The short answer to what is a “subscription business” is simply any business that generates some or all of its revenue from subscriptions.
Though when we look at this more closely, we begin to see that virtually any business can become a subscription business with enough imagination and the tools to make it happen (the latter being especially important).
But first — why would you even want to build a subscription business? Well, the real question should be “Why not?”. One of the largest reasons to implement a subscription business model is the recurring revenue that subscriptions generate.
Perhaps less obvious, but potentially even more valuable, is the ability to create an ongoing, close relationship with each of your customers. Knowing when, where, and how they are using your product (or not using your product for that matter) allows you to continuously tweak and optimize your offering to further enhance those relationships and strengthen your business.
So, what are the top 3 benefits of a recurring revenue model?
- A higher stock valuation for public companies, or more favorable balance sheets for private companies looking for future investment in the company,
- Predictable revenue streams,
- Increased customer loyalty;
For traditional businesses, every month starts with the need to climb a giant mountain of sales, simply to cover its costs. However, for recurring billing businesses, every month starts with predictable revenue coming from its already established customer base.
What’s more, any growth in subscribers (or revenue per subscriber) in a particular month contributes to the compound growth of the company’s revenue for the following months to come, further fueling the company’s growth.
Needless to say, every recurring dollar of revenue has a much greater value to you and your stakeholders than a non-recurring one. As recurring revenue businesses are more predictable, they are less risky and have much more chances of ensuring a long business life. Hence, they are valued as much as 4-5 times higher than their non-recurring counterparts.
The fundamental challenge of scaling a recurring billing business is to build, develop, and nurture customer relationships to the point at which a high level of loyalty is created. This reduces SaaS churn rate and offers businesses a better understanding of how to increase the value of each customer. This is the ultimate goal of a solid subscription business model.
However, businesses are not the only ones benefiting from those long-term relationships. Customers get to enjoy predictable costs and quality, ongoing user experience upgrades, as well as levels of personalization that one-off services are simply unable to offer.
Take the example of a Netflix or Spotify account – the longer you use the service, the better they get to know you. With that knowledge, they can provide you with personalized service and experience that would be difficult to provide without information over a long period of time — and better yet, is difficult for a competitor to replicate. The longer you stick with the service, the harder it is to leave and start all over again!
Accessibility is at the heart of subscriptions. Why buy something, when you could simply “access” it, whenever you need to? Making a purchase usually involves larger upfront costs, a need for storage, maintenance, upgrades, and possibly insurance. With a subscription, your monthly payment takes care of all of the above for you – you can sit back and relax knowing that whenever you need to access the service, it will be available to you.
As companies seek to jump on the subscription bandwagon, “as-a-service” model is no longer reserved for tech, and has now spread into almost every imaginable business area.
Almost any business can become a subscription business — and most companies are thinking about how to become a subscription-based business, or at the very least how to add subscriptions to their existing offering.
From the smallest to the largest companies, top executives are busy thinking of ways to easily incorporate a subscription business model into their current business plan.
Innovative business models and the use of technology have been instrumental in this “as-a-service“ shift. A few examples of less obvious subscription businesses could be:
- ”Printing-as-a-service”: HP
- “Clothes-as-a-service”: Stitchfix, Gwynnie Bee
- “Toys-as-a-service”: Loot Crate, Brickbox
- “Food-as-a-service”: Blue Apron, EAT Club, Soylent
- “Travel-as-a-service”: Inspirato, Velocity Black
So, what are the tools for having a successful subscription business model?
Software sold “as-a-service” was the pioneer of storing almost everything in the cloud, and selling subscriptions as their primary product. Paul Graham’s Viaweb was perhaps the first company to do this, and now SaaS platforms have become the go-to model for all software sales.
Successfully scaling a subscription business requires a flexible platform that can manage your subscriptions and has the ability to work within your business model and existing processes. This is a critical requirement, and can present significant challenges. Many people underestimate the complexity of this element.
Complexity goes hand-in-hand with subscription businesses. Imagine a company that sells a service with 3 levels – bronze, silver, and gold. Now, let’s add an element of “pay-as-you-go” (usage-based billing) or tiered pricing on top of that basic subscription. Plus, a part of your business serves enterprise customers, meaning thousands of subscriptions for their employees and a constant customer churn of employees within those companies.
But that’s just the start. Now let’s take it one step further – imagine that a company wants to be able to test new plans and iterate its business’ offering on the fly, and it needs to be able to review all of that activity within its existing CRM system.
Within just a few short steps, you got yourself to a stage where the in-house capabilities of an out-of-the-box spreadsheet program just won’t be enough, and building an entire subscription platform from scratch just won’t make sense – after all, you have your own product to focus on.
Not only does it highlight why you need the right subscription management and billing software, but more importantly it highlights the significant opportunities that can be seized from a subscription-based business.
Whatever billing platform you choose doesn’t just need to be able to bill customers correctly. It also needs to be a tool to enable customer success. It should offer analytics and facilitate a greater understanding of your customers so that they can get the most value from your product or service.