlock some expensive channel opportunities, like using sales representatives and paying commissions.

Where to start?

You can start a subscription business model rather easily, without tech resources and with very little investment. If you think of a good business model and want to get started asap, you can, for example, use a Shopify store with the Recharge app plugin for subscription and start selling subscriptions. If you send physical products, the supply and operations can become a challenge, but again you can dropship existing products to start super lean.

Challenges and conclusion

The main challenge is to find a product or service that people want regularly, and that people don’t get tired of too quickly in case it is repetitive. It can be quite a challenge to find such a product or service.

The second challenge is that customer acquisition can be harder as it requires more commitment than a one-off purchase. Still, when weighing these against all the pros, I’d say if you see an opportunity to switch your business model to a subscription one, test it as soon as you can, it could be a game changer. Even Amazon did it for eCommerce with Amazon Prime.